Working Paper 694

The Labor Productivity Puzzle

Edward C. Prescott | Senior Monetary Advisor
Ellen R. McGrattan | Consultant

Revised May 21, 2012

Prior to the mid-1980s, labor productivity growth was a useful barometer of the U.S. economy’s performance: it was low when the economy was depressed and high when it was booming. Since then, labor productivity has become significantly less procyclical. In the recent downturn of 2008–2009, labor productivity actually rose as GDP plummeted. These facts have motivated the development of new business cycle theories because the conventional view is that they are inconsistent with existing business cycle theory. In this paper, we analyze recent events with existing theory and find that the labor productivity puzzle is much less of a puzzle than previously thought. In light of these findings, we argue that policy agendas arising from new untested theories should be disregarded.

Published In: Government Policies and the Delayed Economic Recovery (Hoover Institution Press, 2012, pp. 115-154)

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