Productivity or Employment : Is It a Choice?

Author/Editor:

Andrea De Michelis ; Marcello M. Estevão ; Beth Anne Wilson

Publication Date:

May 3, 2013

Electronic Access:

Free Full Text (PDF file size is 1604 KB).Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Traditionally, shocks to total factor productivity (TFP) are considered exogenous and the employment response depends on their effect on aggregate demand. We raise the possibility that in response to labor supply shocks firms adjust efficiency, rendering TFP endogenous to firms’ production decisions. We present robust cross-country evidence of a strong negative correlation between growth in TFP and labor inputs over the medium to long run. In addition, when using instruments to capture changes in hours worked that are independent of TFP shocks, we find that cross-country increases in labor input cause reductions in TFP growth. These results have important policy implications, including that low productivity growth in some countries may partly be a side effect of strong labor market performance. By the same token, countries facing a declining workforce, say, because of aging, may see accelerating TFP as firms find better ways of employing workers.

Series:

Working Paper No. 13/97

Subject:

English

Publication Date:

May 3, 2013

ISBN/ISSN:

9781484331026/1018-5941

Stock No:

WPIEA2013097

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

31

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