Productivity or Employment: Is It a Choice?

 
Author/Editor: De Michelis, Andrea ; Estevão, Marcello ; Wilson, Beth Anne
 
Publication Date: May 03, 2013
 
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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(s): Productivity | Employment | Labor supply | External shocks | Labor productivity

 
English
Publication Date: May 03, 2013
ISBN/ISSN: 9781484331026/2227-8885 Format: Paper
Stock No: WPIEA2013097 Pages: 31
Price:
US$18.00 (Academic Rate:
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