The Vanishing Procyclicality of Labor Productivity

• Authors: Jordi Galí.
• BSE Working Paper: 489 | September 15
• Keywords: Wage rigidities , labor hoarding , labor market turnover , hiring frictions , effort choice
• JEL codes: E24, E32
• Wage rigidities
• labor hoarding
• labor market turnover
• hiring frictions
• effort choice

We document three changes in postwar US macroeconomic dynamics: (i) the procyclicality of labor productivity vanished, (ii) the relative volatility of employment rose, and (iii) the relative (and absolute) volatility of the real wage rose. We propose an explanation for all three changes that is based on a common source: the decline in labor market turnover, which reduced hiring frictions. We develop a simple model with hiring frictions, variable effort, and endogenous wage rigidities to illustrate the mechanisms underlying our explanation. We show that the decline in turnover may also have contributed to the observed decline in output volatility.