Are Procyclical Productivity Fluctuations a Figment of Measurement Error?

Robert J. Gordon

doi:10.1017/CBO9780511616587.013

8 - Are Procyclical Productivity Fluctuations a Figment of Measurement Error?

Published online by Cambridge University Press: 10 December 2009

Robert J. Gordon

Foreword by

Robert M. Solow

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Robert J. Gordon: Affiliation:
Northwestern University, Illinois

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Summary

INTRODUCTION

Multifactor productivity (MFP), or “Solow's residual,” exhibits pronounced procyclical fluctuations in official data for the United States, Japan, and most other countries. These procyclical fluctuations have come to play a central role in recent macroeconomic debates. They provide the modus vivendum of the real business cycle (RBC) model, as well as the basis for Robert Hall's (1986, 1988) interpretation that the procyclicality of MFP demonstrates the existence of market power and/or increasing returns. They are also cited to support recent search models which demonstrate increasing returns in the form of “thick market externalities.”

Scattered through the literature of the past three decades are suggestions that the mismeasurement of output, capital input, or of labor input, might contribute to the observed procyclicality of MFP. However, each of these three mismeasurement sources was examined singly by different authors. This essay is the first to study the potential for all three sources of mismeasurement, interacting together, fully to explain the procyclicality of MFP.

The essay begins with a theoretical analysis that places the potential sources of mismeasurement in an explicit technological context. Part of the observed procyclicality of MFP may indeed be due to mismeasurement, but part may represent the overhead nature of some portion of both labor and capital, due to technological indivisibilities. We set out a model that allows separate roles for several cyclical phenomena that have often been confused in the literature on procyclical MFP, including labor hoarding, variable work effort, variable capital utilization, overhead labor, and overhead capital.

Type: Chapter
Information: Productivity Growth, Inflation, and Unemployment
The Collected Essays of Robert J. Gordon
, pp. 239 - 272

DOI: https://doi.org/10.1017/CBO9780511616587.013 [Opens in a new window]

Publisher: Cambridge University Press

Print publication year: 2003

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