What Caused the Recession of 2008? Hints from Labor Productivity

No 14729, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A labor market tautology says that any change in labor usage can be decomposed into a movement along a marginal productivity schedule and a shift of the schedule. I calculate this decomposition for the recession of 2008, assuming an aggregate Cobb-Douglas marginal productivity schedule, and find that all of the decline in employment and hours since December 2007 is a movement along the schedule. This finding suggests that a reduction in labor supply and/or an increase in labor market distortions are major factors in the 2008 recession. The decline in aggregate consumption suggests that the reduction in labor supply (if any) is neither a wealth nor an intertemporal substitution effect. "Sticky real wages" or the emergence of significant work disincentives are possible explanations for these findings.

JEL-codes: E24 E32 J22 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-lab and nep-mac
Note: EFG PE
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Citations: View citations in EconPapers (16)

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