Countercyclical capability?

Garett Jones had a very interesting econtalk with Russ Roberts. He mentions that one the more interesting features of this recession is that productivity has been pro-cyclical rather than counter cyclical.  The graph below shows that during recessions productivity has generally gone down.

Source: BLS, NBER

As Garett Jones points out, this is rather intuitive to the person who thinks about companies cutting the fat in hard times and laying off the least productive workers.  In really hard times, companies might also cut workers who are focusing on projects that might create future revenue. Garett’s original tweet on the topic phrased it this way:

Workers mostly build organizational capital, not final output. This explains high productivity per 'worker' during recessions.  

In order to understand the significance of counter-cyclical productivity, I looked at a paper published in October 2000 by the Federal Reserve called Why is Productivity Procyclical? Why Do We Care? by John G. Fernald and Susanto Basu.  They analyze the four main reasons why productivity is usually procyclical.

  1. Procyclical technological development, where new technologies are invented during the boom rather than the bust.
  2. Imperfect competition and increasing returns means that when the economy is doing well then productivity is rising.
  3. Capital and labor are utilized more than is actually reported during a boom and less than is reported during a bust, so the procyclical productivity doesn’t actually exist but is caused by cyclical measurement problems.
  4. The reallocation of resources across uses, so as cyclical sectors with higher markups utilize a larger percentage of resources productivity goes up.

The study found that explanations #3 and #4 are the most important.  If the recent boom and bust cycles were not quite as procyclical as before, it could be due to many reasons.

  1. Better measurement of labor and capital.
  2. This boom was more financial in nature with the reallocation of resources going less to industries with naturally higher markups and more industries subsidized by cheap financing
  3. More firm specific capital creation in an increasingly globalized world.

Two and three are the most convincing. However, just because productivity doesn’t drop during recessions doesn’t mean that productivity is now countercyclical.  The relationship has merely weakened somewhat from the 1990’s onward, as this rolling ten year correlation between quarter on quarter changes in real GDP and nonfarm business output per hour demonstrates.

Source: BEA, BLS