St. Louis Fed's Review: Productivity, Labor and the Business Cycle

ST. LOUIS — Structural changes in the U.S. labor market, spurred by innovations in communication or regulatory changes, may have had dramatic effects on productivity. Understanding them is essential to economic policymaking, which is why the Federal Reserve Bank of St. Louis devoted its 29th annual economic policy conference to the topic.

The July/August issue of Review, the St. Louis Fed's bimonthly publication of economic and business issues, features papers from that conference. Review is also available on the Bank's web site: www.research.stlouisfed.org.

"These papers exhibited the breadth of the economist's 'toolbox,' " said Michael T. Owyang, a senior economist of the Reserve Bank and the conference chair, "ranging from a statistical representation of the business cycle, to an econometric analysis of its driving forces, to a measurement of key indicators, to theoretical models of its causes and effects."

The titles and authors of the papers are:

• "What's Real about the Business Cycle?" by James D. Hamilton, a professor of economics at the University of California, San Diego. Among other things, Hamilton shows that although not every recession seems correlated with an increase in interest rate volatility, several pre-Federal Reserve recessions were nearly coincident with shifts in the variability of interest rates.

• "Trends in Hours, Balanced Growth, and the Role of Technology in the Business Cycle," by Jordi Galí, director and senior researcher at the Centre de Recerca en Economia Internacional, and a professor of economics at Universitat Pompeu Fabra. Galí revisits a property embedded in some dynamic macroeconomic models: the stationarity of hours worked. Galí revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. He also considers the international evidence on the effects of technology shocks using a measure of output per hour for the G7 countries. His findings suggest that, with the possible exception of Japan , the evidence on the effects of technology shocks shows major discrepancies with the predictions of standard, real business cycle models.

• "The Cyclicality of Hires, Separations, and Job-to-Job Transitions," by Robert Shimer, a professor of economics at the University of Chicago. Shimer measures the job-finding, separation and job-to-job transitions rates in the United States from 1948 to 2004. He argues that workers move from job to job only if the new job is of higher "quality." He concludes that it is the rate at which both employed and unemployed workers find jobs that dictates fluctuations in unemployment.

• "Reexamining the Monetarist Critique of Interest Rate Rules," by Robert G. King, a professor of economics at Boston University, and Mau-Ting Lin, an assistant professor of economics at the National University of Singapore. Monetarist economists have long argued that central bank interest rate rules exacerbate macroeconomic fluctuations, essentially by not allowing the interest rate to respond promptly to shifts in the supply and demand for loans. King and Lin investigate the responses of prices and outputs to shocks to government spending and productivity under alternative interest rate rules.

• "Productivity and the Post-1990 U.S. Economy," by Ellen R. McGrattan and Edward C. Prescott. McGrattan is a monetary advisor at the Federal Reserve Bank of Minneapolis and an adjunct professor of economics at the University of Minnesota. Prescott is the W.P. Carey Professor of Economics at Arizona State University and a senior monetary advisor at the Federal Reserve Bank of Minneapolis . Labor productivity, typically computed as GDP per hour worked, is a commonly cited measure of the welfare of the economy, but McGrattan and Prescott argue that this measure of productivity can be misleading. In particular, they contend that GDP per hour worked may not fully represent the booming productivity growth of the late 1990s and that the true measure of economic productivity for that period should be substantially higher. McGrattan and Prescott propose an alternative measure of economic productivity that accounts for intangible investment.

• "Organizational Dynamics Over the Business Cycle: A View on Jobless Recoveries," by Kathryn Koenders and Richard Rogerson. Koenders is a doctoral student and Rogerson is the Roundthaler Professor of Economics at the W.P. Carey School of Economics at Arizona State University . Koenders and Rogerson argue that changes in organizational restructuring may have contributed to the so-called jobless recovery of the past two recessions. They demonstrate that reorganization occurs predominantly in the recession and recovery periods of the business cycle. They also find that productivity drops during a recession, suggesting a period of reorganization, and that the jobless recovery may not be unique to the past two recessions.

The titles and authors of the papers are:

· " What's Real about the Business Cycle? " by James D. Hamilton, a professor of economics at the University of California, San Diego. Among other things, Hamilton shows that although not every recession seems correlated with an increase in interest rate volatility, several pre-Federal Reserve recessions were nearly coincident with shifts in the variability of interest rates.

· " Trends in Hours, Balanced Growth, and the Role of Technology in the Business Cycle ," by Jordi Galí, director and senior researcher at the Centre de Recerca en Economia Internacional, and a professor of economics at Universitat Pompeu Fabra. Galí revisits a property embedded in some dynamic macroeconomic models: the stationarity of hours worked. Galí revisits a property embedded in most dynamic macroeconomic models: the stationarity of hours worked. He also considers the international evidence on the effects of technology shocks using a measure of output per hour for the G7 countries. His findings suggest that, with the possible exception of Japan , the evidence on the effects of technology shocks shows major discrepancies with the predictions of standard, real business cycle models.

· " The Cyclicality of Hires, Separations, and Job-to-Job Transitions," by Robert Shimer, a professor of economics at the University of Chicago . Shimer measures the job-finding, separation and job-to-job transitions rates in the United States from 1948 to 2004. He argues that workers move from job to job only if the new job is of higher "quality." He concludes that it is the rate at which both employed and unemployed workers find jobs that dictates fluctuations in unemployment.

· "Reexamining the Monetarist Critique of Interest Rate Rules," by Robert G. King, a professor of economics at Boston University, and Mau-Ting Lin, an assistant professor of economics at the National University of Singapore. Monetarist economists have long argued that central bank interest rate rules exacerbate macroeconomic fluctuations, essentially by not allowing the interest rate to respond promptly to shifts in the supply and demand for loans. King and Lin investigate the responses of prices and outputs to shocks to government spending and productivity under alternative interest rate rules.

· "Productivity and the Post-1990 U.S. Economy," by Ellen R. McGrattan and Edward C. Prescott. McGrattan is a monetary advisor at the Federal Reserve Bank of Minneapolis and an adjunct professor of economics at the University of Minnesota. Prescott is the W.P. Carey Professor of Economics at Arizona State University and a senior monetary advisor at the Federal Reserve Bank of Minneapolis. Labor productivity, typically computed as GDP per hour worked, is a commonly cited measure of the welfare of the economy, but McGrattan and Prescott argue that this measure of productivity can be misleading. In particular, they contend that GDP per hour worked may not fully represent the booming productivity growth of the late 1990s and that the true measure of economic productivity for that period should be substantially higher. McGrattan and Prescott propose an alternative measure of economic productivity that accounts for intangible investment.

· "Organizational Dynamics Over the Business Cycle: A View on Jobless Recoveries ," by Kathryn Koenders and Richard Rogerson. Koenders is a doctoral student and Rogerson is the Roundthaler Professor of Economics at the W.P. Carey School of Economics at Arizona State University. Koenders and Rogerson argue that changes in organizational restructuring may have contributed to the so-called jobless recovery of the past two recessions. They demonstrate that reorganization occurs predominantly in the recession and recovery periods of the business cycle. They also find that productivity drops during a recession, suggesting a period of reorganization, and that the jobless recovery may not be unique to the past two recessions.

Authors offering commentaries are:

• Mark W. Watson, a professor of economics and public affairs at Princeton University;
• Christopher A. Sims, a professor economics at Princeton University , and a visiting scholar at the Federal Reserve banks of New York and Atlanta;
• Randall Wright, a professor of economics at the University of Pennsylvania and a Central Bank Institute Scholar at the Federal Reserve Bank of Cleveland;
• Julio J. Rotemberg, a professor at the Harvard Business School;
• Ricardo J. Caballero, a Ford International Professor of Economics at the Massachusetts Institute of Technology; and
• Fernando Alvarez, a professor of economics at the University of Chicago.

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi . The St. Louis Fed is one of 12 regional Reserve banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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