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What are the drivers of Labor Productivity?

Josué Diwambuena () and Francesco Ravazzolo ()
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Francesco Ravazzolo: Free University of Bozen-Bolzano, Italy; CAMP, BI Norwegian Business School, Norway; RCEA

No BEMPS86, BEMPS - Bozen Economics & Management Paper Series from Faculty of Economics and Management at the Free University of Bozen

Abstract: We propose a new structural VAR with four shocks identified via sign restrictions to identify the drivers of labor productivity in Italy for the period spanning 1996Q1-2018Q4. In particular, we disentangle two supply shocks (productivity and labor supply shocks) and two demand shocks: (i) a demand shock that triggers a positive correlation between output and total hours (demand 1 shock) and (ii) a demand shock that allows for a negative correlation between these two variables (demand 2 shock). We find that the latter demand shock is the dominant source of variations in labor productivity across horizons. Furthermore, the productivity shock is an important driver of labor productivity fluctuations in the short run while labor market shocks are important drivers at longer horizons. We show that the productivity, labor supply, and demand 2 shocks trigger procyclical reactions to labor productivity while the demand 1 and wage bargaining shocks generate countercyclical reactions to productivity. The procyclical response of labor productivity to the demand 2 shock indicates the use of labor hoarding, thereby supporting that firms adjust more the intensive margin. The countercyclical response of labor productivity to the demand 1 shock suggests that firms are eager to adjust the extensive margin when the expected duration of the business cycle phase is persistent.

Keywords: Labor productivity; VAR; sign restrictions. (search for similar items in EconPapers)
JEL-codes: C11 C32 E32 (search for similar items in EconPapers)
Pages: [51 pages]
Date: 2022-08
New Economics Papers: this item is included in nep-mac
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