the role of labor markets in business cycle statistics

7/31/2019 The role of labor markets in business cycle statistics

1/46

The role of labor markets in business cycle

statistics

Jennifer Evans* and Irina Stanga

June 14, 2012

Supervisor: Stefano Gnocchi

Abstract

This paper investigates cross-country heterogeneity in business cycle moments

over the past 30 years to assess whether recent developments are global phenom-

ena, or limited to the case of United States. Furthermore, we consider if labor mar-

ket flexibility, a proposed driver of these developments, is relevant for other OECD

countries. While there is a substantial degree of heterogeneity across countries, we

find a number of statistical similarities between Italy and the United States. We

profile the labor market in each country, and cast doubt on the ability of the labor

market to account for the correlation of productivity with unemployment. How-

ever, our analysis finds evidence that the labor market can explain the vanishing

procyclicality of productivity.

JEL: E24, E32

Keywords: Great Moderation, macroeconomic volatility, labor market

Barcelona GSE, Universitat Pompeu Fabra and Universitat Autonoma de Barcelona

1


2/46

Contents

1 Introduction 1

2 Literature Review 3

3 Data and Methodology 6

4 Results 7

4.1 Comparisons across countries . . . . . . . . . . . . . . . . . . . . . . . . . . 7

4.1.1 Country groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

4.2 Labor markets profiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

4.2.1 Temporary workers . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

4.2.2 Decline of unionization rate . . . . . . . . . . . . . . . . . . . . . . . 11

4.2.3 Sectoral shift from manufacturing to services . . . . . . . . . . . . . 13

4.2.4 Labor market conclusions . . . . . . . . . . . . . . . . . . . . . . . . 13

4.3 Additional business cycle moments . . . . . . . . . . . . . . . . . . . . . . . 14

5 Conclusion 16

6 Appendix 20

6.1 Robustness check . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

6.2 Figures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

2


3/46

1 Introduction

Business cycle statistics in the United States have changed considerably over the past 30

years. Three developments in particular have captured the attention of the economics

profession: (i) a sign shift in the unconditional correlation between productivity and

unemployment, (ii) a decrease in the procyclicality of productivity and (iii) an increase

in the volatility of employment and hours relative to output, and the decline in volatility

of other macroeconomic series, known as the Great Moderation.

While separate theories have been proposed to explain these shifts, structural changes

in the labor market are a common theme. For example, Gali and van Rens (2010) point

to authors who argue that the Great Moderation may have been driven at least in part

by increased wage flexibility.1 Both Gali and van Rens (2010) and Barnichon (2010) find

that the shifts in correlation and procyclicality can be explained in part by a reduction in

labor market frictions. Gali and van Rens (2010) find a common thread in their paper by

using a structural model to show how a reduction in labor market frictions can increasewage flexibility, finding evidence to link all three developments to the labor market.

However, these business cycle developments have been documented for US only.

The scope of this paper is to investigate the cross-country heterogeneity in these busi-

ness cycle moments in order to assess whether the facts emphasized by Gali and van

Rens (2010) and Barnichon (2010) are global phenomena, or limited to the case of US. We

focus on the unconditional sample moments for the cyclical component of key macroe-

conomic variables across 10 OECD countries (including the United States, for compari-

son purposes). Furthermore, we consider if the theories proposed to explain these facts,

which fit well with developments in the US economy, are relevant for other OECD coun-

tries. More specifically, in the first part of the analysis we assess the evolution of the

1See Gourio (2007), Champagne and Kurmann (2010), Nucci and Riggi (2009)

1


4/46

correlation between productivity and unemployment in order to uncover any similari-

ties across countries and form groups. Thereafter, we focus on the group that includes

US and consider whether the explanations based on labor market flexibility are sup-

ported by empirical evidence, i.e. whether countries that belong to the same group had

similar developments related to the degree of labor market rigidities. Finally, we ana-

lyze additional business cycle statistics, such as the cyclicality of labor productivity and

the volatilities of macroeconomic series, in order to determine whether the three devel-

opments listed above are consistent and reflect the characteristics of the labor market

within our group of interest.

Our paper finds a substantial degree of heterogeneity in the patters of correlations

between labor productivity and unemployment across OECD economies. A few coun-

tries, such as Canada and Finland, display unique patterns, while the others can be

grouped according to the sign of the correlation or the timing of the sign switch. Sur-

prisingly, we find that the countries most comparable to the US are Italy and Norway.

By profiling the labor markets of the United States and Italy, we cast doubt on the ability

of the labor market to account for the correlation of productivity with unemployment

and output, but find evidence that the evolutions on the labor markets are consistent

with the vanishing procyclicality of productivity.

First we place our paper in the literature, and discuss the outcomes of previous stud-

ies into the Great Moderation and additional business cycle developments. Thereafter

we present the data and our methodology. We then focus on our results and a discus-

sion of labor market characteristics in the United States and Italy from the 1970s. Finally,

we conclude.

2


5/46

2 Literature Review

The studies that document the three business cycle developments considered above

point towards two main explanations. The first one is related to a change in the relative

importance between technology shocks and non-technology shocks and the second one

is represented by the decrease in the rigidities on the labor market. We further discuss

in detail the theories presented in the literature and the basic mechanisms that account

for these changes.

Barnichon (2010) documents a sign switch of the correlation between unemployment

and productivity in the mid 80s and estimates a VAR in order to trace the impact of a

technology and non-technology shock on these two variables. Based on the empirical

evidence, he points towards two main explanations for the sign switch. First, since a

positive technology shock leads to a positive correlation between the variables, while a

non-technology shock generates a negative one, the sign shift could be explained by a

change in the relative size of the shocks. Second, the evidence indicates a decrease inthe pro-cyclicality of productivity after the mid 80s based on structural changes in the

labor market.

Barnichon (2010) provides a structural interpretation using a New-Keynesian model

with sticky prices, search and matching frictions and variable labor effort. In this con-

text, a non-technology shock is interpreted as an aggregate demand shock that deter-

mines firms to raise the labor input in order to be able to satisfy the increase in demand.

Since employment cannot be adjusted immediately due to hiring costs, firms increase

hours and effort leading to a rise in productivity. However, the use of the intensive mar-

gin is limited because the disutility of workers increases in hours and effort, therefore

firms will start to post vacancies and unemployment will decrease. This is the mecha-

nism through which a positive non-technology shock leads to a negative productivity-

3


6/46

unemployment correlation.

In contrast, a positive technology shock generates an increase in productivity, which

leads firms to lower hours and effort initially, because employment is subject to fric-

tions and hence they face firing costs. This reduction leads to a decrease in the value

of a marginal worker and therefore firms will post fewer vacancies and unemployment

will increase. As a consequence, a technology shock leads to a positive productivity-

unemployment correlation.

In line with this evidence, the two events that explain the correlation sign switch

are an increase in the size of technology shocks relative to other types of shocks and

a decline in the response of productivity to non-technology shocks after the mid 80s.

In the model, the declining procyclicality of productivity is explained through a more

flexible labor market due to smaller hiring frictions and an increased elasticity of hours

per worker. The empirical evidence that could support these developments consists of a

rising share of temporary workers, a decline in the unionization rate and the emergence

of online recruitment sites in the last two decades.

The results of the model indicate that about 40% of the increase in the correlation is

due to changes in the sizes of the shocks and approximately 60% can be associated with

the structural changes. Our purpose is to analyze whether these facts are valid for all

the countries where the switch in the sign of the correlation took place and therefore

determine whether they provide a comprehensive explanation or the evidence can be

extended by considering other factors.

Gali and Gambetti (2008) estimate a structural time varying VAR on output, hours

and labor productivity and find evidence for a decline in the cyclical response of la-

bor productivity to non-technology shocks. Furthermore, the authors document a drop

in the correlation between total hours worked and productivity conditional on non-

technology shocks.

4


7/46

The potential explanation for these findings could be related to the variations in ef-

fort that take place due to the high adjustments costs in employment. Since it is costly

to hire or fire new people when faced with fluctuations in demand, variations in effort

represent a tool for the firms to easily adjust effective labor input. In this context, the

measured hours fluctuate less than their effective counterpart and therefore labor pro-

ductivity will tend to be procyclical. An increase in the flexibility of the labor markets

leads to a decrease in the variations in effort and would therefore explain a decline in

the procyclicality of labor productivity following an aggregate demand shock.

These changes in conditional moments are synchronized with the decline in output

volatility from the early 1980s, however it has not been established whether they share

a common explanation based on structural modifications in the labor market.

On the basis of a similar explanation related to a reduction in hiring costs, Gali and

van Rens (2010) also find evidence for a vanishing procyclicality of labor productivity

and a relative increase in the volatility of employment and the real wage with respect

to output. The mechanism is illustrated through a model with labor market frictions,

variable effort, and endogenous wage rigidities in which effort is considered as a factor

input which is not subject to rigidities and can partly substitute labor. Since frictions

on the labor market create difficulties in adjusting employment, a reduction in frictions

leads to a drop in the volatility of this input and an increase in the one of employment

relative to output. Hence, the procyclicality of productivity is influenced by variations

in effort.

The present study focuses on providing empirical evidence for the explanation based

on an increased flexibility in the labor markets and we leave for future research the con-

sideration of the relative importance of the technology and aggregate demand shocks.

5


8/46

3 Data and Methodology

Our analysis is based on the following macroeconomic time series at the individual

country level: real GDP, average hours per worker, employment, unemployment and

productivity. We consider quarterly, seasonally-adjusted data for the period 1970Q1-

2011Q42 for Australia, Canada, Finland, France, Italy, Japan, Norway, Sweden, United

Kingdom and the United States. There is extensive research related to business cycle

developments in the United States, and we include it as a benchmark with which to

compare other OECD countries. The main data source is the OECD, although some

OECD series were extracted from the FRED database of the St. Louis Federal Reserve

Bank.

To profile the labor markets in our countries of interest, we focus explicitly on tem-

porary workers, unionization rates and sectoral shifts from manufacturing to services.

The main source of this indicators is the CEP-OECD Institutions Data Set (See Nickell

(2006)).Following Barnichon (2010), all series were de-trended with the HP-filter and a

smoothing parameter of 16003 and our calculations are performed on the deviations

of each series from its trend. Labor productivity is based on our own calculations, and

is computed as real GDP divided by the total hours worked. The correlation of produc-

tivity with unemployment and with output, and the volatilities of relevant times series

are computed as 10 year rolling windows over the sample.

2Exceptions: Finland 1970:Q1-2010:Q4; UK 1972:Q1-2011:Q43Our results are robust when data is transformed with the fourth-difference operator used in Stock

and Watson (2002). See the Appendix, section 6.1

6


9/46

4 Results

In the first part of the analysis we present our results regarding the patterns of correla-

tions between unemployment and labor productivity for each country. Thereafter we

propose a grouping based on similarities regarding the signs and breaks. In the second

part of the analysis we zoom in on the group of countries that includes US in order to

make a a brief and qualitative assessment of whether explanations based on the labor

market, as cited in Barnichon (2010) and Gali and van Rens (2010), are consistent with

the empirical facts in each country. Furthermore, we enrich our analysis by examin-

ing the volatility of employment and hours relative to output and the procyclicality of

productivity for the selected group of countries.

4.1 Comparisons across countries

The most striking result from our analysis is the parallel sign shifts experienced by the

United States and Italy (See figures 3,6-7 in the Appendix, section 6.2). The first signif-

icant break in the data occurs for both countries in the mid-1980s, when the correlation

became significantly positive. After 1993, both countries display a second break, and

the correlation becomes zero for the United States and significantly negative for Italy.

Norway experiences a significant sign shift slightly later than the US and Italy. It

breaks from a zero correlation in the beginning of the sample to significantly positive

starting in the late 1980s.

New Zealand, Sweden, UK and Australia display a switch in correlation in the late

70s. Previously, the correlation for New Zealand and Sweden was negative, while in the

UK and Australia the correlation was not significantly different from zero. In the late

70s, the correlations become positive for New Zealand, Sweden and Australia, but the

positive correlation is not significant over the full length of the sample. The correlation

7


10/46

became negative for the UK in the late 90s, although not significantly different from

zero.

The correlations for France and Japan are significantly negative after the 1980s and

do not display any switch in the sign (figure 8). In both countries there are brief periods

in which the correlation is not significantly different from zero.

Canada is the only country for which the switch in correlation is from positive to

negative (See figure 1). The date of this change is in the first quarter of 1983 and is

characterized by a trend instead of a sharp break. The correlation for Finland is not

statistically different from zero along the entire sample (figure 9).

Italy, Norway and the US are the only countries that exhibit sharp breaks over the

sample period. In the case of Australia, Canada, Finland, France, Japan, New Zealand,

Sweden and the UK, the correlation is relatively smooth.

The evolution of the correlation in each individual country can be seen in figures 1-6

in the Appendix, section 6.2.

4.1.1 Country groups

While some countries display similar traits to the United States over the period of in-

vestigation, we also find significant heterogeneity in both the sign of the correlation and

the approximate date of the shift. Furthermore, some countries displayed a sharp break,

and for others the sign shift was characterized by a trend instead of a sharp break. We

classify the countries according to i) the presence of a sign shift, ii) the approximate date

of the shift and iii) the shape of correlation over time.

1) United States, Italy and Norway

2) UK, Sweden, New Zealand, Australia

3) France and Japan

8


11/46

4) Canada and Finland4

In the next section, we will focus on the empirical evidence regarding the labor mar-

ket and additional business cycle moments in the United States and Italy. We are in-

terested in these two countries in particular because their correlations have a similar

shape, exhibit the same sign shift and break at the same date. In addition, there are no

immediately apparent reasons why the correlation should be so similar between these

countries. They do not share a common labor market or currency union and have dif-

ferent political systems.

4.2 Labor markets profiles

To explain the sign switch in the correlation between productivity and unemployment,

the literature has offered up a number of explanations, including the changing relative

importance of technology shocks and shocks to aggregate demand, an improvement in

monetary policy and a decrease in labor market frictions 5. In the absence of a structural

model, we will focus on the hypothesis that labor market frictions drove the change in

the correlation of unemployment and productivity. We will limit our comparison to the

United States and Italy, two countries that at first glance do not seem to have very much

in common in terms of labor market flexibility.

Barnichon (2010) offers insight into why decreasing labor market frictions would

affect the correlation between unemployment and productivity. He suggests that if hir-

ing costs decline, it is easier for firms to adjust the number of workers in response to

fluctuations in demand. As a result, hours per worker and effort6 fluctuate less. Barni-

4See figures 7 - 9 in the Appendix5See Barnichon (2010), Gali and Gambetti (2008), Gali and van Rens (2010)6Effort, which may be measured as approximate labor utilization by the number of hours per em-

ployee, overtime hours, the ratio of production to non-production workers, accident rates, and materialsinput growth (Marchetti and Nucci (2006)) is not included in our analysis

9


12/46

chon (2010) also finds that the elasticity of hours per worker has increased leading to an

increased volatility of hours per worker.

Gali and van Rens (2010) and Gali and Gambetti (2008) offer similar explanations

to explain the shift in correlation between productivity and output. Gali and van Rens

(2010) suggest that labor market frictions make it costly to adjust employment, which

implies firms rely more on the intensive margins (hours and effort) in response to de-

mand. As a result of their structural model analysis, they find that as frictions fall,

it becomes optimal to adjust labor more through employment and less through effort.

Furthermore, they state that recent evidence points to a rise in the elasticity of labor

input with respect to output.

Following Barnichon (2010), we should expect to see similar characteristics and tim-

ing in the United States and Italy along the following dimensions:

1) a rising share of temporary workers

2) a decline in the unionization rate

3) a sectoral shift from manufacturing to services7

We focus here on a comparison between United States and Italy according to these

three points and the additional moments.

4.2.1 Temporary workers

Temporary workers is a difficult dimension on which to compare the United States and

Italy, in large part because several definitions of what it means to be a temporary worker

exist.8 However, in the United States it is clear that temporary workers played a bigger

7The connection between the sectoral shift from manufacturing to services and labor market flexibilitymay not be immediately obvious. However, DAgostino et al. (2006) find that institutional frameworksaffecting the degree of flexibility in the labor market play an important role in the level of service sectoremployment. For example, in their econometric analysis of the determinants of service sector employ-ment, they find a negative effect of the rate of national union density on the service sector employmentshare. They report similar results for the effect of national employment protection legislation.

8See Osterman (2001) for a full list of definitions.

10


13/46

role in the US economy starting in the late 70s and early 80s. According to Osterman

(2001), from "1979 to 1995 the temporary help supply industry grew at a rate of 11.2

percent a year, five times the rate for total U.S. non-farm employment". In addition,

Osterman (2001) shows that, according to Census data, between "1988 and 1996 fully 22

percent were in business services and engineering/management services, i.e. the two

sectors, which supply contract and contingent labour".

The series for temporary workers in Italy also displays an upward trend starting

with the mid 80s (figure 11).9 The slope of the trend becomes more pronounced after

1993, when a series of labor market reforms were implemented in Italy. According to

this criterion, the two countries seem to have a similar evolution.

4.2.2 Decline of unionization rate

The evolutions of the trade union densities are presented in figure 11 in the Appendix.

The rate of union membership in the United States experienced a "modest and concen-

trated decline in the 1979 to 1984 period" (Gosling and Lemieux (2004)), with the peak of

union membership in absolute terms in 1979 with 21 million (Mayer (2004)). However

by 2003 union membership stood at 15.8 million (Mayer (2004)). In terms of propor-

tion, only 11.5% of employed workers were union members in 2003 (Mayer (2004)). In

addition to a decrease in membership, unions also became less relevant for setting em-

ployment terms. Union wage setting in the 1990s is described as decentralized with

"unions [having] little influence over pay in the private sector" (Gosling and Lemieux

(2004)).

The evolution of the trade union density in Italy displays a declining trend starting

with the beginning of the 80s. The pattern is very similar to the one of US, although in

9Unfortunately we lack data before 1983 so we cant assess whether there was a structural break in themid 80s or the increase started much earlier.

11


14/46

absolute terms the unionization rate for US is much lower than the one in Italy over the

entire sample period. However, in order to accurately compare the two countries along

this dimension we need to consider as well the evolution of the coverage rate in Italy,

since for US the two indicators coincide. In the case of Italy, the coverage and unioniza-

tion rates differ because the impact of the policies adopted by the members of the union

extend to all the workers and not just to union members. The coverage ratio has de-

creased since the beginning of the 1970s until 2000 and displays two main shifts in the

trend, one in the mid 80s and the other one at the beginning of the 90s. These changes

can be associated with the two breaks in the correlation between unemployment and

productivity observed in our data, as well as two labor market reforms that took place

in Italy, one in the mid 1980s and one in 1993 (Jimenez-Rodriguez and Russo, 2010).

The process of deregulation from 1984 consisted mainly of the introduction of part-

time contracts and the abolishment of the mechanism of automatic wage indexation,

characterized by uniform wage adjustments to inflation across workers. The reforms

implemented in 1993 regarded a broad range of issues and established a new institu-

tional framework for bargaining procedures, union representations and general em-

ployment policies. The agreements provided a foundation for a better representation of

employees and collective bargaining (OECD (2004) ; Visser (2008)). The Income Policy

Agreement from 1993 created a new bargaining system which incorporated a national

and regional level. The former is meant to protect the purchasing power of wages,

while the second aims at coordinating the additional wage components with firm per-

formance and therefore improves the flexibility of the wage determination by making

it more market driven and sensitive to the economic conditions (Devicienti, Maida, and

Pacelli, 2006).

Although the reforms implemented in 1993 were meant to increase the flexibility of

the labor market, it is not clear to what extent they were implemented in an efficient

12


15/46

manner and whether the objective was achieved. However, assuming that these insti-

tutional changes lead to a certain extent to a decrease in the rigidities, according to our

data these effects are associated with a negative correlation between unemployment

and productivity and not a positive one.

4.2.3 Sectoral shift from manufacturing to services

According to Kutscher and Personick (1986), a substantial shift in employment between

the manufacturing and service sectors can be observed beginning in the late 1970s:

the goods-producing sector lost 3 million jobs between 1979 and 1983, "while service-

producing jobs increased every year during that time span, by a total of 4.1 million"

(1986). While the goods-producing sector recovered slightly in the mid-1980s, the "gain

was dwarfed by the almost 3.0 million new service-producing jobs added in that single

year" (Kutscher and Personick (1986)). See figure 10 in the Appendix for the evolution

in employment shares in the US.

The sectoral shift from manufacturing to services took place in Italy as well, in very

similar proportions with the one in the US. We can notice from figure 10 that the propor-

tion of workers in the service sector relative to manufacturing increased between 1970

and 2011, with a more pronounced upper trend in the mid 80s.

4.2.4 Labor market conclusions

Empirical evidence points towards some similarities across the labor markets in US and

Italy, such as a common evolution of temporary workers and a sectoral shift from man-

ufacturing to services. However, these features are common to many industrialized

countries. More importantly, there are substantial differences regarding the role played

by labor unions in each country. Therefore, while the countries display similar trends

towards flexibility since the 1970s, the evidence points to a more flexible market in US.

13


16/46


17/46

Business Cycle Statistics: United States and Italy

Italy

All Sample 1970-1983 1983-1993 1993-2011

Corr (Unemployment, productivity) -0.06 -0.07 0.44 -0.50

Corr (Unemployment, productivity) -0.06 -0.05 -0.07

Corr (Productivity, output) 0.81 0.88 0.73 0.78

Vol: Employment to output 0.50 0.44 0.56

Vol: Hours relative to output 0.44 0.31 0.55

US

All Sample 1970-1983 1983-2011

Corr (Unemployment, productivity) -0.01 -0.35 0.24

Corr (Productivity, output) 0.39 0.64 0.20


Vol: Hours relative to output 0.29 0.24 0.36

In terms of the procyclicality of productivity, the US and Italy display different be-

havior. In the United States, the strength of this correlation falls significantly in the

second half of the sample, while it remains constant in Italy. We find the US labor mar-

ket to be more flexible than its Italian counterpart thus reinforcing for the claim made

by Gali and van Rens (2010) that increased labor market flexibility is responsible for the

vanishing procyclicality of productivity. However, both Italy and the United States haveexperienced a relative increase in the volatility of employment and hours with respect

to output over the second half of the sample. In their paper, Gali and van Rens (2010)

attribute this increase in labor input volatility to firms increasing reliance on labor input

adjustments in order to meet changes in output, and find that as labor market frictions

decrease in their model, the volatility of employment relative to output increases as

15


18/46

well.

Furthermore, Barnichon (2010) attributes 60% of the switch in the correlation be-

tween labor productivity and unemployment to structural changes related to the labor

market and monetary policy, which suggests the correlation pattern should reflect the

degree of labor market flexibility to some extent. The similarity in the pattern of the

correlation between the United States and Italy suggests that labor market flexibility is

not likely to be the only relevant explanation for the developments in the evolutions of

correlations. However, he does not denote which of the two structural changes are more

important, so our conclusion is only tentative and further research is needed.

5 Conclusion

Recent developments in business cycle statistics have been documented only for US. In

this paper, we address (i) the sign shift in the unconditional correlation between produc-

tivity and unemployment, (ii) a decrease in the procyclicality of productivity and (iii)

an increase in the volatility of employment and hours relative to output for 10 OECD

countries. Barnichon (2010) provides two main explanations for these developments,

one consisting of an increase in the size of technology shocks relative to other shocks

and another based on a increase in labor market flexibility. The purpose of this paper is

twofold. First, we extend the analysis to other OECD countries in order to investigate

whether the changes in correlations remain valid and group the countries according

to similar evolutions of the series. Second, we investigate whether the degree of labor

market flexibility could be a valid explanation for similar developments and patterns in

the group formed by US and Italy. In order to asses this assumption we look at empiri-

cal evidence regarding the evolution of temporary workers, unionization rates, sectoral

shifts. Finally, we analyze additional business cycle statistics, such as the cyclicality of

16


19/46

labor productivity and the volatilities of macroeconomic series, in order to determine

whether the three developments listed above are consistent and reflect the characteris-

tics of the labor market within our group of interest.

We find that there are significant differences in the flexibility and evolution of the

labor markets in US and Italy despite the high similarities in the patterns of correlations

between unemployment and labor productivity. The two countries display similarities

only in terms of the evolution of temporary workers and sectoral shifts from manufac-

turing to services, the latter being a common feature of most industrialized countries.

However, the role played by the unions point to a more flexible market in US. Fur-

thermore, the effects of the reforms implemented in Italy at the beginning of the 90s

are associated with a switch in the correlation from positive to negative and not vice

versa. Finally, the procyclicality of productivity declined only in US and not in Italy,

which provides evidence for Gali and van Rens (2010) claim that increased labor mar-

ket flexibility is responsible for the vanishing procyclicality of productivity. However,

we consider that labor market flexibility is not likely to be the only relevant explanation

for the developments in the evolutions of correlations between labor productivity and

unemployment, and the increase in the volatility of employment and hours relative to

output. We do not assess here the explanation based on the relative evolution of tech-

nology and non-technology shocks, therefore this hypothesis remains as a ground for

future research.

17


20/46

References

Barnichon, R. (2010). Productivity and Unemployment over the Business Cycle. Journal

of Monetary Economics 57.

DAgostino, A., R. Serafini, and M. Ward-Warmedinger (May 2006). Sectoral Explana-

tions of Employment in Europe: The Role of Services. European Central Bank: Working

Paper Series 625.

Devicienti, F., A. Maida, and L. Pacelli (2006). The Resurrection of the Italian Wage

Curve. LABOR Center for Employment Studies Working Paper (52).

Gali, J. and L. Gambetti (2008). On the Sources of Great Moderation. American Economic

Journal: Macroeconomics 1(1), 2657.

Gali, J. and T. van Rens (2010). The Vanishing Procycality of Labor Productivity. Unpub-

lished manuscript.

Gosling, A. and T. Lemieux (2004). Labor Market Reforms and Changes in Wage In-

equality in the United Kingdom and the United States. Seeking a Premier Economy: The

Economic Effects of British Economic Reforms, 1980-2000 June.

Jimenez-Rodriguez, R. and G. Russo (2010). Aggregate Employment Dynamics and

(Partial) Labor Market Reforms? Center for Studies in Economics and Finance Working

Paper (260).

Kutscher, R. and V. Personick (1986). Deindustrialization and the shift to services.

Monthly Labor Review June.

Marchetti, D. and F. Nucci (May 2006). Labor effort over the business cycle. Banca

DItalia: Temi di discussione del Servizio Studi 625.

18


21/46

Mayer, G. (2004). Union Membership Trends in the United States. Congressional Research

Service: CRS Report for Congress August.

Nickell, W. (2006). The Cep-Oecd Institutions Data Set. CEP Discussion Paper 759.

OECD (2004). Wage-setting Institutions and Outcomes. OECD Employment Outlook,

127181.

Osterman, P. (2001). Flexibility and Commitment in the United States Labour Market.

International Labour Organisation, Research Programme: "Adjustment of labour markets toeconomic and structural change: labour market flexibility, security and labour market poli-

cies 18.

Stat, O. (2012). Real gdp, average hours per worker, employment, unemployment.

Statistics.

Stock, J. H. and M. W. Watson (2002). Has the Business Cycle Changed and Why? NBER

Macroeconomics Annual 17, 159218.

Visser, J. (2008). The Quality of Industrial Relations and the Lisbon Strategy. European

Commission, Industrial relations in Europe.

19


22/46

6 Appendix

6.1 Robustness check

Robustness Check, Business Cycle Statistics: United States and Italy

Italy

All Sample 1970-1983 1983-1993 1993-2011

Corr (Unemployment, productivity) -0.02 -0.05 0.32 -0.29


Corr (Productivity and output) 0.77 0.88 0.68 0.73


Vol: Hours to output 0.47 0.33 0.62

US

All Sample 1970-1983 1983-2011


Corr (Productivity and output) 0.55 0.71 0.44


Vol: Hours to output 0.28 0.23 0.35

20


23/46

6.2 Figures

Figure 1: 10 year rolling correlations between unemployment and productivity

21


24/46


22


25/46


23


26/46


24


27/46


25


28/46


26


29/46


27


30/46


28


31/46


29


32/46

Figure 10: Sectoral shift from manufacturing to services

30


33/46

Figure 11: Temporary workers and Trade Union Density

31


34/46

Figure 12: Evolution of volatilities: Focus group

-0.01

0

0.01

0.02

0.03

0.04

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

US: 10-year rolling standard deviation of output

Output

0

0.005

0.01

0.015

0.02

0.025

Q11970

Q21971

Q31972

Q41973

Q11975

Q21976

Q31977

Q41978

Q11980

Q21981

Q31982

Q41983

Q11985

Q21986

Q31987

Q41988

Q11990

Q21991

Q31992

Q41993

Q11995

Q21996

Q31997

Q41998

Q12000

Q22001

US: 10-year rolling standard deviation ofemployment

Employment

0

0.001

0.002

0.003

0.004

0.005

0.006

0.007

11970

21971

31972

41973

11975

21976

31977

41978

11980

21981

31982

41983

11985

21986

31987

41988

11990

21991

31992

41993

11995

21996

31997

41998

12000

22001

US: 10-year rolling standard deviation of hours

32


35/46

Figure 13: Evolution of volatilities: Focus group

0

0.002

0.004

0.0060.008

0.01

0.012

0.014

Q11970

Q21971

Q31972

Q41973

Q11975

Q21976

Q31977

Q41978

Q11980

Q21981

Q31982

Q41983

Q11985

Q21986

Q31987

Q41988

Q11990

Q21991

Q31992

Q41993

Q11995

Q21996

Q31997

Q41998

Q12000

Q22001

US: 10-year rolling standard deviation of

productivity

Productivity

0

0.005

0.01

0.015

0.02

0.025

Q1

1970

Q2

1971

Q3

1972

Q4

1973

Q1

1975

Q2

1976

Q3

1977

Q4

1978

Q1

1980

Q2

1981

Q3

1982

Q4

1983

Q1

1985

Q2

1986

Q3

1987

Q4

1988

Q1

1990

Q2

1991

Q3

1992

Q4

1993

Q1

1995

Q2

1996

Q3

1997

Q4

1998

Q1

2000

Q2

2001

Italy: 10-year rolling standard deviation ofproductivity

Productivity

33


36/46


37/46

Figure 15: The cyclicality of productivity

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Q12003

Q32004

Q12006

Q32007

Q12009

Q32010

The procyclicality of productivity in Italy,1970Q1-2011Q4

Real GDP: Deviations from trend Productivity: Deviations from trend

-0.06

-0.05

-0.04

-0.03

-0.02

-0.01

0

0.01

0.02

0.03

0.04

0.05

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Q12003

Q32004

Q12006

Q32007

Q12009

Q32010

The procyclicality of productivity in the US,

1970Q1-2011Q4

Real GDP: Deviations from trend Productivity: Deviations from trend

35


38/46

Figure 16: Volatility ratios: Focus group

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Q119

70

Q219

71

Q319

72

Q419

73

Q119

75

Q219

76

Q319

77

Q419

78

Q119

80

Q219

81

Q319

82

Q419

83

Q119

85

Q219

86

Q319

87

Q419

88

Q119

90

Q219

91

Q319

92

Q419

93

Q119

95

Q219

96

Q319

97

Q419

98

Q120

00

Q220

01

Italy: Volatility ratios over time

Employment/Output Hours/Output

0

0.1

0.2

0.3

0.40.5

0.6

0.7

0.8

0.9

1

Q11970

Q21971

Q31972

Q41973

Q11975

Q21976

Q31977

Q41978

Q11980

Q21981

Q31982

Q41983

Q11985

Q21986

Q31987

Q41988

Q11990

Q21991

Q31992

Q41993

Q11995

Q21996

Q31997

Q41998

Q12000

Q22001

US: Volatility ratios over time

Employment/Output Hours/Output

36


39/46

Figure 17: Volatilities

0

0.002

0.004

0.006

0.008

0.01

0.012

0.014

0.016

0.018

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Australia: 10-year rolling

standard deviations

Employment Lab prod1 Real GDP Hours

0

0.005

0.01

0.015

0.02

0.025

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Canada: 10-year rolling standard

deviations

Real GDP Employment Lab prod1 Hours

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

1970

1971

1972

1973

1975

1976

1977

1978

1980

1981

1982

1983

1985

1986

1987

1988

1990

1991

1992

1993

1995

1996

1997

1998

2000

Finland: 10-year rolling standard

deviations

37


40/46


0

0.005

0.01

0.015

0.02

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

France: 10-year rolling standard deviations


0

0.005

0.01

0.015

0.02

0.025

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Italy: 10-year rolling standard deviations


0

0.005

0.01

0.015

0.02

0.025

11972

21973

31974

1975

11977

21978

31979

1980

11982

21983

31984

1985

11987

21988

31989

1990

11992

21993

31994

1995

11997

21998

31999

2000

Norway: 10-year rolling standard

deviations

38


41/46


0

0.01

0.02

0.03

0.04

0.05

Q11970

Q21971

Q31972

Q41973

Q11975

Q21976

Q31977

Q41978

Q11980

Q21981

Q31982

Q41983

Q11985

Q21986

Q31987

Q41988

Q11990

Q21991

Q31992

Q41993

Q11995

Q21996

Q31997

Q41998

Q12000

Q22001

New Zealand: 10-year rolling standard

deviations


0

0.005

0.01

0.015

0.02

0.025

1970

1971

1973

1974

1976

1977

1979

1980

1982

1983

1985

1986

1988

1989

1991

1992

1994

1995

1997

1998

2000

2001

Sweden: 10-year rolling standard

deviations

0

0.005

0.01

0.015

0.02

0.025

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Japan: 10-year rolling standard deviations


39


42/46


0

0.005

0.01

0.015

0.02

0.025

Q11971

Q21972

Q31973

Q41974

Q11976

Q21977

Q31978

Q41979

Q11981

Q21982

Q31983

Q41984

Q11986

Q21987

Q31988

Q41989

Q11991

Q21992

Q31993

Q41994

Q11996

Q21997

Q31998

Q41999

Q12001

UK: 10-year rolling standard deviations


0

0.005

0.01

0.015

0.02

0.025

0.03

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

US: 10-year rolling standard deviations


40


43/46


0

0.05

0.1

0.15

0.2

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Australia: 10-year rollingstandard deviations

Unemployment

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Canada: 10-year rolling

standard deviations

Unemployment

0

0.05

0.1

0.15

0.2

0.25

0.3

1970

1971

1972

1973

1975

1976

1977

1978

1980

1981

1982

1983

1985

1986

1987

1988

1990

1991

1992

1993

1995

1996

1997

1998

2000

Finland: 10-year rolling standard

deviations

41


44/46


0

0.02

0.04

0.06

0.08

0.1

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

France: 10-year rolling standard

deviations

Unemployment

0

0.01

0.02

0.03

0.040.05

0.06

0.07

0.08

0.09

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Italy: 10-year rolling standard deviations

Unemployment

0

0.05

0.1

0.15

0.2

0.25

1972

1973

1974

1975

1977

1978

1979

1980

1982

1983

1984

1985

1987

1988

1989

1990

1992

1993

1994

1995

1997

1998

1999

2000

Norway: 10-year rolling standard

deviations

42


45/46


0

0.1

0.2

0.3

0.4

0.5

0.6

Q11970

Q21971

Q31972

Q41973

Q11975

Q21976

Q31977

Q41978

Q11980

Q21981

Q31982

Q41983

Q11985

Q21986

Q31987

Q41988

Q11990

Q21991

Q31992

Q41993

Q11995

Q21996

Q31997

Q41998

Q12000

Q22001

New Zealand: 10-year rolling standard

deviations

Unemployment

0

0.05

0.1

0.15

0.2

0.25

1970

1971

1973

1974

1976

1977

1979

1980

1982

1983

1985

1986

1988

1989

1991

1992

1994

1995

1997

1998

2000

2001

Sweden: 10-year rolling standard

deviations

0

0.02

0.04

0.06

0.08

0.1

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

Japan: 10-year rolling standard deviations

Unemployment

43


46/46


0

0.02

0.04

0.06

0.08

0.1

0.12

Q11970

Q21971

Q31972

Q41973

Q11975

Q21976

Q31977

Q41978

Q11980

Q21981

Q31982

Q41983

Q11985

Q21986

Q31987

Q41988

Q11990

Q21991

Q31992

Q41993

Q11995

Q21996

Q31997

Q41998

Q12000

UK: 10-year rolling standard deviations

Unemployment

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

Q11970

Q31971

Q11973

Q31974

Q11976

Q31977

Q11979

Q31980

Q11982

Q31983

Q11985

Q31986

Q11988

Q31989

Q11991

Q31992

Q11994

Q31995

Q11997

Q31998

Q12000

Q32001

US: 10-year rolling standard deviations

Unemployment

the role of labor markets in business cycle statistics

Documents