Labor Hoarding and the Business Cycle

The puzzle of procyclical labor productivity occupies an important position in the debate over real business cycle theory. Real business cycle proponents attribute it to procyclical technology shocks, opponents to 'labor hoarding'--retention during recessions of workers not needed for current production, thus downwardly biasing productivity measurements. This paper uses a model featuring heterogeneous industries to illustrate that the conventional presumption of countercyclical aggregate labor hoarding generating procyclical productivity measurements is not necessarily well grounded in theory. Copyright 1994 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.