Interpreting the procyclical productivity of manufacturing sectors: can we really rule out external effects?

Abstract

Recent empirical contributions on procyclical productivity have focused on the dynamic implications of persistent aggregate fluctuations on sectoral productivity. Given a permanent innovation in aggregate output, unobserved variations of labour (or capital) utilization may have only a transitory effect on measured productivity, whereas external effects should produce permanent effects. It is found that persistent aggregate fluctuations have a permanent effect on productivity of four-digit US manufacturing industries. While a number of alternative explanations of this evidence are discussed and ruled out, the findings are consistent with a simple model with external or thick market effects.