Cyclical Productivity in Europe and the United States: Evaluating the Evidence on Returns to Scale and Input Utilization

This paper studies procyclical productivity growth at the industry level in the United States and three European countries (France, Germany and the Netherlands). Industry-specific demand-side instruments are used to examine the prevalence of non-constant returns to scale and unmeasured input utilization. For the aggregate US economy, unmeasured input utilization seems to explain procyclical productivity. However, this correction still leaves one in three US industries with procyclical productivity. This failure of the model can also be seen in Europe and is mostly concentrated in services industries. Copyright (c) The London School of Economics and Political Science 2006.