The Interaction Between Business Cycles and Productivity Growth: Evidence from US Industrial Data

In this paper, we employ total factor productivity data adjusted for factor utilisation over the cycle, to model the dynamic interaction between TFP and employment. Our data spans twenty 2-digit SIC code manufacturing sectors in the US. There are two key results. First, we show that the impact of technology shocks on employment cycles is much weaker than suggested by real business cycle-type models, and that in a number of cases employment responds negatively to technology shocks. Second, in examining the impact of demand shocks on TFP, we find some evidence for both opportunity cost and learning-by-doing effects.