The Productivity Puzzle and the Decline of Unions

This paper finds that rapid de-unionization can explain the sudden vanishing of the procyclicality of productivity in the U.S. during the 1980s. Cross-sectional evidence from U.S. states and industries shows that a lower cost of hiring and firing workers due to the decline in union power prompted firms to rely less on labour hoarding, making productivity less procyclical. In a model with endogenous worker effort, allowing the employment adjustment cost to fall by the amount implied by the decline in union density can generate more than half of the observed drop in the procyclicality of productivity