The Productivity Puzzle and the Decline of Unions

This paper argues that rapid de-unionization during the 1980s can explain the sudden vanishing of the procyclicality of productivity in the U.S. I use cross-sectional evidence from U.S. states and industries to argue that the 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. Allowing the hiring cost to decrease by the same proportion as the decline in union density can match almost the entire drop in cyclical productivity correlations in a model with endogenous effort and costly employment adjustment.