Cyclical factor utilization

Abstract

We introduce procyclical labor and capital utilization, as well as costs of rapidly increasing employment, into a business-cycle model. Plausible variations in factor utilization enable us to explain observed variability of real GNP with considerably smaller economy-wide disturbances. The costs of adjustment create very interesting and realistic lead and lag relationships: employment does not peak until a full quarter after output; workweeks, effort, capital utilization and productivity all sharply lead the business cycle.

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