Cyclical productivity and the workweek of capital

Abstract

Standard specifications of the production function assume that an increase in labor given the stock of physical capital will reduce the capital-labor ratio. Since the stock of physical capital is quasi-fixed, the elasticity of output with respect to labor should be less than 1 as long as there are constant returns to scale. However, empirical studies of productivity typically find short-run increasing returns to labor. But the effective stock of capital should not be regarded as fixed if, when labor increases, it goes onto a previously inoperative shift. Labor that works the late shift will have at least as much capital as labor working days. Hence, for increases in labor that are accompanied by increases in the workweek of capital, there is no presumption of diminishing marginal product of labor. This paper describes briefly a data set that provides a direct measure of the workweek of capital and then investigates its role in cyclical productivity. It finds that much of the apparent cyclicality of total factor productivity is accounted for by variation in the workweek of capital.

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