- From Dec 2007 to Nov 2008, aggregate hours are down 4.7 percent relative to the trend for the prior 36 months
- From 2007 Q4 to 2008 Q3, productivity per hour is UP 1.9 percent, or 0.7 percent above the trend for the prior 12 quarters.
- Productivity numbers are not in yet for 2008 Q4, but let's suppose that (as compared to 2007 Q4) they are 0.9 percent above trend (that is, continuing the pattern of the prior three quarters).
The graph below is a supply and demand representation of the situation, based on the assumption that labor demand has an elasticity of -0.3 --> with stable labor demand, a 4.7 percent labor reduction would be associated with a 1.4 percent labor productivity increase.
We see that Dec 2008 is explained mainly by a supply shift. The magnitude of the supply shift is not unusual as recessions go. The lack of a significant demand shift is.
I expect that economists and others will find this conclusion very controversial, even though this is exactly the kind of accounting that Murphy and Katz did on their well accepted paper on the skill premium. Indeed, their method is better applied here because we know more about the aggregate labor demand elasticity than we do about the cross-skill elasticity of substitution in production.
[Technical Note: I stretched the price axis for the purposes of illustration. If drawn to scale, the demand shift is even smaller relative to the supply shift than shown above. Assuming that labor demand follows Cobb-Douglas with 0.7 labor's share and the elasticity of labor supply is less than 2, then more than 90 PERCENT of the reduced quantity of labor is due to a labor supply shift.]