Tuesday, January 6, 2009

Labor Supply and Demand: Today and in the Great Depression

Figure 15 (from my new paper "What Caused the 2008 Recession? Hints from Labor Productivity") is a scatter plot contrasting this recession and previous ones along these dimensions. Each recession is one data point in the chart. The horizontal axis measures the change in the log productivity residual from one quarter prior to the NBER peak to the fourth quarter following the NBER peak. The vertical axis measures the change in the unmeasured labor distortion (also in log points). The first three recessions each had productivity shifts that were less than experienced during non-recession years. The 2008 recession is unusual in that it has normal productivity shifts (so far) throughout the recession, but the largest adverse labor distortion shock. The 1970s and 1980s had less increase in the labor distortion than did the other recessions.


The Great Depression of the 1930s (not shown in the Figure) is qualitatively like the 1970s recession, but multiplied many times. Cole and Ohanian (1999, Table 6) find total factor productivity to fall five percent in the first year of the Great Depression, and a total of 14 percent through four years. Mulligan (2005, Figure 4) finds the Great Depression labor supply distortion to increase 0.17 log points in the first year and 0.46 log points through four years.

In other words, 1929-30 would be in the same quadrant of Figure 15 as the 1970s recession, and on about the same ray from the origin, but five times further away. 1929-33 would be about 15 times further.

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