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Productivity
Growth
Investing in
recession?
Recent
empirical studies of the cyclical behaviour of job creation and job
destruction have found that destructions are concentrated in recession
periods, while creations are subject to relatively smaller fluctuations
over the cycle. In Discussion Paper No. 578, Research Fellows Philippe
Aghion and Gilles Saint-Paul formalize the idea that economic
fluctuations can stimulate productivity growth with a simple model in
which firms' investment in such growth in the reorganization of their
production or in technical progress is greater during recessions that
are expected to be followed by an expansionary phase. Productivity
growth increases because the opportunity cost (in terms of forgone
profits) of investing capital or labour resources in technological
improvements or managerial reorganizations is low during depression
phases the more so when the discrepancy between booms and slumps is
large.
Aghion and Saint-Paul first study a one-firm (or one-sector) model, in
which the sole producer decides at each instant how to distribute labour
between reorganization (or R&D) and production activities. They find
that the average growth rate is an increasing function of the amplitude
of the economic fluctuations which are assumed to occur randomly and
increases with the frequency of recessions, provided that the latter are
initially less frequent than expansionary phases. For a multi-firm (or
multi-sector) version of this model, in which firms are subject to
uncorrelated idiosyncratic shocks of the same type, they find that the
average growth rate again depends on the amplitude and frequency of
fluctuations. The growth process introduces an additional discounting
effect, however, which works through relative prices over time to an
extent that increases with the intersectoral substitutability of
products.
Aghion and Saint-Paul then analyse the combined effects of idiosyncratic
fluctuations and aggregate recessions, which they find reinforce one
another the more so when firms incur (large) fixed production costs.
More generally, large fixed production costs tend to increase the impact
of economic fluctuations on growth. Finally, they show that under a
natural interpretation of the model where firms continually hire or fire
workers for both `reorganization' and `production' activities their main
results are consistent with those found in recent empirical evidence on
the cyclical behaviour of job reallocation.
On the
Virtue of Bad Times: An Analysis of the Interaction Between Fluctuations
and Productivity Growth
Philippe Aghion and Gilles Saint-Paul
Discussion Paper No. 578, October 1991 (IM)
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