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Macro Advisers: Okun's Law Is Working Well. Nothing to See Here. Move Along

There has long been some question of whether there is something to explain in divergence between production and employment in this downturn. Macro Advisors says not:

Macroadvisers: Swings in Hours and Productivity in the Recession and Recovery — Unusual or Not?: Our model for hours understands the recent experience of hours, and given actual data on output, it therefore explains most of the swings in productivity over the last few years. Stated simply, nearly the entire decline in hours between the second quarter of 2007 and the third quarter of 2009, as well as most of the surge in productivity that occurred in 2009 and early 2010, is accounted for by the model. The model also easily accounts for the softening of productivity in the second quarter and it more than accounts for the rebound in productivity in the third quarter.

The model understands these swings to be due largely to cyclical factors, including changes in output and in labor utilization, and in changes in the growth of business capital stocks. Movements in total factor productivity (TFP) have for the most part been a secondary factor in accounting for swings in productivity and hours in recent years — except in the second quarter, when a temporary weakening in TFP growth contributed to the decline in productivity. The model more than accounts for the rebound in productivity growth in the third quarter. Indeed, it “expected” an increase 1.1 percentage points larger than actually occurred, reflecting both a positive swing in the cyclical contribution and a rebound in TFP growth.

Some have argued that productivity was inexplicably strong during the recent surge. A possible reason is that employers might have slashed their labor forces by more than what was warranted out of concern that demand would weaken by substantially more than it did. As a result, productivity was unsustainably high. However, we are not inclined to agree because our model understands well both the level and recent growth of productivity.