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Procyclical Productivity in Manufacturing

Keywords: Productivity , Procyclical , Manufacturing , Aggregation Bias

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We study the cyclical behavior of labor productivity in eighty industries of the Chilean manufacturing sector in the 1979-2001 period. We find that labor productivity at the sector-level is procyclical but it is a-cyclical when using aggregate data. We provide an analytical and empirical explanation for this divergence. We also use an econometric model to quantify the determinants of productivity. The results indicate that technology shocks account for one half of productivity growth, thus supporting the supply shocks hypothesis as the main source of business cycles in Chile. The other 50% of the productivity changes is explained by reallocation of resources from less to more productive sectors as well as the presence of increasing returns. Variations in factor utilization were insignificant


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