What Caused The Recession Of 2008? Hints From Labor Productivity

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Executive Summary

A labor market tautology says that any change in labor usage can be decomposed into a movement along a marginal productivity schedule and a shift of the schedule. The author calculates this decomposition for the recession of 2008, assuming an aggregate Cobb-Douglas marginal productivity schedule, and find that the entire decline in employment and hours since December 2007 is a movement along the schedule. This finding suggests that a reduction in labor supply and/or an increase in labor market distortions are major factors in the 2008 recession.

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