On the employment effects of productivity shocks: The role of inventories, demand elasticity, and sticky prices

Yongsung Chang, Andreas Hornstein, Pierre Daniel Sarte

Research output: Contribution to journalArticlepeer-review

22 Citations (Scopus)

Abstract

Whether technological progress raises or lowers employment in the short run has been the subject of much debate in the recent years. We show that cross-industry differences in inventory holding costs, demand elasticities, and price rigidities potentially all affect employment decisions in the face of productivity shocks. In particular, the employment response to a permanent productivity shock is more likely to be positive the less costly it is to hold inventories, the more elastic industry demand is, and the more flexible prices are. Using data on 458 4-digit U.S. manufacturing industries over the period 1958-1996, we find statistically significant effects of variations in inventory holdings and demand elasticities on short-run employment responses, but less conclusive evidence pertaining to the effects of measured price stickiness.

Original languageEnglish
Pages (from-to)328-343
Number of pages16
JournalJournal of Monetary Economics
Volume56
Issue number3
DOIs
Publication statusPublished - 2009 Apr

Bibliographical note

Funding Information:
We wish to thank an anonymous referee, Bennett McCallum, John Fernald, Mark Watson, as well as seminar participants at the 2004 NBER Economic Fluctuations Group meeting and the NBER Summer Workshop for their comments. We further thank Valerie Ramey for calling our attention to the importance of industry demand elasticities. Her suggestions have led to substantial re-writing of an earlier draft. We thank Dan Hurley for excellent research assistance. Chang acknowledges financial support from the Korea Research Foundation Grant funded by the Korean Government (MOEHRD) KRF-2005-003-B00034. Any opinions expressed in this paper are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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