NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

What Caused the Recession of 2008? Hints from Labor Productivity

Casey Mulligan

NBER Working Paper No. 14729
Issued in February 2009
NBER Program(s):   EFG   PE

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. I calculate this decomposition for the recession of 2008, assuming an aggregate Cobb-Douglas marginal productivity schedule, and find that all of the 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. The decline in aggregate consumption suggests that the reduction in labor supply (if any) is neither a wealth nor an intertemporal substitution effect. "Sticky real wages" or the emergence of significant work disincentives are possible explanations for these findings.

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Document Object Identifier (DOI): 10.3386/w14729

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