The Productivity Puzzle and the Decline of Unions

This paper finds that rapid de-unionization can explain the sudden vanishing of the procyclicality of productivity in the U.S. during the 1980s. Cross-sectional evidence from U.S. states and industries shows that a lower cost of hiring and firing workers due to the decline in union power prompted firms to rely less on labour hoarding, making productivity less procyclical. In a model with endogenous worker-effort, allowing the employment adjustment cost to change according to the change in union density matches well the dynamics of the cyclicality of productivity in the post-War U.S. economy.