A longstanding issue in empirical economics is the behavior of average labor productivity
over the business cycle. This paper provides new insights into the cyclicality of
aggregate labor productivity by examining the cyclical behavior of productivity at
the plant level as well as the role of reallocation across plants over the cycle.
We find that plant-level productivity is even more procyclical than aggregate productivity,
because short-run reallocation yields a countercyclical contribution to labor productivity.
At the plant level, we find that cyclicality of productivity varies systematically
with long-run employment growth. Over the course of the cycle, plants that are long-run
downsizers exhibit significantly greater procyclicality of productivity than do long-run
upsizers. When we control for the direction of a cyclical shock, we find that the
fall in productivity from an adverse cyclical shock for long-run downsizers is significantly
larger in magnitude than is the fall in productivity from an equivalent adverse cyclical
shock for long-run upsizers. We argue that these findings raise questions about one
of the most popular explanations of procyclical productivity: changing factor utilization
over the cycle.