In order to avoid a number of problems encountered in previous research, this study develops a structural econometric model capable of assessing systematically the contribution of these three hypotheses to procyclical productivity. The analysis is particularly sensitive to the possibly distorting effects of technology shocks, which are assessed using a recently developed econometric test. No evidence is uncovered to suggest that labor hoarding or technology shocks play important roles. The estimated cost elasticity is nonetheless robust to these shocks, and is found to be less than unity. The evidence points strongly to the conclusion that procyclical productivity is due almost entirely to the shape of the technology.
Marginal cost is below average cost, and falls during expansions.
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