Induced innovation, the distributive cycle, and the changing pattern of labour productivity cyclicality: an SVAR analysis for the US economy

Abstract

This paper aims to: a) contribute to the empirical literature on induced technical change by investigating the wage-productivity nexus at business cycle frequencies in the US economy; b) explore the changing pattern of the distributive cycle in the US. In order to do so, it carries out the estimation of several structural vector autoregressive (SVAR) models for two subperiods: the post-war period (1948–1984) and the Great Moderation (1985–2019). We find that: i) wage shocks have positive effects on labour productivity at business cycle frequencies in both subperiods; ii) the US economy exhibits profit-led activity, although this appears to be driven more by technology than by distributive shocks; iii) during the Great Moderation, labour productivity has become acyclical, and real wages are no longer responsive to employment; the disappearance of the procyclical pattern of labour productivity can then be explained by a lessened incentive to invest in labour-saving innovations by firms due to missing wage growth in the upturn of the business cycle.