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Seasonal Solow Residuals and Christmas: A Case for Labor Hoarding and Increasing Returns

1998; Wiley; Volume: 30; Issue: 3 Linguagem: Inglês

10.2307/2601103

1538-4616

R. Anton Braun, Charles L. Evans,

Economic theories and models

In aggregate unadjusted data, measured Solow residuals exhibit large seasonal variations. Total Factor Productivity grows rapidly in the fourth quarter at an annual rate of 16 percent and regresses sharply in the first quarter at an annual rate of-24 percent. How much of the total seasonal variation in the measured Solow residual can be explained by Christmas? The answer to this question is surprising. With increasing returns and time-varying labor effort, Christmas is sufficient to explain the seasonal variation in the Solow residual, consumption, average productivity, and output in all four quarters. Our analysis of seasonally unadjusted data uncovers important roles for labor hoarding and increasing returns that are difficult to identify in adjusted data. PRESCOTT ( 1986) HAS ARGUED that the variability of Solow s residual is a reasonable estimate of the variability of exogenous technology shocks. When Solow' s residual is measured using seasonally unadjusted data for the postwar U.S. economy, it exhibits large seasonal variations, growing rapidly in the fourth quarter at an annual rate of 16 percent and falling sharply in the first quarter at an annual rate of - 24 percent. This paper starts from the premise that it is implausible to attribute seasonal variation of this magnitude to changes in the state of technology. We present a model in which all seasonal fluctuations arise from a single demand shift, Christmas. This demand shift, together with misspecification of the traditional production function, leads to large seasonal variation in the Solow residual. We consider two candidates for misspecification, labor hoarding and external increasing returns to scale. Even when technological growth is aseasonal, either candidate in isolation can induce spurious seasonality in the Solow residual. Our general equilibrium analysis indicates that (1) the economy's seasonal patterns in all four quarters may be a response simply to a fourth quarter consumption demand shift and (2) a combination of labor hoarding and external increasing returns is important for replicating these patterns in aggregate quantity variables for the postwar U.S. economy. Since our analysis identifies important roles for labor hoarding and increasing returns, these results have implications for nonseasonal macroeconomic models. Indeed, our analysis im