No. 424 - Labor effort over the business cycle

Unobservable labor utilization is recognized as a crucial feature of economic fluctuations. Yet very little is known on the behavior of work effort over the business cycle. By using firm-level panel data drawn from two high-quality sources, we obtain a microeconomic estimate of variable labor effort from a dynamic cost minimization set-up. We argue that, contrary to common assumptions, the relationship between effort and hours is not monotonic. During a recovery, if a critical level of hours per capita is reached (say, because of labor market rigidities), every additional hour is worked with decreasing effort, due to physical fatigue. We provide supporting evidence by estimating the structural parameters of a Taylor approximation of the effort function. Corroborating evidence has been obtained by estimating the elasticity of effort with respect to hours at different business cycle conditions.