No. 1522 - Labor productivity, effort and the euro-area business cycle

Temi di discussione (Working papers)
by Vivien Lewis and Stefania Villa
March 2026
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The paper studies the drivers of the high procyclicality of labor productivity observed in the euro area in the period 1991-2019. It proposes a new theoretical model in which, in addition to capital, labor can also be used with varying intensity.

The estimation of the model with variable labor effort shows that this is able to replicate euro-area macroeconomic data more accurately than alternative models featuring constant labor effort. Effort contributes significantly to the adjustment of the labor input to the business cycle and is key to account for the procyclicality of productivity. Variable effort over the cycle mitigates changes in marginal costs and helps reduce inflation volatility.

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  1. 17 March 2026
    No. 1522 - Labor productivity, effort and the euro-area business cycle
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