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The "Problem" of Procyclical Real Wages and Productivity

This paper examines the apparent contradiction of diminishing returns to labor due to procyclical real wages and labor productivity. The paper shows how this problem arises using Cobb-Douglas production function estimates for the private business sector in the United States during the period 1948-73. The difficulty with this evidence is that it ignores the cyclical pattern is taken into account, the resulting estimates indicate diminishing returns to labor. More important, the results show that procyclical real wage and productivity are consistent with the theory when the cyclical behavior of factor employment is taken into account.