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BPEA Article

Output and Labor Input in Manufacturing


THE RELATION between output and labor input in manufacturing is important
in quantitative analysis of economic fluctuations. Empirical work
on this topic generally supports the conclusion that labor inputs respond
with a delay, and not in full proportion, to changes in output. Thus, variations
in output are accompanied by corresponding variations in average
labor productivity. This phenomenon is something of a paradox, for shortrun
increasing returns to labor, or SRIRL, are difficult to rationalize if the
sector being explained is assumed to operate on a static production function
in which labor is the most variable factor. One need not make this assumption,
and a variety of plausible deviations from it, which can explain the
qualitative empirical results, have been advanced. It also seems possible
that some of the apparent SRIRL reported in previous studies reflects
statistical bias in estimating the labor-output relation.

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