Does Productivity Affect Unemployment? A Time-Frequency Analysis for the US

Abstract

The effect of increased productivity on unemployment has long been disputed both theoretically and empirically. Although economists mostly agree on the long run positive effects of labor productivity, there is still much disagreement over the issue as to whether productivity growth is good or bad for employment in the short run. Does productivity growth increase or reduce unemployment? This paper try to answer this question by using the property of wavelet analysis to decompose economic time series into their time scale components, each associated to a specific frequency range. We decompose the relevant US time series data in different time scale components and consider co-movements of productivity and unemployment over different time horizons. In a nutshell, we conclude that, according to US post-war data, productivity creates unemployment in the short and medium terms, but employment in the long run.