Housing Booms and the U.S. Productivity Puzzle

By Jose Carreno


The United States has been experiencing a slowdown in productivity growth for more than a decade. I exploit geographic variation across U.S. Metropolitan Statistical Areas (MSAs) to investigate the link between the 2006-2012 decline in house prices (the housing bust) and the productivity slowdown. Instrumental variable estimates support a causal relationship between the housing bust and the productivity slowdown. The results imply that one standard deviation decline in house prices translates into an increment of the productivity gap — i.e. how much an MSA would have to grow to catch up with the trend — by 6.9p.p., where the average gap is 14.51%. Using a newly-constructed capital expenditures measure at the MSA level, I find that the long investment slump that came out of the Great Recession explains an important part of this effect. Next, I document that the housing bust led to the investment slump and, ultimately, the productivity slowdown, mostly through the collapse in consumption expenditures that followed the bust. Lastly, I construct a quantitative general equilibrium model that rationalizes these empirical findings, and find that the housing bust is behind roughly 50 percent of the productivity slowdown.

I used to think that productivity growth in the longer run is really tied to innovation. This paper challenges this view, as it shows that half of the productivity slowdown is tied to aggregate demand issues. Maybe there is still a link between aggregate demand and innovation, but this would be getting convoluted.

One Response to Housing Booms and the U.S. Productivity Puzzle

  1. Jose Carreno says:


    Thank you very much for your interest in my work. A comment:

    The paper doesn’t really challenge the connection between productivity growth and innovation in the long-run. Instead, it is a paper that focuses on the short/medium run.

    The idea is that a large and long-lasting aggregate demand shock can make productivity to temporarily deviate from its long-run trend. This could happen even in a setup where the pace of innovation is stable and the technology frontier keeps growing as usual if, for example, a long slump in capital expenditures affects productivity growth through a slowdown in the pace of technology diffusion and the pace of accumulation of capital per worker.

    In the context of the US productivity slowdown, I come to the conclusion (on both empirical and theoretical grounds) that around half seems to be an endogenous response from the Great Recession, whereas the other half could be tied to structural forces that affect the long-run trend or any other kind. An implication of this is that productivity is expected to recover in part, which also explains why the growth rate of labor productivity has been significantly increasing since around 2016 and catching up with the long-run average growth rate.

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