Short-run labor productivity in a dynamic model

A classic empirical finding is that the short-run output elasticity of demand is smaller than unity and is less than in the long run. This phenomenon is called ‘short-run increasing returns to labor’ (SRIRL). In this paper we analyze SRIRL using a dynamic factor demand model for variable and quasi-fixed inputs, where the latter incur increasing marginal internal adjustment costs. Speeds of adjustment of quasi-fixed inputs are endogenous and variable, not constant parameters. Labor hoarding is shown to be neither necessary nor sufficient for SRIRL. These results are illustrated empirically using annual U.S. manufacturing data, 1952-71.