Lumpy investments, factor adjustments and productivity

Abstract

This paper describes firms’ output and factor demands before, during and after episodes of lumpy investment. By using a rich employer–employee panel data set for two manufacturing industries and one service industry, we focus on simultaneous variations in output, capital, materials and man hours, as well as the skill composition and hourly cost of labour. Investment spikes are followed by roughly proportional changes in sales, labour and materials, and significant increases in capital intensity. Capital adjustments are found to be smoother in the service industry than in the two manufacturing industries. This result may be related to differences in labour intensity between the industries. The changes in productivity that are associated with the investment spikes are small, which indicates that productivity improvements are not related to instantaneous technological change through investment spikes.