Webex-seminar: Learning by Necessity: Government Demand, Capacity Constraints, and Productivity Growth

This paper investigates whether high pressure factor (labor and capital) markets induce firms to increase productivity. I show that increases in government purchases raise total factor productivity measured in quantity units (TFPQ) at the plant level. Supporting the importance of high pressure factor markets, I find that plants facing tighter capacity constraints show greater TFPQ growth when facing increased demand than those with more slack. The evidence is based on newly digitized and detailed data on production, productivity, and capacity utilization from the archives of the US War Production Board, Army Air Force, War Manpower Commission, and Aircraft Production Council. Shifts in military strategy provide an instrument for demand shifts across plants specializing in different aircraft types. Unpacking the mechanisms, I find that productivity increases in face of high demand and high pressure factor markets were associated with adoption of new production (line) techniques, greater reliance on production outsourcing, and improved labor relations. The study speaks to a long historical debate on the effects of demand-side factors on  productivity growth.