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

This paper studies how firms adapt to large demand shocks when facing capacity constraints. I show that increases in government purchases raise total factor productivity measured in quantity units (TFPQ) at the production-line level. TFP responds more to demand in plants facing tighter capacity constraints, a phenomenon I call “learning by necessity”. The evidence is based on newly digitized and detailed data on production, productivity, and capacity utilization from several archival sources on US World War II aircraft production. Shifts in military strategy provide an instrument for aircraft demand at the production-line level. I provide suggestive evidence that plants adapted to surging demand by improving production methods, outsourcing, and combating absenteeism. I outline a simple theory of learning by necessity to show why firms at high utilization rates may be more inclined to invest in productivity-enhancing measures. The study speaks to a long historical debate on whether demand factors can affect productivity growth.




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B-17 Flying Fortress aircraft. Source: Museum of Flight