Unproductive by Choice: Substitution and the Slowdown in Aggregate Productivity Growth in the United States
13 Pages Posted: 8 May 2019
Date Written: April 9, 2019
I develop a new decomposition of aggregate total factor productivity. The decomposition is based on the idea that all output produced in the economy is the result of the use of some factor of production, but we cannot measure all factors of production. I model productivity as an index of these unobserved factors of production. This view of productivity introduces a new avenue through which productivity can either grow or decline. Changes in the effective price of labor and capital will cause substitution to or from productivity. I decompose productivity using its conditional factor demand equation to measure the extent to which changes in the effective price of labor and capital are behind the slowdown in productivity growth in the United States from 2006 to 2016. I find fully two-thirds of the slowdown can be explained by relatively more substitution to labor and capital and away from productivity.
Keywords: Productivity, United States Productivity Growth, Aggregate Productivity, Endogenous Productivity
JEL Classification: E23,E22,O47
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