Unproductive by Choice: Substitution and the Slowdown in Aggregate Productivity Growth in the United States

Abstract

I propose a new decomposition of aggregate total factor productivity. I model productivity as an index of unmeasured factors of production, and decompose the conditional factor demand for this index. With this model of productivity, changes in the price of labor or capital cause substitution to or from productivity. I study whether such changes explain the slowdown in US productivity growth from 2005 to 2016. I find that the declining growth rate of the effective price of labor and capital encouraged substitution away from productivity. If labor and capital prices had remained constant, productivity growth would be accelerating.

Keywords: Productivity, United States Productivity Growth, Aggregate Productivity, Endogenous Productivity

JEL Classification: E23, E22, O47