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

Abstract

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

Suggested Citation

Flynn, Zach, Unproductive by Choice: Substitution and the Slowdown in Aggregate Productivity Growth in the United States (April 9, 2019). Available at SSRN: https://ssrn.com/abstract=3368575 or http://dx.doi.org/10.2139/ssrn.3368575

Zach Flynn (Contact Author)

Afiniti ( email )

1701 Pennsylvania Ave
Washington, DC 20006
United States

HOME PAGE: http://zflynn.com

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