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A Theory of Total Factor Productivity and the Convergence Hypothesis: Workers’ Innovations as an Essential Element

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Harashima, Taiji

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Abstract

A theory of total factor productivity (TFP) is needed to explain why substantial differences in international income have been observed. This paper presents a theory of TFP that incorporates workers’ innovations. Because workers are human and capable of creative intellectual activities, they can create innovations even if these innovations are minor. The creative activities of ordinary workers have been almost entirely neglected in economics even though the importance of workers’ learning activities has been emphasized by the theories of learning-by-doing and human capital. I examine this creative element and show that innovations created by ordinary workers are indispensable for efficient production. A production function incorporating workers’ innovations is shown to have a Cobb-Douglas functional form with a labor share of about 70%. The production function offers a microfoundation of the Cobb-Douglas production function and more importantly indicates that heterogeneous parameter values with regard to workers’ innovations are essential factors of the currently observed substantial income difference across economies.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 15508.

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Date of creation: 31 May 2009
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Handle: RePEc:pra:mprapa:15508

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Related research
Keywords: Innovation: Total factor productivity; Experience curve effect; Convergence hypothesis; Cobb-Douglas production function;

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Find related papers by JEL classification:
O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
E23 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Production
J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
D24 - Microeconomics - - Production and Organizations - - - Production; Capital and Total Factor Productivity; Capacity
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology

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