Labor productivity, capital accumulation, and aggregate efficiency across countries: Some stylized facts

This paper studies the cross-section dynamics of the proximate determinants of labor productivity: physical capital, human capital, and aggregate efficiency. Using a panel data set for 74 countries covering the 1950-2010 period, it first documents that labor productivity of the median country has been mostly stagnant, while cross-country differences have drastically increased. An evaluation of proximate sources points to a similar pattern of stagnation and increasing dispersion in both physical capital and aggregate efficiency. Human capital is the only variable where median progress and inequality reduction can be observed. Next, the paper shows how standard regression methods consistently overestimate the fraction of the variation in labor productivity that is explained by physical capital. The source of this upward bias appears is the unaccounted covariance between capital accumulation and aggregate efficiency. Taking this covariance into account, most of the variation in labor productivity turns out to be explained by differences in aggregate efficiency. Finally, the paper concludes arguing that allocative inefficiencies at the sectoral level, such as those predicted by dual-economy type models, are important for understanding the large and increasing differences in aggregate efficiency across countries.