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A Decomposition of U.S. Business Sector TFP Growth into Technical Progress and Cost Efficiency Components

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  • Diewert, W. Erwin
  • Fox, Kevin J.

Abstract

One of the problems with index number methods for computing TFP growth is that during recessions, these methods show declines in TFP and this seems to imply that technical progress is negative during these periods. This is rather implausible since it implies technological regress; i.e., that that the production frontier has contracted. The paper works out a nonparametric method where one can decompose TFP growth into two components: a technical progress component (i.e., a shift in the production frontier over time) and an inefficiency component that is due to the fixity of capital and labour in the short run. The new decomposition is illustrated using the new Bureau of Economic Analysis (BEA) Integrated Macroeconomic Accounts which facilitated the construction of a set of productivity accounts for two key sectors of the US private business sector: the Corporate Nonfinancial Sector and the Noncorporate Nonfinancial Sector. The analysis sheds light on productivity growth slowdowns over the period 1960 to 2014.

Suggested Citation

  • Diewert, W. Erwin & Fox, Kevin J., 2016. "A Decomposition of U.S. Business Sector TFP Growth into Technical Progress and Cost Efficiency Components," Microeconomics.ca working papers erwin_diewert-2016-8, Vancouver School of Economics, revised 30 Jun 2016.
    • Handle: RePEc:ubc:pmicro:erwin_diewert-2016-8
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    Cited by:

    1. Balk, Bert M. & Zofío, José L., 2020. "Symmetric decompositions of cost variation," European Journal of Operational Research, Elsevier, vol. 285(3), pages 1189-1198.
    2. Balk, B.M. & Zofío, J.L., 2019. "The Decompositions of Cost Variation," ERIM Report Series Research in Management ERS-2019-006-LIS, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
    3. Josh Martin & Rebecca Riley, 2023. "Productivity measurement - Reassessing the production function from micro to macro," Working Papers 033, The Productivity Institute.
    4. Juan Aparicio & Magdalena Kapelko & Bernhard Mahlberg & Jose L. Sainz-Pardo, 2017. "Measuring input-specific productivity change based on the principle of least action," Journal of Productivity Analysis, Springer, vol. 47(1), pages 17-31, February.
    5. Wroński Marcin, 2019. "The productivity growth slowdown in advanced economies: causes and policy recommendations," International Journal of Management and Economics, Warsaw School of Economics, Collegium of World Economy, vol. 55(4), pages 391-406, December.
    6. Yan He & Yung-ho Chiu & Bin Zhang, 2020. "Prevaluating Technical Efficiency Gains From Potential Mergers and Acquisitions in China’s Coal Industry," SAGE Open, , vol. 10(3), pages 21582440209, July.
    7. W. Erwin Diewert & Kevin J. Fox, 2018. "A decomposition of US business sector TFP growth into technical progress and cost efficiency components," Journal of Productivity Analysis, Springer, vol. 50(1), pages 71-84, October.

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    More about this item

    Keywords

    Total Factor Productivity; user costs; measures of technical progress; measures of technical and allocative inefficiency; nonparametric cost functions;
    All these keywords.

    JEL classification:

    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • C82 - Mathematical and Quantitative Methods - - Data Collection and Data Estimation Methodology; Computer Programs - - - Methodology for Collecting, Estimating, and Organizing Macroeconomic Data; Data Access
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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