New ESCoE Discussion Paper

The Mystery of TFP

By Nick Oulton (Centre for Macroeconomics, London School of Economics, National Institute of Economic and Social Research and Economic Statistics Centre of Excellence)


I analyse TFP growth at the sectoral and aggregate level, using data for 10 industry
groups covering the market sector for 18 countries over the period 1970-2007 drawn
from the EU KLEMS dataset. TFP growth displays persistence at the aggregate level
but not at the industry level, suggesting industry outputs are measured with error. In
all countries resources have been shifting away from industries with high TFP growth
towards industries with low TFP growth. Nevertheless I find that structural change
(as measured by changes in value added shares) has favoured growth in most
countries. Errors in measuring capital or in measuring the elasticity of output with
respect to capital are unlikely to substantially reduce the role of TFP in explaining
growth. The pattern of growth in these 18 countries is more consistent with an
underlying two-sector model than with the one-sector (Solow) model. Standard
theory suggests that TFP growth induces capital accumulation, at least in the long
run. This is not the case with the raw EU KLEMS data used here. But standard
theory finds some support when the data are smoothed to remove cyclical effects.

ESCoE DP-2017-02

Friday, October 06, 2017