Adventures In Measuring Productivity

Noah Smith has a headache (excerpt):

Big TFP data mystery!

I had been under the impression that over the last three decades or so, the rich countries had all experienced similar rates of TFP growth. My source for that was the OECD's time-series on multifactor productivity (another name for TFP).....

...As you can see, most rich countries grew their TFP at the same average rate, consistent with the idea that TFP mostly measures technology in the long term, and that technology spreads rather easily between rich countries. A few countries, like Korea, Ireland, and Finland, did much better over this period, and a few countries, like Italy, Spain, and Portugal, lagged behind. But most rich countries were clustered along the same basic line. The U.S., UK, France, and Germany (highlighted on the graph) all stayed very close to each other....

...But I now see that FRED has its own TFP numbers for various countries, taken from the Penn World Tables. And here's what happens when I plot the TFP numbers for the U.S., UK, France, and Germany over the same time period (1985-2011)...

...What??!!

The U.S. and UK lines match up as before, but the Germany and France lines are wildly, totally different! In fact, according to the Penn World Tables, Germany's TFP actually steadily declined from the mid-80s to 2011!

…First of all, it turns out that the Penn World Tables, currently assembled by a team of economists from UC Davis and the University of Groningen, have undergone substantial revisions to their methodology in recent years. …these revisions were enough to substantially change the results of all cross-country growth regressions. Simon Johnson, William Larson, Chris Papageorgiou, Arvind Subramanian criticized the new Penn methodology, and suggested possible changes.

Meanwhile, the OECD methodology for calculating TFP has some questions surrounding it as well. To get TFP you need measures of labor and capital inputs. The OECD uses a pretty textbook method for doing this - simply stick in the raw estimates for the dollar values of labor and capital. But when they tried using another database called EU-KLEMS that tries to adjust for "quality" of inputs, they found totally different numbers....

...The real takeaway here, though, is that TFP measurements are HIGHLY suspect, and will continue to be so for the foreseeable future.

There’s an addendum to the main post, which resolves some of the issues Prof Smith notes here, but the main point is still valid – measuring “productivity” is hard, and estimates not always reliable. That’s on top of the fact that there are many different types of “productivity”, and there are conceptual problems in defining it, as I pointed out once before.

Just as valid, if we don’t understand what productivity really is (in the context of the real world), it’s kinda tough to figure out what policies would be most effective in raising it. Score one for economic theology here – policy making in this area is as much a matter of faith and guesswork as it is an application of economic theory and empirical evidence.