Did Double Deflation Create the Swedish Manufacturing Growth Miracle? Is There a Lesson for Other Western European Countries and the US?

This paper shows that Sweden had the highest labor productivity growth in manufacturing compared to other western EU-countries, Japan and the US in 1995-2010. Moreover, Swedish productivity growth was by far highest in the computer, electronic and optical equipment (CEO) industry. The annual labor productivity growth in the CEO-industry was 40 percent compared to 6 percent in manufacturing. This paper finds that labor productivity growth in the CEO-industry differs considerably depending on whether labor productivity is measured in terms of value added or gross output. Thus, these differences primarily depend on whether double deflation or single deflation is used. According to this paper, it is the multiplication effect of the inverted share of value added in gross output that is boosting value added based productivity growth in the CEO-industry. Depending on which deflation method that is applied for the Swedish CEO-industry annual labor productivity growth for total manufacturing varies between 4.5 and 6 percent in 1995-2010. Thus, part of the productivity growth miracle in Swedish manufacturing is a statistical artefact. This also raises the question whether productivity growth at the industry level should be measured in terms of value added or gross output