Productivity Measurement with Nonstatic Expectations and Varying Capacity Utilization: An Integrated Approach

Typically measures of multifactor productivity growth have been based on a production and optimization framework that assumes all inputs are instantaneously adjustable, thus ignoring the important impacts of short run fixity of certain inputs. This paper focuses on the distinction between short and long run production behavior represented by economic capacity utilization indexes, and on the adjustment of observed productivity measures for the effects of short run fixity characterized by these indexes. A dynamic optimization model based on adjustment costs for quasi-fixed inputs is developed to calculate capacity utilization adjustments for productivity growth measures. The resulting framework is then used to identify empirically the effects of capacity utilization, nonstatic expectations,nonconstant returns to scale and adjustment costs for both capital and labor on productivity growth in the U.S. manufacturing sector, 1947-1979.