Raw Materials, Profits, and the Productivity Slowdown (Rev)

A factor-price frontier framework is used to clarify the analogy of an increase (decrease) in raw material prices with that of autonomous technological regress (progress). Factor-price profiles estimated for the United States, the United Kingdom, Germany, and Japan bring out the major role of raw materials in the profit and product wage squeeze after 1972, with some differences between countries. The production model, in conjunction with estimates obtained from the factor-price frontier, attributes almost all the slowdown in total productivity to the rise in relative raw material prices. It is also shown that part of the apparent productivity riddle has to do with the common use of double-deflated national accounting measures of value added, which have an inherent measurement bias.