The Misinterpretation of Productivity Measures at Country and Sector Level

Data on productivity at sector or country level has become a familiar topic in media and the socio-political debate regarding labour policies. But what may be surprising is that such data –which is usually on labour productivity (LP)– does not actually tell us about productivity in the implicit meaning that media and experts transmit to us; i.e., that of “an increase in the index indicates that the country’s (sector’s) companies are producing more products or services with the same quantities of resources (employees, equipment, materials, energy, and the rest), or producing the same with less quantities of resources; etc.”. The objective of this paper is to show that given the way productivity indicators at sector and country level are actually defined and determined by statistical agencies (as well as scholars), the resulting figures –for comparisons among countries or sectors, as well as over time (‘productivity growth’)– do not actually have the above ‘logical’ assumed meaning. It is argued here that the figures resulting for these ‘popular’ LP indicators depend only partially on the level of productivity itself of the encompassed companies, but mainly on other socioeconomic and markets variables; and that this shortcoming is not overcome turning to the more complex multi-factor productivity indicators (L&K or KLEMS models) that statistical agencies also provide –though to a lesser extent. The present paper is intended to also be readable by lay professionals regarding productivity measurement technicalities—since they make up the majority of the people that use/read the referred data on productivity—, seeks to illustrate the inadequacy of commonly-published productivity measures by analyzing how the standard productivity measures for countries and sectors are defined and calculated in practice by public statistics agencies, and to show that the resulting figures depend only partially on the true productivity levels and mainly on other socioeconomic and business and markets variables.The paper starts by presenting a summary of the overall conceptual basis: The way economists and statisticians define and calculate the standard productivity measures at the enterprise level—namely, Total factor productivity and Labor productivity. And then, attention is driven to the core topic: how their adaptations to the sector (“industry”) and country-level are actually defined and determined by public statistics agencies. This allows us to discuss and make clear the real meaning of these official indexes, and thereby to warning against the widespread misleading use and interpretation of those productivity statistical data—not only in the media and the socio-political arena but even by academics—, and how these misinterpretations lead to distorted conclusions regarding the real world