Unraveling the Productivity Growth Slowdown in the U.S., Canada and Japan: The Effects of Subequilibrium, Scale Economies and Markup

Measures of productivity growth typically include in the Productivity "residual" the impacts of subequilibrium from fixity of factors, costs of adjustment, returns to scale and markups. This paper proposes a general two part framework for adjusting the residual measure to take these impacts into account. Errors computing the weights on output and quasi-fixed input growth in traditional measures are first corrected for both primal- and Cost-side measures. Then the deviation of revenues from costs is used to decompose the full primal measure to identify the differential influences of technical change, utilization fluctuations, scale economies and price margins. Use of the framework is illustrated empirically for the U.S.,, Japanese and Canadian manufacturing sectors, using an econometric model that allows explicit incorporation and measurement of these influences. The adjusted measures show that a significant amount of cyclical and secular change in measured productivity growth can be attributed to production characteristics other than technical change, particularly scale economies.