Measuring TFP: The role of profits, adjustment costs, and capacity utilization

Series: Working Papers. 2143.

Author: Diego Comin, Javier Quintana, Tom Schmitz and Antonella Trigari.

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Measuring TFP: The role of profits, adjustment costs, and capacity utilization (2 MB)

Abstract

We develop a new method for estimating industry-level and aggregate total factor productivity (TFP) growth. Our method accounts for profits and adjustment costs, and uses firm surveys to proxy for changes in factor utilization. Using it to compute TFP growth rates in the United States and in five European countries since the early 1990s, we obtain results that substantially differ from the ones obtained with standard methods (i.e., Solow growth accounting and the utilization-adjusted method of Basu, Fernald, and Kimball, 2006). In every European country, our TFP series is less volatile and less cyclical than the standard ones, with striking differences during the Great Recession and Eurozone crisis. In the United States, our method indicates higher TFP growth overall and a more gradual productivity slowdown.