Productivity

Summary

Assumptions

  • Output=productivity x factors of production i.e. y=A x k^αh^(1-α)
  • Growth rate of output = growth rate of productivity + growth rate of factors of production.
  • Productivity = f(technology, cutting edge of technology, efficiency, open economy)
  • Technology - unlike capital - is nonrival which means easy transfer, but also means there are less incentives for creation because of a lack of excludability.
  • Efficiency = effectiveness with which factors of production and technology are combined to produce output - it's an umbrella concept for differences other than technology where A=TxE

Model/Theory

Productivity

  • Development accounting involves breaking down differences in income into a productivity part and a factor of production part: 
    • Ratio of productivity = Ratio of output / Ratio of factors of production
  • Growth accounting  A-hat = y-hat - αk-hat-(1-α)h-hat

Technology

  • Technology growth can overcome problems of diminishing returns
  • 75% of R&D is done by firms who are motivated by profits and the hope of  1. competitive adv (patents?) 2. size of the market 3. how long will adv last? 4. limited uncertainty

Efficiency

  • Break even point for technology gaps and efficiency is more than 100 years. Thus most of the difference is due to inefficiencies.
  • Featherbedding is when increases in price lead to unions forcing capitalists to pay higher wages/hire workers that are not needed.
  • Types of inefficiency - 1. unproductive activities (e.g. rent-seeking, theft), 2. idle resources 3. misallocation of factors among sectors (due to barriers to mobility &. wages not equal to marginal product - discrimination? 3. misallocation of factors among firms (e.g. government firms/monopoly) 4. technology blocking (not from patents etc.) - often violence related

Openness

  • Two times of international interaction 1. trade 2. flows of factors of production
  • Test for openness is law of one price (though there are transport costs)
  • Globalisation is due to 1. lower transport costs.2. transmission of information 3. more open trade policy (less tariffs, quotas, excessive standards, anti-dumping duties)
  • Openness is highly correlated with GDP/capita but does it cause?
    1. Compare growth rates in open and closed countries & find closed group is 1.5% vs open at 3.1%. Also, closed no relationship between GDP/capita and growth rate, open countries though offer strong evidence of convergence 
    2. Changes in openness affect growth rates? Increased openness e.g. South Korea lead to increased growth. Decreased openness lead to decreased growth.
    3. Used geography as randomly exogenous variable and found that when trade rose, income rose, and when trade fell income fell. 
  • Openness through factor accumulation or productivity? Not factor accumulation as capital flows aren't sufficient.
  • Productivity 1. Comparative Adv/Specialization 2. More able to import existing technologies/capital/business practices. 3. Larger markets (bigger incentives to invest) 4. Increases efficiency by reducing monopoly power/increased foreign competition 5.Economies of scale from increased output

Predictions

Evidence

  • We find large productivity differences between countries where India's productivity per worker is just 31% of USA's. 
  • We find that factors of production (47%) are roughly just as important as productivity (53%) and they tend to rise together. 
  • In US we find that productivity grew at 0.54% per year which makes up 40% (0.54%/1.34%) of the growth rate of output per worker. Across countries we find there is often negative productivity growth in poor poor countries. Across countries we find that 68% of the variation in growth rates is due to variation in productivity growth and 32% is because of factor accumulation. 
  • Alwyn Young found that Hong Kong's growth was primarily productivity, Singapore primarily capital accumulation (esp. human) which is unsustainable. 
  • Russian workers - even post communism are only 20% as productive as US workers - this is a difference in efficiency not technology.
  • Globalisation in two waves 1. peaking pre WWI with world exports at 8% of world GDP 2. now 24% in 2010. Between 1870 and 1925 100m changed countries ~ 10% of the world's population in 1870, much lower today.
  • 1990s study found non-tariff barriers roughly equal to tariff barriers. Though average tariff rates have fallen dramatically from 40% at the end of WW2 to 6% in 2000 and 2.8% among OECD countries.
  • In Japan only 27% of tech progress originated domestically, Canada 3%, US is the only country with a majority being domestic at 82%

Evaluation

  • Problems arise in inadequate measurements of factors of production, making the remainder (productivity) inaccurate.
  • Oftentimes economists overestimate the level of investment (particularly in developing countries) because corruption means much less money is going into companies than they think. 
  • Technological changes comes with creative destruction and potentially harmful side effects for society.
  • Patents have a number of problems incl. 1. inefficiency of monopoly 2. preventing other firms R&D (e.g. delays in patent applications to 3 years) 3. existence of patent trolls. Alternatives incl: 1. secrecy > patents. 2. open source movement
  • Opposition to openness comes from self-interested parties who are going to suffer from trade (though less than net national interest) e.g. a particular industry, or factor of production. Other weak arguments are: 
    • Exploitation - workers wouldn't take those jobs unless they didn't have better alternatives
    • Poor countries can't compete - it's exchange not competition.
    • Environmental exploitation.
    • Loss of national sovereignty
    • Ability to levy taxes (f.o.p. can just leave)
    • Costs of foreign capital 1. subject to international investors --> macro shocks 2. allow go into debt