Browsing by Subject "Mismeasurement"

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Solving productivity puzzles - on the nature of total factor productivity, technological change and the explanatory power of the mismeasurement hypothesis
(2020) Zwiessler, Oliver; Hagemann, Harald
Long-term economic development, productivity growth and technological progress are inevitably linked to each other. The present study tackles this nexus and elaborates on the declining rates of productivity growth in the recent past. As the field of study is the German economy and in order to avoid problems associated with structural changes, the point of departure for the analysis of productivity trends is 1991. The first part of the study is dedicated to the question, whether total factor productivity (TFP) is a suitable variable for depicting technological progress in the system of national accounts. Apart from providing insight into the evolution of the growth accounting framework, the study presents three views of how to interpret the connection between TFP and technology: a traditional view, which states an equivalence (the „residual-view“), a view that emphasizes the ignorance of the components of the residual and a third-way, which explains the occurence of the residual as a result from (technological) „spill-over“-effects. Usually, the birth point of the theory of growth accounting and the discussion about „the residual“, which form the traditional view, are associated with the works of Robert Solow (1956, 1957). However, it was Jan Tinbergen (1959 [1942]), who has originally set up such a framework, mathematically based on a Cobb-Douglas production function (1928). As a critical reaction on the traditional view, subsequent research has tackled the issue by promoting the ignorance-character of the residual. Moreover, it was tried to minimize this catch-all variable by trying to explain economic growth just with the input factors labour and capital and not a technology-labelled residual. A third possibilty of interpretation is provided mainly by Richard Lipsey and Kenneth Carlaw (2003), who interpret any changes in TFP as „spill-over“-effects from technology, but not technology per se. The second part of the study then tackles the German productivity puzzle – declining rates of productivity growth from 1991 onwards. Accepting a connection between technology and producitivity, decreasing productivity growth rates imply less technological progress – a confusing result in course of the wave of technological innovations of the 21st century. Two strands of explanations are provided. As a first possibility, there is the so-called mismeasurement hypothesis. If measurement errors occur and/or if the system of national accounts is an inaccurate measurement framework, then this could explain the missing portion of output in the data. Potential for mismeasurement exists, i.e. by the problem of capturing quality effects or by the general problem of accurately measuring developments in the ICT-sectors of modern service economies like Germany. In order to evaluate the magnitude of potential mismeasurement, a study by Chad Syverson (2016, 2017) is chosen and applied on Germany. The results of the German application and the base study converge – there is potential mismeasurement, its magnitude however is simply too small to account for the entire bulk of the missing data. In contrast to potential mismeasurement, a second strand of explanation is discussed, implying ‚real‘ economic problems. Applying the theory of secular stagnation, any decline in productivity growth then is the result from insufficient economic conditions. The present study adopts the supply side argumentation, revived and mainly formed by Larry Summers (2012, 2015). Summers‘ argumentation is separated into a major argument of less technological innovations (less significant innovations) and potential „headwinds“, which falter economic growth. The present study analyses the German economy in the light of potential headwinds and finds different headwinds and impacts, compared to Summers‘ original analysis, which is set up for the US. Demographic aspects, insufficient capital spending (especially in infrastructure) and rising inequality are the major headwinds for Germany. In comparison to the US, Germany performs better regarding the educational system and public (and private) debt.