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Title: Measuring TFP: The Role of Profits, Adjustment Costs, and Capacity Utilization

Author(s): Diego Comin, Javier Quintana Gonzalez, Tom Schmitz and Antonella Trigari

Publication Date: October 2020


Programme Area(s): International Macroeconomics and Finance, Macroeconomics and Growth and Monetary Economics and Fluctuations

Abstract: Standard methods for estimating total factor productivity (TFP) growth assume that economic profits are zero and adjustment costs are negligible. Moreover, following the seminal contribution of Basu, Fernald and Kimball (2006), they use changes in hours per worker as a proxy for unobserved changes in capacity utilization. In this paper, we propose a new estimation method that accounts for non-zero profits, structurally estimates adjustment costs, and relies on a utilization proxy from firm surveys. We then compute industry-level and aggregate TFP growth rates for the United States and five European countries, for the period 1995-2016. In the United States, our results suggest that the recent slowdown of TFP growth was more gradual than previously thought. In Europe, we find that TFP was essentially flat during the Great Recession, while standard methods suggest a substantial decrease. These differences are driven by profits in the United States, and by profits and our new utilization proxy in Europe.

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Bibliographic Reference

Comin, D, Quintana Gonzalez, J, Schmitz, T and Trigari, A. 2020. 'Measuring TFP: The Role of Profits, Adjustment Costs, and Capacity Utilization'. London, Centre for Economic Policy Research.