Many economists currently take a somewhat jaundiced view of the estimation of aggregate production functions. Three problems seem particularly troublesome: the "unobservables' problem, especially with regard to input utilization; the aggregation problem; and the simultaneous equations problem. In Discussion Paper No. 34, Research Fellow John Muellbauer presents theoretical arguments and empirical evidence from British manufacturing which suggests that the first problem is the most serious, with important dimensions in the measurement of capital and output as well as that of utilization.

Muellbauer investigates two classic questions. Feldstein (1967) observed in a cross-section context that the elasticity of output with respect to average observed hours of work significantly exceeded the elasticity with respect to employment. Craine, in a 1973 paper, found a similar result for time-series data. The other question is one with which most researchers on productivity have struggled: how to correct productivity for cyclical variations in the utilization of inputs. Muellbauer suggests a novel answer, based on the use of overtime hours data. He finds that it gives excellent empirical results and can also account for the elasticities observed by Feldstein and Craine.

John Muellbauer discussed this and other related work at a lunchtime meeting on 3 December, a full account of which appears in this Bulletin.

Aggregate Production Functions and Productivity Measurement: A New Look
John Muellbauer

Discussion Paper No. 34, November 1984 (ATE)