Measuring TFP: The Role of Profits, Adjustment Costs, and Capacity Utilization
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.
Lorenzo Arcà provided outstanding research assistance. We are grateful to Germán Gutiérrez for sharing his estimates of profit shares, to Klaas de Vries and Robert Stehrer for their help with the EU KLEMS data, and to Kimberly Bayard, Aaron Flaaen, Norman Morin and Justin Pierce for their help with US capacity utilization data. We also thank John Earle, Simon Goerlach, Christoph Hedtrich, Pete Klenow, Kenneth Judd, Thomas Le Barbanchon, Pau Roldan-Blanco, Luca Sala, Fabiano Schivardi and seminar participants at Bocconi, Pavia and Konstanz for useful comments. This project has received funding from the European Union’s Horizon 2020 research and innovation programme under grant agreement No 72073. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.