Labour or Total Factor Productivity: Do We Need to Choose?

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Abstract

This article argues that both labour productivity and total factor productivity (TFP) have useful roles, and neither should be used exclusively. In the standard neoclassical model, TFP is the preferred guide to long-run trends because capital accumulation is endogenous to TFP growth, while labour productivity is better for short-run (under a decade) analysis. The choice also depends on capital stock data quality — poor capital estimates favour labour productivity — and on the assumed growth model: in models where capital accumulation drives TFP, labour productivity may be equally informative about long-run trends.

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