A demand and supply analysis of productivity growth

Abstract

The paper rejects growth accounting as failing to reveal the economic forces that drive growth. Instead, it seeks to explain changing productivity growth in terms of economic phenomena such as the changing structure of output, the rate of adoption of new technology, and the strength of aggregrate demand. We introduce such a model and test it using pooled cross section and time series data for 16 OECD economies over a 30 year period. The parameter estimates allow us to decompose each economy's productivity growth into the part caused by its changing structure and the part explained by demand conditions. The estimates are used to account for the productivity slowdown that occurred in these economies after 1973, and to examine the recent productivity increase in the US. The model fully explains this growth surge in terms of the changed demand factors and structure of the US economy. We conclude by arguing that a prime benefit of strong aggregate demand is its stimulation of investment and technological change, leading to the adoption of new technology on a broad front.