Abstract
A model of labour productivity that distinguishes between permanent and transient shocks on productivity is proposed. We show that this model is a type of unobserved components model – a random walk with drift plus noise model. The advantage of this approach is that it provides a coherent framework to identify the deterministic trend growth component and also the productivity-enhancing (or technology-related) stochastic components. The model is applied to aggregate labour productivity in Australia, and the time series of technology shocks extracted sheds some light on the contributions of policy reforms to productivity.
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