Total Factor Productivity or Technical Progress Function? Post-Keynesian Insights for the Empirical Analysis of Productivity Differentials in Mature Economies

Abstract

The dominant supply-side foundation for explanations of the growth potential of an economy is losing its persuasive power in the face of persistent losses in output and employment experienced by mature economies in the aftermath of the financial crisis. There is now an opening for eclectic approaches that consider the interaction between supply-side and demand-side factors in shaping macroeconomic outcomes. In this paper, we develop a model that reflects such an approach to interpreting differential productivity growth over the long run, and then present empirical results for several countries. On the supply-side, the model considers the linkage between the intensity and efficacy of the accumulation process and the gains of productivity in terms of a Kaldorian Technical Progress Function. Then, drawing on the Evsey Domar's Keynesian notion of dynamic equilibrium as the growth rate that reconciles additions to capacity with the absorption of aggregate output by demand, we derive a locus for a ‘Domar equilibrium path’. Imbalances caused by excess aggregate supply or demand, and by the effects of ‘shocks’ are presented and discussed using a simple graphical framework. In the empirical analysis, an error-correction model is applied to the fundamental relationship between the rate of growth of product per work-hour and the rate of capital accumulation. The results suggest that the differences in productivity growth among countries are can be explained in terms of the efficiency of their ‘accumulation paths’.