Differences In Productivity Growth Research Articles

Open Economy Dynamics Exchange Rates Theories

Exchange rate agreements are a nation’s set of rules that determine the international exchange value of the domestic currency and link a nation’s currency value to the currencies of other nations. Evolved out of the gold standard and the Bretton Woods pegged exchange rate system, today’s flexible exchange rates imply intervention by monetary authorities. Exchange rates are determined by the interaction of buyers and sellers, households, firms and financial institutions that buy and sell foreign currencies to make international payments in the foreign exchange market. If two parties agree to an exchange of bank deposits and execute the deal immediately, such exchange rates governing on the spot trading are called spot exchange rates. Covered interest parity (CIP) relates interest rates across countries and the rate of change between forward exchange rates and the spot exchange rate. Empirics and evidence show that the uncovered interest parity might not hold in actual markets. In contrast to uncovered interest parity, exchange rates tend to appreciate with a higher interest rate because of capital inflows. Carry trade and momentum trading tend to establish such a relationship. While the uncovered interest rate parity explains short run movements of exchange rates, the purchasing power parity (PPP) theory of the exchange rate determines long run market conditions. The purchasing power parity (PPP) appears as one of the most useful descriptions of the long-run exchange rate, when short-run relative price effects have worked themselves out or when inflationary forces dominate real changes. Tariffs, quotas and other restrictions on imports increase the relative profitability of traded goods and appreciate the equilibrium real exchange rate. A natural resource discovery increases the ratio of traded to non-traded goods and appreciates the real exchange rate. A faster rate of productivity growth in the traded goods sector relative to domestic non-traded goods and foreign traded goods appreciates the real exchange rate. Productivity growth differentials between tradable and non-tradable goods is important. A change in domestic consumer preferences towards traded goods depreciates the equilibrium. Home demand growth may be biased towards non-traded goods insofar as if the share of government spending in GDP increases and government spending is more biased to non-traded goods than is private spending, the equilibrium real exchange rate appreciates. If the home country accumulates net foreign assets, this allow it to enjoy interest income from the foreign country. The real exchange rate appreciates and the resulting payments deficit is financed by the interest income. Contrawise, an increase in net foreign indebtedness requires a payments’ surplus on goods account in order to service the foreign debt, which depreciates the exchange rate. A systematic divergence appears between a bilateral nominal and real exchange rates when comparing a developed country with a less developed country, which is known as the Balassa-Samuelson thesis. In addition to capital account transactions motivated by interest differentials, central bank intervention becomes important in keeping an exchange rate away from its PPP defined level. There is a linkage between foreign currency reserves and an extended Taylor-type optimal monetary policy rule for small open economies. Shrestha and Semmler (2011) therefore build a dynamic decision model with foreign currency reserves as a policy objective in the central bank’s loss function. By solving this model by the maximum principle and dynamic programming algorithm, Shrestha and Semmler (2011) show that the central bank could build up a buffer stock of foreign exchange reserves strategically useful to avoid speculative attacks on currency and possible financial crises, thereby enhancing the welfare of the economy.

Tradability and productivity growth differentials across EU Member States

We apply the tradable-nontradable framework (T-NT) to evaluate the lack of convergence in labor productivity among EU Member States. Our results show that increases in overall productivity are primarily due to the tradable and not the nontradable sectors of production. The low productivity growth in peripheral EU countries before the crisis was accompanied by a sharp increase in the production of nontradables (i.e. nontradable goods and services) relative to other EU countries. We identify differences in the legal systems and the quality of public institutions, among others, as factors relevant for explaining the observed productivity growth differentials. Our findings have implications for the European Commission’s macroeconomic imbalance procedures since the T-NT approach allows identifying patterns of real divergence on a disaggregated level.

Tradability and Productivity Growth Differentials Across EU Member States

We apply the tradable-nontradable framework (T-NT) to evaluate the lack of convergence in labor productivity among EU Member States. Our results show that increases in overall productivity are primarily due to the tradable and not the nontradable sectors of production. The low productivity growth in peripheral EU countries before the crisis was accompanied by a sharp increase in the production of nontradables (i.e. nontradable goods and services) relative to other EU countries. We identify differences in the legal systems and the quality of public institutions, among others, as factors relevant for explaining the observed productivity growth differentials. Our findings have implications for the European Commission’s macroeconomic imbalance procedures since the T-NT approach allows identifying patterns of real divergence on a disaggregated level.

Comment on “Computerizing industries and routinizing jobs: Explaining trends in aggregate productivity” by Sangmin Aum, Sang Yoon (Tim) Lee and Yongseok Shin

Aum et al. (2018) quantify the impact of production complementarities and differential productivity growth across occupations and sectors on the slowdown of aggregate productivity growth. This note expands their work to study substitutability between new computer equipment and labor in individual occupations as opposed to all occupations combined. Preliminary empirical evidence suggests (1) significantly different elasticities of substitution between computers and labor across occupations and (2) a strong correlation between productivity growth of computers and labor in occupations where these two inputs are complementary. When they are substitutes, however, their productivity growth rates appear uncorrelated. These findings have the potential to amplify or weaken the magnitude of the aggregate productivity slowdown explained by Aum et al. (2018) making their approach a promising avenue for future research.

Comment on 'Computerizing Industries and Routinizing Jobs: Explaining Trends in Aggregate Productivity' by Sangmin Aum, Sang Yoon (Tim) Lee and Yongseok Shin

Aum, Lee, and Shin (2018) quantify the impact of production complementarities and differential productivity growth across occupations and sectors on the slowdown of aggregate productivity growth. This note expands their work to study substitutability between new computer equipment and labor in individual occupations as opposed to all occupations combined. Preliminary empirical evidence suggests (1) significantly different elasticities of substitution between computers and labor across occupations and (2) a strong correlation between productivity growth of computers and labor in occupations where these two inputs are complementary. When they are substitutes, however, their productivity growth rates appear uncorrelated. These findings have the potential to amplify or weaken the magnitude of the aggregate productivity slowdown explained by Aum, Lee, and Shin (2018) making their approach a promising avenue for future research.

Global Imbalances and Structural Change in the United States

Since the early 1990s, as the United States has borrowed from the rest of the world, employment in the U.S. goods-producing sector has fallen. We construct a dynamic general equilibrium model with two mechanisms that could generate declining goods-sector employment: foreign lending and differential productivity growth across sectors. We find that 18 percent of the decline in goods-sector employment from 1992 to 2012 follows from U.S. trade deficits. Most of the decline in employment in the goods sector can be accounted for by differences in productivity growth across sectors. As the United States repays its debt, its trade balance will reverse, but goods-sector employment will continue to fall.

Factor specificity and wage inequality in a developing economy: The role of technology and trade in Indian manufacturing

The wage inequality between skilled and unskilled labour has been observed to have risen in both developed and developing countries in recent years. The received explanations for this phenomenon have been mainly attributed to (1) outsourcing and (2) skilled biased technological change. However, very few of these explanations were carried out in a general equilibrium framework. In a recent paper using a general equilibrium framework with factor specificity it has been suggested that differential marginal productivity growth of skilled and unskilled labour could be a possible cause of rising wage inequality. While this is an interesting testable hypothesis, it is in essence, seems to be incomplete as it does not try to explain why the productivities of skilled and unskilled labour should move differently. In our paper, we shall try to first, examine the trend of wage inequality in Indian manufacturing and second, examine whether the productivity differential hypothesis as an explanation of rising wage inequality in India can be validated. Having done this we further try to examine the possible factors that might be affecting the marginal productivities of skilled and unskilled labour differently.

Does Home Production Drive Structural Transformation?

Using new home production data for the United States, we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report two main findings. First, the estimation results show that home services have a lower income elasticity than market services. Second, the slowdown in home labor productivity, which started in the late 70s, is a key determinant of the rise of market services. Our counterfactual experiment shows that, without the slowdown, the share of market services would have been lower by 7.5 percent in 2010. (JEL D13, J24, L16)

Structural Transformation and Comparative Advantage: Implications for Small Open Economies

AbstractData from the last half‐century show that revealed comparative advantage in agriculture (manufacturing) is negatively (positively) associated with the rate of decline in labour share in agriculture. Motivated by this finding, the author constructs and calibrates a simple open‐economy model, where there is learning‐by‐doing in manufacturing and industry‐supplied inputs to agricultural production. This paper focuses on the effects of comparative advantage and learning‐by‐doing on structural transformation and calibrate the model to the US and the UK data to estimate key parameters of the model. Quantitative experiments show that holding constant other factors a small difference in a country's comparative advantage can account for a large variation in structural transformation for open economies, which does not require nearly as much differential productivity growth as in closed‐economy models.

Capital-Labor Substitution, Structural Change and Growth

There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism. There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism.

Does Home Production Drive Structural Transformation?

Using new home production data for the U.S., we estimate a model of structural transformation with a home production sector, allowing for both non-homotheticity of preferences and differential productivity growth in each sector. We report two main findings. First, the estimation results show that home services have a lower income elasticity than market services. Second, the slowdown in home labor productivity, started in the late 70s, is a key determinant of the rise of market services. Our counterfactual experiment shows that, without the slowdown, the share of market services would be lower by 5.8% in 2010.

A Small Open Economy with the Balassa-Samuelson Effect

The Balassa-Samuelson (B-S) effect implies that highly productive countries have higher inflation and appreciating real exchange rates because of larger productivity growth differentials between tradable and nontradable sectors relative to advanced economies. The B-S effect might pose a threat to converging European countries, which would like to adopt the Euro because of the limits imposed on inflation and nominal exchange rate movements by the Maastricht criteria. The main goal of this paper is to judge whether the B-S effect is a relevant issue for the Czech Republic to comply with selected Maastricht criteria before adopting the Euro. For this purpose, a two-sector DSGE model of a small open economy is built and estimated using Bayesian techniques. The simulations from the model suggest that the B-S effect is not an issue for the Czech Republic when meeting the inflation and nominal exchange rate criteria. The costs of early adoption of the Euro are not large in terms of additional inflation pressures, which materialize mainly after the adoption of the single currency. Also, nominal exchange rate appreciation, driven by the B-S effect, does not breach the limit imposed by the ERM II mechanism.

Capital-Labor Substitution, Structural Change and Growth

There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the relative importance of each sector, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in the initial attempts, recent models stress the role of supply-side factors in this process of structural change. Along these lines, Ngai and Pissarides (American Economic Review, 2008) focus in differential productivity growth across sectors while Acemoglu and Guerrieri (Journal of Political Economy, 2008) stress differences in factor proportions and capital deepening. We explore a general framework that encompasses, as special cases, these two supply-side mechanisms. Our model uncovers an additional driving force for structural change based on differences in the degree of capital-labor substitutability. When the flexibility to combine capital and labor varies across intermediate goods and the final sector is Cobb-Douglas, as the economy grows the fraction of capital (labor) allocated to the sector with high elasticity of substitution increases (decreases). We provide some casual evidence consistent with this new mechanism.

Capital-Labor Substitution, Structural Change and the Labor Income Share

Long run economic growth goes along with structural change. Recent work has identified explanatory factors on the demand side (non-homothetic preferences) and on the supply-side, in particular differential productivity growth across sectors and differences in factor proportions and capital deepening. This paper documents that there have also been differential trends in labor and capital income shares across sectors in the U.S. and in a broad set of other industrialized economies, and shows that a model where the degree of capital-labor substitutability differs across sectors is consistent with these trends. The interplay of differences in productivity growth and in the substitution elasticity across sectors drive both the evolution of sectoral factor income shares and the shape of structural change. We evaluate the empirical importance of this mechanism and the other mechanisms proposed in the literature in the context of the recent U.S. experience. We find that differences in productivity growth rates between manufacturing and services have been the most important driver of structural change. Yet, differences in substitution elasticities are key not only for understanding the evolution of sectoral and aggregate factor income shares, but also for the shape of structural change. Differences in capital intensity and non-homothetic preferences have hardly mattered for the manufacturing-services transition.

Purchasing Power Parity, Wages and Inflation in Emerging Markets

Three open economy puzzles are, first, the price level of an advanced economy (AE) is higher compared to that of an emerging or developing economy (EDE) measured in the same currency. But, second, inflation tends to be much higher in EDEs. Third, there is a persistent deviation of real exchange rates from equilibrium values although nominal shocks, which cause such deviation, are expected to have only short-run effects. Balassa Samuelson (BS) explained the first puzzle by introducing two sectors with differential productivity growth. The article presents a framework that allows a new simple proof of the BS result. Inflation in EDEs is often attributed to the catch-up process where productivity in traded goods starts growing faster than that in non-traded goods. But if wages grow at a relatively higher non-traded goods productivity growth, nominal shocks can trigger deviations from equilibrium and adjustments that sustain inflation. This explanation retains the BS ranking of relatively lower traded goods productivity in EDEs, yet explains the second and third puzzles. Tests with Indian data support the hypotheses, suggesting that they provide a better explanation of Indian inflation.

Capital Labor Substitution, Structural Change, and the Labor Income Share

Long run economic growth goes along with structural change. Recent work has identified explanatory factors on the demand side (non-homothetic preferences) and on the supply-side, in particular differential productivity growth across sectors and differences in factor proportions and capital deepening. This paper documents that there have also been differential trends in labor and capital income shares across sectors in the U.S., and in a broad set of other industrialized economies, and shows that a model where the degree of capital-labor substitutability differs across sectors is consistent with these trends. The interplay of differences in productivity growth and in the substitution elasticity across sectors drives both the evolution of sectoral factor income shares and the shape of structural change. We evaluate the empirical importance of this mechanism and the other mechanisms proposed in the literature in the context of the recent U.S. experience. We find that differences in productivity growth rates between manufacturing and services have been the most important driver of structural change. Yet, differences in substitution elasticities are key not only for understanding the evolution of sectoral and aggregate factor income shares, but also for the shape of structural change. Differences in capital intensity and non-homothetic preferences have hardly mattered for the manufacturing-services transition.

Inequality and debt in a model with heterogeneous agents

We show that to account for the cross-sectional divergence in debt-to-income ratios in US data a DSGE model must assume a tax reallocation across the top- and bottom-income quantile of the population, rather than differential productivity growth, and low cost of access to financial intermediation.

Regional disparities and productivity in China: Evidence from manufacturing micro data

AbstractIn this paper we first estimate firm‐specific total factor productivities within 2‐digit manufacturing industries using a semi‐parametric algorithm and micro data for the period 2000–2007. Next, to characterize regional disparities in China we compute aggregate productivity by the categories of three regional typologies, based on population density, coastal‐inland, and rural‐urban criteria. We analyse the productivity differentials across the categories of the typologies by decomposing regional productivity level and growth into productivity effect and industry composition effect. We find clear evidence of regional convergence. Besides density of economic activity, recent policy and structural factors seem to affect regional productivity level and growth differentials.

Real Exchange Rates and Fundamentals: A Cross‐Country Perspective

This paper employs newly constructed measures for productivity differentials, external imbalances, and commodity terms of trade to estimate a panel cointegrating relationship between real exchange rates and a set of fundamentals for a sample of 48 industrial countries and emerging markets. It finds evidence of a strong positive relation between the consumer price index‐based real exchange rate and commodity terms of trade. The estimated impact of productivity growth differentials between traded and nontraded goods, while statistically significant, is small. Increases in net foreign assets, government consumption, and trade restrictions tend to be associated with appreciating real exchange rates.

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

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’.