Last year I published a post arguing that there are two productivity puzzles – one in the level and the other in the growth rate of labour productivity – that contained an error. In the original blog, I showed that we could decompose the puzzle(s!) into contributions from either slower than trend growth in capital services per hour worked (capital deepening) or technology growth (TFP).
Much has been written about the productivity puzzle. But there are actually two puzzles apparent in the data – one in the level that hit at the crisis and the other in the growth rate, which is a more recent phenomenon – and they could be driven by completely different sources. Distinguishing between the two puzzles is important precisely because of these potential differences – if anyone analyses the puzzle as a whole looking for the force driving it, the actual underlying variety will confound our estimates of the relative importance of these drivers.
In this post I discuss:
- what people mean by the productivity puzzle, usually a percent deviation from the pre-crisis trend;
- how I think of it as actually two puzzles: one in the level and the other in the growth rate; and
- why this distinction can be important, using the example of a simple growth accounting decomposition of productivity growth into capital deepening and technological advancement.