Decomposing Total Factor Productivity Growth in Manufacturing and Services

Headnote

Using the World Input-Output Database, this paper calculates total factor productivity (TFP) growth for a sample of 40 economies during the period 1995-2009 to show that TFP growth in Asian economies has been relatively strong. In a number of Asian economies, TFP growth in services has outpaced that in manufacturing. This paper presents a novel structural decomposition of TFP growth and shows that the main drivers of aggregate productivity growth, as well as differences in productivity growth between services and manufacturing, have been changing factor requirements. These effects tend to offset the negative productivity effect of a declining ratio of value added to gross output.

Keywords: manufacturing and services, structural decomposition, total factor productivity

JEL codes: O40, O57

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I.Introduction

A great deal of effort has been expended in trying to understand why differences in the dynamics of productivity persist across both economies and time (see, for example, Temple 1999). The reason for such an interest is clear: relatively minor differences in productivity growth between economies, when sustained over time, can lead to large differences in standards of living. One particular strand of this literature highlights and attempts to explain the relatively strong performance of Asian economies in terms of productivity growth in the recent past (see, for example, Young 1992, Krugman 1994, Felipe 1997).

In this paper, we update the discussion of the relative performance of Asian economies vis-a-vis the rest of the world. Using data from the World Input-Output Database (WIOD), the paper confi ms the relatively strong performance of Asian economies in terms of total factor productivity (TFP) growth over the period 1995-2009. The paper further shows that while for most economies in the sample, TFP growth in manufacturing has outpaced that of TFP growth in services-which is consistent with the view that productivity in services is in general lower than in manufacturing (see, for example, Baumol 1967)-in a number of economies, particularly Asian economies, TFP growth in services has been faster than in manufacturing, lending some support to the concept of an "Asian services model" (Park and Noland 2013).

In search of an explanation for the relatively strong performance of Asian economies and of the different dynamics of productivity in manufacturing and services, this paper presents...