Explaining Total Factor Productivity

In this paper we investigate the relationship between a common measure of total factor productivity (TFP) and the concept of disembodied, factor-augmenting technological change. We propose a convenient way to compute the factor-augmenting rates of technological change from the estimates of an ordinary aggregate Translog production function. Using U.S. data as an illustration, we find that TFP is overwhelmingly explained by labor. Furthermore, technological change is anti-labor biased, in the sense that it tends to decrease the income share of labor. This is due to the relatively large Hicksian elasticity of complementarity between capital and labor. Nonetheless, technological change has a positive effect on the return of both capital and labor, although the impact on labor is less than what TFP or average labor productivity would suggest.