Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

The Productivity of Nations

Academic journal article Economic Quarterly - Federal Reserve Bank of Richmond

The Productivity of Nations

Article excerpt

(ProQuest Information and Learning: ... denotes formulae omitted.)

In this article, we document observations on labor productivity across countries over time. Using data from Heston, Summers, and Aten (2002) on gross domestic product (GDP) per worker-our measure of labor productivity-we emphasize three main facts about the distribution of labor productivity across countries between 1960 and 1996.1 First, there is substantial dispersion in labor productivity across countries. For instance, in 1960 an average worker in the richest 5 percent of countries in the world produces about 35 times more output than an average worker in the poorest 5 percent of countries in the world.

Second, disparity in labor productivity has increased over time. By 1996, the labor productivity ratio between the richest and poorest countries increased to approximately 46. This increase in disparity is explained by a substantial deterioration in labor productivity in the poorest countries of the world relative to that of the United States. We report several statistics of dispersion indicating that labor productivity differences between the richest and poorest countries have increased since the mid-1980s. This characterization of increased dispersion in labor productivity contrasts with a relative stability documented in previous studies, in which the coverage period ended in 1985.

Third, there is substantial mobility of individual countries in the distribution of labor productivity over time. For instance, labor productivity in Hong Kong relative to that in the United States rose from 19 percent in 1960 to 94 percent in 1996-an increase of a factor of almost 5 during the period-while relative labor productivity in Venezuela declined from 94 percent in 1964 to 36 percent in 1996-a more than twofold drop in relative productivity. We also document a number of individual episodes of growth and decline. Accounting for these specific labor productivity paths may prove useful not only from a policy perspective, but also in testing and improving existing theories of productivity levels or in the development of alternative theories.

This article relates to a large literature on the world distribution of income that includes Kaldor (1961), Kuznets (1966), Maddison (1995, 2001), Parente and Prescott (1993), Chari, Kehoe, and McGrattan (1996), Jones (1997), among many others. We contribute to this literature by adding the period between 1985 and 1996 to the analysis. In addition, we focus on output per worker as opposed to output per capita since output per worker relates more directly to theories of labor productivity. The difference between the two measures is given by the employment-to-population ratio. While there are substantial differences in these ratios across countries, the differences are not systematically related to development. Therefore, our summary statistics characterizing output per worker over time are similar to statistics calculated using output per capita. However, there are substantial changes in employment-to-population ratios for individual countries over time, and these changes are not systematically related to development or growth in relative productivity. Therefore, for an individual country, changes in output per capita can severely overstate or understate changes in labor productivity.

There are two additional differences between this article and the previous literature. First, we characterize disparity and mobility using trended data. That is, we use the Hodrick-Prescott filter to abstract from business-cycle fluctuations in the data. Second, we seek to systematically identify remarkable episodes of growth (positive or negative) in the data at some point during the 1960-1996 period. In the literature, countries facing these episodes are typically referred to as miracles and disasters. We document 13 miracle and 17 disaster episodes in our data set. Among the miracle episodes, we report the movement of labor productivity in Botswana relative to that in the United States from 7 percent to 30 percent in 26 years; in Hong Kong, from 19 percent to 94 percent in 36 years; and in China, from 4 percent to 8 percent in 18 years. …

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