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services the growth economics blog skip to primary content skip to secondary content the growth economics blog this blog takes robert solow seriously search main menu home about me class material data figures maps papers tag archives services why did consumption tfp stagnate posted on december 17 2014 by dvollrath 9 note the growth economics blog has moved sites click here to find this post at the new site i ve been trying to think more about why consumption sector tfp flatlined from about 1980 forward what i mentioned in the last post about this was that the fact that tfp was constant does not imply that technology was constant i then speculated that technology in the service sector may not have changed much over the last 30 years partly explaining the lack of consumption productivity growth by a lack of change i mean that the service sector has not found a way to produce more services for a given supply of inputs and or produced the same amount of service with a decreasing supply of inputs take something that is close to a pure service a back massage a one hour back massage in 1980 is almost identical to a one hour back massage in 2014 you don t get twice or any other multiple of the massage in 2014 that you got in 1980 and even if the therapist was capable of reducing back tension in 30 minutes rather than 60 you bought a 60 minute massage we often buy time when we buy services not things and it isn t so much time as it is attention and it is very hard to innovate such that you can provide the same amount of attention with fewer inputs i e workers because for many services you very specifically want the attention of a specific person for a specific amount of time the massage you d complain to the manager if the therapist tried to massage someone else at the same appointment so we don t have to be surprised that even technology in services may not rise much over 30 years but there were obviously technological changes in the service sector as several people brought up to me inventory management and logistics were dramatically changed by it this allows a service firm to operate leaner with a smaller stock of inventory but this kind of technological progress need not show up as technological change in doing productivity accounting that is what we call technology when we do productivity accounting is not the only kind of technology there is the technology in productivity accounting is only the ability to produce more goods using the same inputs and or produce the same goods using fewer inputs it doesn t capture things like a change in the shape of the production function itself say a shift to using fewer intermediate goods as part of production let s say a firm has a production function of where is technology in the productivity sense is capital is labor and is intermediate goods productivity accounting could reveal to us a change in but what if an innovation in inventory management logistics means that changes if innovation changes the shape of the production function rather than the level then our tfp calculations could go anywhere here s an example let s say that in 1980 production is innovation in logistics and inventory management makes the production function in 2014 total factor productivity in 1980 is calculated as and total factor productivity in 2014 is calculated as tfp in 2014 relative to 1980 the growth in tfp is which is an unholy mess the first fraction is tfp in 2014 calculated using the 1980 function the second fraction is the reciprocal of tfp in 1980 calculated normally so the first two fractions capture the relative tfp in 2014 to 1980 holding constant the 1980 production function the last fraction represents the adjustment we have to make because the production function changed that last term could literally be anything less than one more than one more than 100 less than 0 0001 if and rose by a lot while didn t go up much this will lower tfp in 2014 relative to 1980 it all depends on the actual units used if i decide to measure in thousands of units rather than hundreds of units i just made tfp in 2014 go down by a factor of 4 relative to 1980 once the production function changes shape then comparing tfp levels across time becomes nearly impossible so in that sense tfp could definitely be getting it wrong when measuring service sector productivity you ve got an apples to oranges problem so if we think that it innovation really changed the nature of the service sector production function meaning that and or changed then tfp isn t necessarily going to be able to pick that up it could well be that this looks like flat or even shrinking tfp in the data if you d like this supports david beckworth s notion that consumption tfp doesn t pass the smell test we ve got this intuition that the service sector has changed appreciably over the last 30 years but it doesn t show up in the tfp measurements that could be due to this apples to oranges issue and in fact consumption tfp doesn t reflect accurately the innovations that occurred to an ambitious graduate student document changes in the revenue shares of intermediates in consumption and or services over time correct tfp calculations for these changes or at least provide some notion of the size of that fudge factor in the above equation share this share on x opens in new window x share on facebook opens in new window facebook share on reddit opens in new window reddit email a link to a friend opens in new window email like loading posted in uncategorized tagged consumption productivity services us 9 replies i love the smell of tfp in the morning posted on december 11 2014 by dvollrath 17 note the growth economics blog has moved sites click here to find this post at the new site very recently john fernald of the sf fed released a quarterly series on total factor productivity tfp in the us one of the neat things about his series is that you can look separately at investment equipment and consumer durables and consumption everything else when you plot these out you see a really big divergence note my graph from fernald s data consumption tfp essentially flat lines from about 1980 until today at the same time investment tfp races ahead aggregate tfp is a weighted average of the two and since investment is only about 20 of total spending this means aggregate tfp exhibits a slight rise each series is normalized to 100 in 1947 so you cannot compare absolute levels across sectors like this the flat line in consumption tfp has generated a few puzzled reactions david beckworth in particular said that the consumption series does not pass the smell test he says that fernald s measure and by implication other tfp calculations must be flawed and wants a better way to measure productivity this is an overreaction and represents a misunderstanding of what tfp is and what it measures the first thing that often happens is that people confuse labor productivity with tfp labor productivity depends on tfp and on other factors of production like capital so labor productivity could be rising in the consumption sector even if tfp is not but leaving that possible misunderstanding aside let s think more carefully about what goes into tfp as a rough guide when we measure changes in tfp what we get is the following chg tfp chg technology chg utilization markups x chg inputs you can be more technical about things but this is roughly what you ll get what are those three parts technology this is what it sounds like the ability to produce real goods services with a given stock of real inputs if technology improves this will add to our measure of tfp utilization if the economy or the sector we are talking about is using their capital or labor more intensely then this will show up as increased utilization and will also pass through to higher tfp for the given stock of inputs workers or number of machines you are getting more output markups x inputs this term is a tricky one if you charge price markups over marginal cost then this is equivalent to saying that you do not produce as much as socially optimal where p mc so if we increase inputs in your sector this raises output and gets us closer to the socially optimal point so when markups exist higher input use will translate to higher tfp the problem that plagues beckworth and many others is that they are trying to exactly equate tfp with technology that just isn t the case technology can be improving in the consumption goods sector but this could be offset by changes in utilization markups or input use flat lining tfp doesn t imply that there were no gains in technology so what could be going on with utilization and markups inputs if you dig through fernald s data you can find that utilization in the consumption sector has fallen over time the consumption sector uses factors about 97 as intensely as it did in the 1960s that shows up as lower tfp an additional factor that would play into consumption tfp staying flat would be market power and here i think beckworth gets it right that whatever is going on in consumption is because of services the service sector tends to have really low markups over marginal cost additionally and i have nothing but some intuition to back this up i think innovation in the service sector may typically take the form of lowering markups think wal mart it sells the same crap you can find in 100 other stores it s entire business model is selling it for less than everyone else with low and falling markups the contribution of additional inputs like capital e g various it investments and labor would not have added to tfp growth so consumption tfp could reasonably have flat lined i don t think this represents any kind of glaring flaw in the methodology but you have to separate the idea of tfp from the idea of technology once you do that flat lining consumption tfp is reasonable on top of all that the idea that consumption technology has not grown much over time isn t that hard to believe consider this example we just were forced to buy a new fridge because the old one konked out long very annoying story the fridge is produced by the consumer durables sector our fridge is more efficient quieter colder etc etc than a fridge from 10 years ago there have been clear technological advances in fridge making that i benefit from if i wanted a fridge equivalent to what we had 10 years ago i could get that for probably 1 4 of the price of the new fridge so there is obvious technological change going on in the investment sector and obvious tfp gains but i bought the fridge through best buy as it turns out another long annoying story best buy s value added such as it was is part of consumption because it is a service and is best buy any better at selling fridges or screwing up delivery dates than they were ten years ago maybe maybe not if you told me that a major appliance retailer in 1990 was about as efficient at selling and delivering fridges as one today i d believe you what is the major technological breakthrough in the service industry that i should think of from the last few decades those little headsets that people at the gap wear does that mean i shouldn t care about slow growth in consumption tfp no we d prefer to have faster tfp growth than slower tfp growth but you shouldn t dismiss tfp because it doesn t match up to the notion in your head if tfp doesn t pass the smell test it may be that you re sniffing the wrong thing share this share on x opens in new window x share on facebook opens in new window facebook share on reddit opens in new window reddit email a link to a friend opens in new window email like loading posted in uncategorized tagged consumption growth markups productivity services tfp 17 replies recent posts moving day the declining marginal product of capital do you need more money for economic growth to occur calculating growth rates iq and economic growth shameless plug click on the picture to find it on amazon follow blog via email enter your 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