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Relative Price Effects on Decompositions of Change in Aggregate Labor Productivity

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  • Dumagan, Jesus C.

Abstract

This paper shows that the decomposition of log-change in aggregate labor productivity (ALP) devised by Balk (2013) based on Sato-Vartia indexes is inexact when applied to gross domestic product (GDP) in chained or in constant prices so that sectoral contributions do not necessarily add up to "actual" log-change in ALP. However, this paper adjusts Balk`s decomposition by incorporating "relative prices"--from the "generalized exactly additive" (GEAD) decomposition of "arithmetic change" in ALP (Dumagan 2013)--and shows that the adjusted Balk decomposition is exact for GDP in chained or in constant prices like GEAD. An important finding is that relative prices could reverse the signs of sectoral contributions from Balk`s inexact decomposition. Hence, results from related decompositions of log-change in ALP, e.g., those based on the Tornqvist framework, that do not explicitly recognize relative prices could be misleading and, therefore, may need reconsideration.

Suggested Citation

  • Dumagan, Jesus C., 2013. "Relative Price Effects on Decompositions of Change in Aggregate Labor Productivity," Discussion Papers DP 2013-44, Philippine Institute for Development Studies.
    • Handle: RePEc:phd:dpaper:dp_2013-44
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    File URL: https://www.pids.gov.ph/publication/discussion-papers/relative-price-effects-on-decompositions-of-change-in-aggregate-labor-productivity
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    References listed on IDEAS

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    1. J. C. Dumagan & V. E. Ball, 2009. "Decomposing growth in revenues and costs into price, quantity and total factor productivity contributions," Applied Economics, Taylor & Francis Journals, vol. 41(23), pages 2943-2953.
    2. William D. Nordhaus, 2002. "Productivity Growth and the New Economy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 33(2), pages 211-265.
    3. Timmer,Marcel P. & Inklaar,Robert & O'Mahony,Mary & Ark,Bart van, 2013. "Economic Growth in Europe," Cambridge Books, Cambridge University Press, number 9781107412446.
    4. Kevin J. Stiroh, 2002. "Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?," American Economic Review, American Economic Association, vol. 92(5), pages 1559-1576, December.
    5. Barry P. Bosworth & Jack E. Triplett, 2007. "The Early 21st Century U.S. Productivity Expansion is Still in Services," International Productivity Monitor, Centre for the Study of Living Standards, vol. 14, pages 3-19, Spring.
    6. Jianmin Tang & Weimin Wang, 2004. "Sources of aggregate labour productivity growth in Canada and the United States," Canadian Journal of Economics, Canadian Economics Association, vol. 37(2), pages 421-444, May.
    7. Sato, Kazuo, 1976. "The Ideal Log-Change Index Number," The Review of Economics and Statistics, MIT Press, vol. 58(2), pages 223-228, May.
    8. Dumagan, Jesus C., 2002. "Comparing the superlative Tornqvist and Fisher ideal indexes," Economics Letters, Elsevier, vol. 76(2), pages 251-258, July.
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    Cited by:

    1. Abueg, Luisito, 2016. "A historical walkthrough with L’Hospital, from indeterminates to applied problems in mathematics," MPRA Paper 79011, University Library of Munich, Germany, revised Apr 2016.

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    Keywords

    relative prices; productivity change decomposition; index number theory;
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