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The vintage effect in TFP-growth: An analysis of the age structure of capital

  • Gittleman, Maury
  • ten Raa, Thijs
  • Wolff, Edward N.

The age structure of capital plays an important role in the measurement of productivity. It has been argued that the slowdown in the 1970's can be ascribed to the aging of the stock of capital. In this paper we incorporate the age structure in productivity measurement. A proposition proves that Nelson's (1964) formula is wrong. Our final proposition shows that inclusion of the vintage effect prompts an upward correction of measured productivity growth in times of an aging stock of capital. Here capital ages if the investment/capital ratio falls short of the inverse of the capital age, as a first proposition shows. The analysis rests on a rigorous accounting for vintages. We translate the Bureau of Economic Analysis' age of capital data into a measure of rates of obsolescence. Empirically, the correction of productivity growth for the vintage effect requires an estimate of the obsolescence and depreciation parameters on the basis of age data. The results indicate that the use of capital stock in efficiency units does cause some smoothing of Total Factor Productivity growth over time. In the 1950s, when investment accelerated, the vintage-adjusted capital growth rate well exceeded the BEA growth rate, and vintage-adjusted TFP growth is significantly lower than unadjusted TFP growth. The measured productivity slowdown of the 1970s is somewhat ameliorated.

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Article provided by Elsevier in its journal Structural Change and Economic Dynamics.

Volume (Year): 17 (2006)
Issue (Month): 3 (September)
Pages: 306-328

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Handle: RePEc:eee:streco:v:17:y:2006:i:3:p:306-328
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/525148

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  1. Hulten, Charles R, 1992. "Growth Accounting When Technical Change Is Embodied in Capital," American Economic Review, American Economic Association, vol. 82(4), pages 964-80, September.
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  3. Wolff, Edward N, 1991. "Capital Formation and Productivity Convergence over the Long Term," American Economic Review, American Economic Association, vol. 81(3), pages 565-79, June.
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  5. John A. Tatom, 1979. "The productivity problem," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 3-16.
  6. Solow, Robert M, 1988. "Growth Theory and After," American Economic Review, American Economic Association, vol. 78(3), pages 307-17, June.
  7. Bosworth, D L, 1978. "The Rate of Obsolescence of Technical Knowledge-A Note," Journal of Industrial Economics, Wiley Blackwell, vol. 26(3), pages 273-79, March.
  8. Jorgenson, Dale W., 1966. "The Embodiment Hypothesis," Scholarly Articles 3403063, Harvard University Department of Economics.
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  11. Charles R. Hulten, 1992. "Growth Accounting When Technical Change is Embodied in Capital," NBER Working Papers 3971, National Bureau of Economic Research, Inc.
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