International Productivity Growth Differentials Sectoral Analysis and Missing Productivity

In Jones (2002), Lucas (2009), and Lucas and Moll (2014), among others, growth is a function of new ideas, and reflects Kuznets (1960) useful knowledge (or testable knowledge) as a main driver of growth. In both Kuznets and Jones, the discovery of new ideas is tied to population growth. In the long run, the stock of ideas is proportional to the number of researchers, which is proportional to population. This is the scale factor, where essentially, long-run growth is tied to population growth in the advanced countries. The growth of knowledge due to new ideas depends on the number of people producing them and their productivity, essentially determines Total Factor Productivity growth (TFP). During the transition to the long-run, knowledge in excess of the long-run population growth, i.e., excess knowledge, explains most of the productivity growth. We use EUKLEMS 2017 data to show that the model explains 80 percent of the international productivity growth differentials because excess knowledge varies from one country to another. Effective world research efforts diffuse at a different pace from one country to another. We also modify the model and test hypotheses about sector-led growth such as finance and ICT. Finally, we shed light on the current missing productivity conundrum.