A Model of TFP

This paper proposes an aggregative model of total factor productivity (TFP) in the spirit of <xref ref-type="bibr" rid="R13">Houthakker (1955-1956)</xref>. It considers a frictional labour market where production units are subject to idiosyncratic shocks and jobs are created and destroyed as in <xref ref-type="bibr" rid="R20">Mortensen and Pissarides (1994)</xref>. An aggregate production function is derived by aggregating across micro-production units in equilibrium. The level of TFP is explicitly shown to depend on the underlying distribution of shocks as well as on all the characteristics of the labour market as summarized by the job-destruction decision. The model is also used to study the effects of labour-market policies on the level of measured TFP. Copyright 2006, Wiley-Blackwell.