Technical change, returns to scale, and the productivity slowdown

The recent slowdown in the growth of productivity in the U.S. has attracted considerable attention. The deceleration has been attributed to many factors, including a slowdown in the growth of capital intensity and the stock of R&D, changes in the sectoral composition of output, dramatic rises in oil prices, and declines in the capital utilization rate due to sluggish demand. In this article authors provide a framework for decomposing changes in total factor productivity (TFP) in the presence of economies of scale. The traditional growth accounting framework is a special case of our model. By allowing for economies of scale, authors demonstrate formally the positive relationship between growth in productivity and output which is found in the empirical studies by the economists John Kendrick, Nicholas Kaldor, and others. The model is based on an output demand function, a variable cost function which is shifted by disembodied technical change and a stock of R&D, and a market-clearing rule which equates output price to average variable cost plus quasi rents to R&D. This framework identifies the contribution of demand growth, real factor prices, and the stock of R&D to changes in the growth of TFP.