White Papers | 11 March 2019

Total Factor Productivity Growth = Totally Fictitious Pretentious Garbage

Executive Summary

Economists often seem to obsess about productivity. The stagnation
of growth and incomes is often blamed on poor productivity growth. In particular, the “declining growth of total factor productivity…a measure of innovation” is the subject of much angst and hand wringing. Some think that this decline is proof that innovation is over, and that we are trapped in a world of low growth. Others argue that the slowdown is only a temporary pause while we adjust to the new machine age. We argue that both viewpoints are incorrect. So-called total factor productivity is not a measure of innovation at all. Rather, it can be shown that it is simply a weighted average of real wage growth and profit growth. The real mystery to be solved is not why innovation is low, but why real wage growth has been so low.

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