United States of America: Selected Issues
Author: International Monetary Fund
Publication Date:
31 Oct 1997
eISBN:
9781451839494
Language:
English
Keywords:
ISCR; CR; Medicare; balance budget agreement; outlay; price; productivity convergence; GDP ratio; output ratio in the United States; productivity difference; productivity in the United States; Gross capital formation
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This Selected Issues paper on the United States analyzes problems in the measurement of output and prices. The paper examines income versus expenditure measures of national output. Sources of consumer price index and findings of the Boskin Commission are discussed, and mismeasurement of output and productivity is analyzed. Developments in productivity across industries in the United States are described. In particular, the paper focuses on the slowdown in aggregate productivity growth that began in the mid-1970s and examines whether this slowdown has continued in recent years and is common across industries.

Abstract

This Selected Issues paper on the United States analyzes problems in the measurement of output and prices. The paper examines income versus expenditure measures of national output. Sources of consumer price index and findings of the Boskin Commission are discussed, and mismeasurement of output and productivity is analyzed. Developments in productivity across industries in the United States are described. In particular, the paper focuses on the slowdown in aggregate productivity growth that began in the mid-1970s and examines whether this slowdown has continued in recent years and is common across industries.

IV. Investment and Productivity in the Major Industrial Countries1

1. Since the early 1960s, the United States has consistently lagged behind the other major industrial countries in terms of the share of national income that is invested. Nevertheless, real output per capita in the United States has remained significantly higher than in these other countries, particularly when measured on a purchasing power parity basis. Also, the gap between real per capita income in the United States and other major industrial countries has not narrowed appreciably during this period, as factors of production (primarily capital and labor) generally have continued to be used more efficiently in the United States (Chart 1). Recent studies find that this productivity gap may largely reflect structural and institutional factors.

CHART 1
CHART 1

UNITED STATES: GDP PER CAPITA 1/2/

(In thousands of US dollars)

Citation: IMF Staff Country Reports 1997, 097; 10.5089/9781451839494.002.A004

Sources: OECD National Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.1/ Continental Europe includes France, Germany, and Italy.2/ Measured In constant 1985 US$ (using 1985 purchasing power parity weights) per total population.

2. As a ratio to GDP, nominal gross investment in the United States over the period 1960–95 was on average nearly 13 percentage points of GDP lower than in Japan, and it was 2½–4½ percentage points lower than in Canada, France, Germany, and Italy (Table 1 and Chart 2).2 Only in the United Kingdom was the nominal investment/GDP ratio consistently lower than in the United States. The generally faster rate of investment in other major industrial countries compared with the United States has been reflected in movements in relative capital/labor ratios. In the United States, this ratio has risen modestly since 1960, while it has increased substantially faster in all other major countries. By 1994, the capital/output ratio in the United States was lower than in Canada, France, and Italy, while the ratio in the other major countries had risen to close to the U.S. level (Chart 3).3

Table 1.

United States: Capital Formation Across Major Industrial Countries

article image
Sources: OECD National Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.
CHART 2
CHART 2

UNITED STATES: NOMINAL AND REAL INVESTMENT 1/

Citation: IMF Staff Country Reports 1997, 097; 10.5089/9781451839494.002.A004

Sources: OECD National Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.1/ Continental Europe includes France, Germany, and Italy.
CHART 3
CHART 3

UNITED STATES: PRODUCTIVITY 1/

Citation: IMF Staff Country Reports 1997, 097; 10.5089/9781451839494.002.A004

Sources: OECD Notional Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.1/ Continental Europe includes France, Germany, and Italy.2/ Measured in constant 1985 US$ (using 1985 purchasing power parity weights) per total population.

3. With the relatively faster rise in capital/labor ratios in the other major industrial countries, labor productivity has increased more rapidly than in the United States, and as a result, labor productivity across the major countries has steadily moved toward the U.S. level (Table 2).4 At the same time, capital productivity has declined in the other major countries relative to the United States, in part reflecting the more intensive use of capital relative to labor in these countries. However, the relatively more efficient use of all factors of production combined by the United States is reflected in relative movements in total factor productivity (TFP). After moving rapidly toward convergence during the 1960s and 1970s, differences in TFP between the United States and other major industrial countries subsequently have tended to persist.

Table 2.

United States: Productivity Convergence 1/

(Index: U.S. = 100)

article image
Sources: OECD National Accounts; Bureau of Economic Analysis, U.S. Department of Commerce; and staff estimates.

Converted to U.S. dollars at constant prices on purchasing power parity basis.

For capital and total factor productivity, data from Germany, Italy, and Japan is for 1994.

Labor input measured by total employment (not aggregate hours worked).

4. TFP attempts to take into account contributions from all inputs. In practice, however, TFP is calculated as the ratio of GDP to a weighted index of homogenous labor and capital. TFP also is generally calculated using the growth accounting methodology, which implicitly assumes perfect competition, profit maximization, and constant returns to scale. Specifically,

TFP=YLαK1-α

whore Y, L, K, and α are, respectively, GDP, employment, the capital stock, and labor’s share of output. As measured in this way, TFP would reflect changes in such factors as human capital, technology, and the organization and management of the production process. Measured TFP may also reflect changes in the intensity of use of labor (since employment is used as the measure of labor input) and capital (since no adjustment is made for capacity utilization). Moreover, the assumptions implicit to growth accounting may not hold, and the calculation of TFP may reflect the effects of economies of scale, the structure and competi-tiveness of the economy, and distortions in factor and product markets.

5. Economic theory would predict a convergence in TFP among similar economies over time, as countries would tend to adopt similar production technologies. The observed recent slowdown in TFP convergence may be explained by differences in the composition of investment, in the quality of labor, in the structure of firms, and in the incentives provided in product and factor markets.

6. Because capital is not homogenous, it is possible that certain forms of investment may be more productive than others. De Long and Summers (1991 and 1992) argue that some investments (specifically, those in machinery and equipment) yield external benefits, and Maddison (1987) finds that residential and nonresidential capital make different contributions to growth. Higher productivity in the United States, therefore, may be a result of the composition of investment relative to the other major industrial countries. In each country, the largest category of investment is machinery and equipment (Tables 3, 4, 5, and 6). However, by the 1990s, nominal and real equipment investment in the United States was a higher percentage of total (or private) investment than in the other economies except for Canada. It is possible that the relatively higher share of machinery and equipment investment in the United States has led to higher aggregate productivity. However, Adams and Chadha (1992) find that the long-run growth performance of the U.S. economy is consistent with the neoclassical growth model, which assumes no external benefits from investment, and Auerbach and others (1993) contend that the De Long-Summers result is not robust.5

Table 3.

United States: Components of Nominal Gross Capital Formation 1/

(In percent of GDP)

article image
Sources: OECD National Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.

For the United States, components include only private capital formation; for other countries, the components include private and public investment. Numbers may not add up to total because of unavailable date and/or rounding.

For Japan, data were not available for nonrcaidential structures and machinery and equipment.

For Germany, inventory data were available only after 1967.

Table 4.

United States: Components of Real Gross Capital Formation 1/

(In percent of GDP)

article image
Sources: OECD National Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.

For the United States, components include only private capital formation; for other countries, the components include private and public investment Numbers may not add up to total because of unavailable data and/or rounding.

For Japan, data were not available for nonresidential structures and machinery and equipment.

For Germany, inventory data were available only after 1967.

Table 5.

United States: Composition of Nominal Gross Capital Formation 1/

(In percent of total)

article image
Sources: OECD National Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.

For the United States, components include only private capital formation; for other countries, the components include private and public investment. Numbers may not add up to 100 because of unavailable data and/or rounding.

For Japan, data were not available for nonresidential structures and machinery and equipment.

For Germany, inventory data were available only after 1967.

Table 6.

United States: Composition of Real Gross Capital Formation 1/

(In percent of total)

article image
Sources: OECD National Accounts; and Bureau of Economic Analysis, U.S. Department of Commerce.

For the United States, components include only private capital formation; for other countries, the components include private and public investment Numbers may not add up to 100 because of chain-weighted data, unavailable data and/or rounding.

For Japan, data were not available for nonresidential structures and machinery and equipment.

For Germany, inventory data were available only after 1967.

7. Van Ark and Pilat (1993) note that labor quality explains some of the difference in productivity among Germany, Japan, and the United States, although as the differences in education and skills have narrowed among the countries, the effect of changes in human capital has been reduced. Maddison (1987) finds that the slowdown in improvements in labor quality since 1973 explains part of the slowdown in productivity growth in Germany and Japan relative to the United States.

8. Examining productivity at the sectoral level, Bernard and Jones (1996) argue that productivity convergence has stopped in manufacturing but continues in other sectors, particularly services. They explain these developments by noting that a larger fraction of manufactured goods are traded, and that in the tradeable-goods sectors, comparative advantage can lead to specialization. Therefore, while technology diffusion may lead to productivity convergence for nontradeable products, it need not lead to convergence for tradeable goods. Van Ark and Pilat (1993) and Maddison (1987) find that differences in plant size, structure, and economies of scale explain differences in productivity levels among countries, and continued differences in economies of scale also explain the slowdown in convergence in recent decades.

9. Analyzing productivity at the aggregate, industry, and firm level in Germany, Japan, and the United States, the McKinsey Global Institute (1996) contends that the differences in productivity among these three countries in the 1990s are mainly due to the different incentives given managers by product and factor markets. Greater competition in product markets encourage managers in the United States to improve productivity and cut costs, to provide customized products and pricing schemes to employ capacity more effectively, and to source material and intermediate consumption goods globally. Greater competition is also achieved in the United States by having a more open, less regulated market. When regulations are required, such as for public utility monopolies, U.S. regulators have tighter price controls, often enforcing price caps, which induce managers to improve productivity to increase profits. Furthermore, when monopolies are publicly owned, as in many other countries, governments may provide managers mixed incentives, not necessarily focused on productivity.

10. Factor markets, in particular capital markets, also may play a major role in explaining the disparity in productivity, according to the McKinsey Global Institute (1996). The U.S. capital market is perceived as penalizing underperformers and fostering “creative destruction” to a greater extant than the capital markets in Japan and Germany. In large part, the differences in these markets reflect the structure of corporate ownership in these countries. In the United States, ownership is more diffuse and “outsider-oriented,” and firms are more susceptible to mergers and acquisitions. Japanese and German firms also rely more on bank lending as a source of capital. The banks, which generally maintain long-term relationships with the firms and can have significant loans at risk, may be more willing to provide funds to less efficient firms for a longer period than the capital markets in the United States.

11. According to the McKinsey Global Institute (1996), labor markets play a secondary role in explaining productivity differences. For example, labor shortages in Japan may have induced firms to invest too heavily in areas such as automation. Maddison (1987) argues that the inflexibility of labor markets, particularly in Japan and to a lesser extent in Germany, have contributed to the productivity slowdown in those countries because employers may be hesitant to trim unproductive workers.

List of References

  • Adams, Charles and Bankim Chadha, 1992, “Growth, Productivity, and the Rate of Return on Capital,” IMF Working Paper, WP/92/35 (Washington, DC: International Monetary Fund).

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  • Auerbach, Alan I., Kevin A. Hassett, and Stephen D. Oliner, 1993, “Reassessing the Social Returns to Equipment Investment,” NBER Working Paper, No. 4405 (Massachusetts: National Bureau of Economic Research).

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  • Bernard, Andrew B. and Charles I. Jones, 1996, “Comparing Apples to Oranges: Productivity Convergence and Measurement Across Industries and Countries,” The American Economic Review, Vol. 86, No. 5, pp. 1216–38.

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  • De Long, J. Bradford and Lawrence H. Summers, 1991, “Equipment Investment and Economic Growth,” Quarterly Journal of Economics, pp. 445–502.

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  • De Long, J. Bradford and Lawrence H. Summers, 1992, “Equipment Investment and Economic Growth: How Strong is the Nexus,” Brookings Papers on Economic Activity, pp. 157–212.

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  • Hayashi, Fumio, 1986, “Why is Japan’s Saving Rate So Apparently High?” in Stanley Fischer, Ed., NBER Macroeconomics Annual, 1986 (Massachusetts: MTT Press).

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  • Maddison, Angus, 1987, “Growth and Slowdown in Advanced Capitalist Economies: Techniques of Quantitative Assessment,” Journal of Economic Literature, Vol. 25, No. 2, pp. 649–98.

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  • McKinsey Global Institute, 1996, Capital Productivity (Washington, DC: McKinsey and Company).

  • Lipsey, Robert E. and Irving B. Kravis, 1987, “Is the U.S. a Spendthrift Nation?” NBER Working Paper Wo. 2274 (Massachusetts. National Bureau of Economic Research).

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  • Van Ark, Bart and Dirk Pilat, 1993, “Productivity Levels in Germany, Japan, and the United States: Differences and Causes,” Brookings Papers on Economic Activity, Vol. 2, pp. 1–69.

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1

Prepared by Ranil Salgado.

2

Net investment may be a more appropriate measure for the purposes of this exercise because it represents net additions to the capital stock; however, capital consumption (or depreciation) is measured differently across countries, and therefore, net investment may not be comparable. See Hayashi (1986) and Lipsey and Kravis (1987) for more discussion on this point.

3

Note that prior to reunification (1990), Germany had a higher capital to labor ratio than the United States. Data through June 1990 apply to the (former) Federal Republic of Germany, and data after that date refer to (unified) Germany.

4

Labor input here is measured using total employment. Although it would be more appropriate to derive labor productivity based on hours worked, these measures were not available for all seven countries on an aggregate basis. Bernard and Jones (1996) and Van Ark and Pilat (1993) used hours worked instead of employment for the manufacturing sector in some of these countries and found similar results to those presented in this paper. To the extent that hours worked per employee follow different trends in the different countries, the labor productivity and total factor productivity convergence results presented here will be inaccurate.

5

Using the De Long-Summers data, Auerbach and others find no evidence of external benefits when the OECD countries are analyzed in isolation.

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Cover IMF Staff Country Reports
United States: Selected Issues
Author: International Monetary Fund
Volume/Issue:
Volume 1997: Issue 097
Publisher:
International Monetary Fund
ISBN:
9781451839494
ISSN:
1934-7685
Pages:
110
DOI:
https://doi.org/10.5089/9781451839494.002

UNITED STATES: GDP PER CAPITA 1/2/

(In thousands of US dollars)

UNITED STATES: NOMINAL AND REAL INVESTMENT 1/

UNITED STATES: PRODUCTIVITY 1/