Measuring productivity based on the reduction of produced capital to labor

Abstract

Abstract Noting that capital is a produced factor of production, this paper explores the measurement of productivity based on the reduction of capital to labor. Specifically, it examines two productivity indicators based on this approach: ‘the modified Solow residual’ (MSR) and ‘total labor productivity’ (TLP), defined as the quantity of output per unit input. The study finds that MSR is a more general indicator of the growth contribution of technological progress than the conventional Solow residual in that it provides accurate estimates of the growth contribution for all types of technological progress and reduces to the conventional Solow residual in the case of Hicks-neutral technological progress. TLP is found to provide a broader perspective on productivity as it encompasses the efficiency of factor allocation as well as the level of technology. This paper also estimates the MSR of the Korean economy and compares it with conventional Solow residual estimates.