A General Model for Productivity Research

Bert M. Balk, Erasmus University Rotterdam

The measurement of productivity change (through time) or productivity difference (between production units which are deemed comparable, also called the comparison of productivity levels), is usually based on models that make use of strong assumptions such as competitive behaviour and constant returns to scale. In this presentation I will develop a blueprint for comparative productivity measurement. It will be shown that all the usual, neoclassical assumptions can be avoided. Such assumptions enter the picture when one proceeds from measurement to explanation.

The key concept is a production unit's profitability. In the KL-VA framework this is defined as value added divided by joint capital and labour input cost. Given detailed prices and quantities, value added as well as capital and labour input cost are computed as sums of prices times quantities. For the input cost of owned capital assets a number of decisions must be faced: 1) which interest rate must be used in the unit user cost expression?; 2) must the unanticipated revaluations (measured ex post) be retained as part of the user cost?; 3) must the productive capital stock be adjusted by a utilization rate? For the labour input cost imputations must be made for self-employed persons.

A natural way of comparing a production unit at two time periods or two units during the same time period is to consider its or their profitability ratio. This is a ratio of value ratios. In principle, any such value ratio can be decomposed into a price index and a quantity index. The quantity component of the profitability ratio is called the (primal) Total Factor Productivity (TFP) index.

Simple manipulations with this definition lead to an expression that can serve as focal point for
• linking TFP to welfare measures;
• dissecting TFP with respect to aspects of firm dynamics;
• model-based decompositions of TFP (into technological change, efficiency change, etc.);
• research into drivers of TFP change.
I will close with a list of some pressing issues.

Background reading material:

Balk, B. M., 2003, “The residual: On monitoring and benchmarking firms, industries, and economies with respect to productivity”, Journal of Productivity Analysis 20, 5-47.
___, 2010, “An assumption-free framework for measuring productivity change”, The Review of Income and Wealth 56, Special Issue 1, S224-S256.
___, 2011, “Measuring and decomposing capital input cost”, The Review of Income and Wealth 57, 490-512.

About the speaker
Prof. Dr. Bert M. Balk held a chair in business administration, in particular the measurement of price, quantity, and productivity changes and economic-statistical research, at the Rotterdam School of Management, from 2001 to 2011. This chair was supported by Statistics Netherlands, where Prof. Balk worked in various positions from 1973 to 2011. A.o. he was deputy head of the Department for Price Statistics and director of the Center for Research of Enterprise Microdata (Cerem). His research interests include measurement in economics, in particular index number theory and productivity measurement. He has published a large number of articles in academic journals, has written two books, and serves on the editorial boards of the Journal of Productivity Analysis and Statistica Neerlandica.

Venue: Fourth Floor, Grote Gracht Building (Phd Students Classroom)

Date: 20 October 2011

Time: 12:30 - 13:30  CEST