Measuring Total Factor Productivity and Variable Factor Utilization

Abstract

This research constructs estimates of total factor productivity (TFP) growth for six sectors of the Latvian economy for the period 2000-2008, using a sectoral quarterly data set. Estimates are obtained by controlling for qualitative changes in production factors and assuming a mechanism for capturing changes in the utilization of labor and capital. The study provides two main results. First, the use of indicators for labor and capital utilization intensity allows for minimization of fluctuations in the TFP measure and makes it less dependent on output growth compared with the Solow residual approach. Second, the comparison of both methods shows that the estimate of TFP growth obtained by the Solow residual approach might be undervalued for manufacturing, electricity, gas and water supply, wholesale and retail trade, as well as hotels and restaurants, while overvalued for growth in the transport, storage, and communication sector of the Latvian economy.