What Determines Productivity?

T to the massive infusion of detailed production activity data into economic study over the past couple of decades, researchers in many fields have learned a great deal about how firms turn inputs into outputs. Productivity, the efficiency with which this conversion occurs, has been a topic of particular interest. The particulars of these studies have varied depending on the researchers’ specific interests, but there is a common thread. They have documented, virtually without exception, enormous and persistent measured productivity differences across producers, even within narrowly defined industries. The magnitudes involved are striking. Chad Syverson (2004b) finds that within fourdigit SIC industries in the U.S. manufacturing sector, the average difference in logged total factor productivity (TFP) between an industry’s 90th and 10th percentile plants is 0.651. This corresponds to a TFP ratio of e0.651 = 1.92. To emphasize just what this number implies, it says that the plant at the 90th percentile of the productivity distribution makes almost twice as much output with the same measured inputs as the 10th percentile plant. Note that this is the average 90–10 range. The range’s standard deviation across four-digit industries is 0.173, so several industries see much larger productivity differences among their producers. U.S. manufacturing is not exceptional in terms of productivity dispersion. Indeed, if anything, What Determines Productivity?