A Model of TFP

This paper proposes an aggregative model of total factor productivity (TFP) in the spirit of Houthakker (1955—1956). It considers a frictional labor market where production units are subject to idiosyncratic shocks and jobs are created and destroyed as in Mortensen and Pissarides (1994). An aggregate production function is derived by aggregating across micro production units in equilibrium. The level of TFP is explicitly shown to depend on the underlying distribution of shocks as well as on all the characteristics of the labor market as summarized by the job-destruction decision. The model is also used to study the effects of labor-market policies on the level of measured TFP. ∗I thank Gadi Barlevy, Marco Bassetto, Jeffrey Campbell, Xavier Gabaix, Nobu Kiyotaki, Erzo G. J. Luttmer, Marc Melitz, Ed Prescott, and Esteban Rossi-Hansberg for comments. Financial support from the National Science Foundation (grant SES-0232583) and the C.V. Starr Center for Applied Economics at New York University is gratefully acknowledged. The views expressed herein are those of the author and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. Address: Federal Reserve Bank of Minneapolis, Research Department, 90 Hennepin Avenue, Minneapolis, MN 55401, USA. E-mail: [email protected].