Is There Really a Gap Between Aggregate Productivity and Technology?

Abstract

The important contribution by Basu and Fernald (European Economic Review, 2002, 46) shows that, in practice, there is a statistically significant gap between aggregate productivity and technology that can be attributed to inefficient product and labour markets. This is important, as it implies that the Solow residual is an imperfect index for aggregate technology change. We take a related approach and find that when we control for capacity utilization, time varying markup and account for externalities between industries, by employing a superior system estimator, the gap between the aggregate productivity and technology is shown to narrow considerably.