Factor Substitution and Productivity in New Zealand

Abstract

This paper produces aggregate and industry estimates of total factor productivity (TFP) for New Zealand. TFP is estimated based on constant elasticity of substitution (CES) production functions that permit varying assumptions about factor augmentation and that allow for industry‐specific values of the elasticity of substitution between inputs. The CES approach simultaneously explains changes in labour share and output over time, and provides estimates of the contribution of capital and labour to productivity in New Zealand. The results suggest that negative capital‐augmenting technical change in several industries has weighed on productivity in New Zealand.

Labour-augmenting technical change data for alternative elasticities of substitution: growth, slowdown, and distribution dynamics

“…At best it is a temporary phenomenon as in the estimates of Klump, McAdam, and Willman (2007) and the theoretical model of Acemoglu (2003). and Steenkamp (2018) and several earlier studies (see León-Ledesma, McAdam, and Willman 2010) find negative constant growth rates for it, which are hard to explain as they may reflect negative unmeasured quality growth or be the mirror image of too high capital growth in the generated capital data. 9 Klump, McAdam, and Willman (2007) and Schubert and Neuhäusler (2018) show that it vanishes when specifications are more general; only labour-augmenting technical change is relevant in the long run.…”