Measuring Total Factor Productivity and Variable Factor Utilisation: Sector Approach, The Case of Latvia

Working Paper 3/2009

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 utilisation of labour and capital. The paper delivers two main results. First, the use of indicators for labour and capital utilisation intensity allows for minimisation of fluctuations in the TFP measure and makes it less output growth dependent compared with the Solow residual approach. Second, the comparison of both methods shows that the estimate of the 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 the growth in the transport, storage and communication sector of the Latvian economy.

Keywords: Total Factor Productivity, Solow residual, factor utilisation

JEL classification codes: C22, D24

Research published: Measuring Total Factor Productivity and Variable Factor Utilization: Sector Approach, the Case of Latvia. Eastern European Economics, vol.48, No.5, September-October 2010, pp.63-101 Available: http://mesharpe.metapress.com/openurl.asp?genre=article&id=doi:10.2753/EEE0012-8775480504