Growth, components and macroeconomic determinants of total factor productivity: An analysis for OECD countries

Productivity, the fundamental element of sustainable growth, in the simplest definition, is the term that expresses the level of efficient use of labor, capital and other factors of production. This term is an indicator of the ability of economic units to transform their input into output. Considering large and increasing differences between countries in terms of per capita income levels and factor accumulations that cannot fully explain these differences, productivity growth and its macroeconomic determinants emerge as a dominant issue. The study consists of a two-stage and multi-layered empirical analysis. Firstly, the total factor productivity (TFP) growth and its components have been estimated for the period 1970-2017 using a panel data set of 28 OECD countries and a stochastic frontier analysis approach. It has been found that the average annual increase in TFP is 0.13% for the whole analysis period. The findings show that the average annual productivity declined in the early years of the 1970s and 1980s. The decline in productivity occurred again in 2008 with the start of the global economic crisis and hit a record in 2009 with 2.25% along the whole analysis period. Another finding in the study is that the growth of TFP is dependent mainly on technical progress rather than improvements in technical efficiency and scale efficiency. In the second stage of the study, the factors affecting the quality and the quantity of the factors of production are included in the analysis and the macroeconomic determinants of TFP are resolved. In this context, five indices have been calculated under the headings of economic stability index, innovation index, technology diffusion index, education index, and economic freedom index, and TFP has been analyzed via panel regression methods. The findings show that the most important factor determining TFP is the technology diffusion index, which shows the mechanisms of transfer of technology from country to country. This variable is followed by the education index. According to another finding, the innovation capacity of the economy also has a significant impact on the growth of TFP. Other important findings of the study are that within the scope of the period and countries analyzed, the economic stability index and the economic freedom index also have a significant effect on TFP, but the size of these effects is more limited than other variables.