Macroeconomic Causes of Unbalanced Productivity Growth in Open Economies

Soederstroem, H.T. & Brundell, P. (1983). Macroeconomic Causes of Unbalanced Productivity Growth in Open Economies. IIASA Collaborative Paper. IIASA, Laxenburg, Austria: CP-83-049

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Abstract

It is a well-known empirical fact that the goods producing (tradables) sector of industrialized economies tends to have a higher rate of labor productivity growth than the service (non-tradables) sector. The difference has been used to explain unbalanced sectoral growth patterns, structural inflation and other macroeconomic phenomena. This paper sets forth and tests the proposition that a significant part of the observed productivity growth difference is the result of a relative decline of the tradables sector, which in turn is caused by macroeconomic disturbances leading to a relative increase of the product wage in that sector. Explicit hypotheses on an endogenous determination of productivity growth differences are derived from a small macro model and tested on data from 1960 to 1975 for 14 OECD countries divided into two groups: large economies and small open economies. We find empirical support for the hypothesis of a structural explanation of the sectoral productivity growth difference in both large and small economies. For small open economies there is also a significant relationship between product wage disturbances and the relative decline of the tradables sector. The empirical analysis indicates that in these countries productivity growth is the same in both sectors in the absence of product wage disturbances.

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