Chasing an Elusive Target: Measuring Productivity Growth under Factor-Biased Technical Change

We show theoretically and empirically that standard methods give downward biased estimates of productivity growth if technical change is factor-biased. We show how to correct for this bias and construct more reliable measures of the productivity gains from technical progress. We consider two empirical applications, one where the source of technical progress is unobserved, and a second where the source can be directly measured. In the first application, we use the frequently applied NBER-CES productivity database for the United States over the years 1958–2011. The bias is especially large in the last decade, making our finding relevant for the discussion on the slowdown in US productivity growth since 2000. In the second application, we study the adoption of broadband internet in Norwegian firms in the early 2000s. We have plausibly exogenous variation in the availability and adoption of broadband internet by firms. In both applications, we find that the factor-biased nature of technological progress, if ignored, leads to the erroneous conclusion of only modest productivity gains from adopting new technology when the actual gains are in fact considerable.