Quality mismeasurement masks true manufacturing productivity growth

The study reveals that nearly all measured total factor productivity (TFP) growth in manufacturing since 1987, and its subsequent post-2000s decline, originates from a few computer-related industries.

The authors argue that conventional metrics fail to fully capture quality improvements, leading to an understatement of actual productivity.

By comparing consumer, producer, and import price indices, they find that consumer price indices indicate less inflation in rapidly changing industries, suggesting mismeasurement in standard industry deflators.

Using an input-output framework, the paper estimates that TFP growth is understated by 1.4 percentage points in durable manufacturing and 0.3 percentage points in nondurable manufacturing.

Conversely, TFP growth is slightly overstated in nonmanufacturing industries, by 0.25 percentage points annually.

This mismeasurement was slightly larger before 2009 than after, indicating a persistent issue.

For decades, manufacturing productivity growth outpaced the overall US economy, increasing by 1.2 percent annually between 1987 and 2009, compared to 0.9 percent for the private economy.

However, from 2009 to 2023, manufacturing TFP slightly declined, while private economy TFP maintained a 0.8 percent annual growth rate.

This leader-follower reversal is puzzling, especially given manufacturing's significant role in innovative activity, accounting for over two-thirds of corporate patents and R&D spending despite only one-tenth of aggregate employment.

The paper introduces a novel price-based dual approach, contrasting consumer-facing and producer-facing price indices, to address this measurement challenge and assess real output and TFP growth.