Effects of Change in Relative Prices in Existing Decompositions of Aggregate Labor Productivity Growth: A Resolution of the Aggregate Effect

• Main Author: Dumagan, Jesus C.
• Format: text
• Published: Animo Repository 2019
• Subjects: Labor productivity growth; GDP growth; relative prices; index number theory; Growth and Development; Labor Economics
• Online Access: https://animorepository.dlsu.edu.ph/res_aki/30; https://animorepository.dlsu.edu.ph/cgi/viewcontent.cgi?article=1032&context=res_aki
• Institution: De La Salle University

Diewert (2015) reworked Tang and Wang’s (2004) growth decomposition and claimed that: “Thus even if all industry labor productivity levels remain constant and all labor input shares remain constant, economy wide labor productivity growth can change due to changes in industry real output prices (italics added)” (p. 370). However, contrary to his 2015 claim, Diewert (2016) found “puzzling” results from Australian data where the sum of price change effects across industries did not matter much and explained this puzzle by an approximation formula that showed price effects sum to zero with the first-order accuracy. In contrast, this paper derives the exact formula that shows price effects sum to zero, depending on the quantity index underlying the GDP in the definition of aggregate labor productivity. It is shown that Diewert’s formula is an approximation to this paper’s exact formula showing that the aggregate effect of relative price changes is zero