The fallacy in productivity decomposition

Simon Bruhn, Thomas Grebel and Lionel Nesta

SciencePo Working papers Main from HAL

Abstract: This paper argues that the typical practice of performing growth decompositions based on log-transformed productivity values induces fallacious conclusions: using logs may lead to an inaccurate aggregate growth rate, an inaccurate description of the microsources of aggregate growth, or both. We identify the mathematical sources of this log-induced fallacy in decomposition and analytically demonstrate the questionable reliability of log results. Using firm-level data from the French manufacturing sector during the 2009-2018 period, we empirically show that the magnitude of the log-induced distortions is substantial. Depending on the definition of accurate log measures, we find that around 60-80% of four-digit industry results are prone to mismeasurement. We further find significant correlations of this mismeasurement with commonly deployed industry characteristics, indicating, among other things, that less competitive industries are more prone to log distortions. Evidently, these correlations also affect the validity of studies that investigate the role of industry characteristics in productivity growth.

Keywords: productivity decomposition; growth; log approximation; geometric mean; arithmetic mean (search for similar items in EconPapers)
Date: 2021-01-01
New Economics Papers: this item is included in nep-eff, nep-gro, nep-hme and nep-ino
Note: View the original document on HAL open archive server: https://hal-sciencespo.archives-ouvertes.fr/hal-03474838
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: The fallacy in productivity decomposition (2023)
Working Paper: The fallacy in productivity decomposition (2023)
Working Paper: The fallacy in productivity decomposition (2023)
Working Paper: The Fallacy in Productivity Decomposition (2021)
Working Paper: The fallacy in productivity decomposition (2021)
Working Paper: The fallacy in productivity decomposition (2021)
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