SOME COUNTRIES PRODUCE SO MUCH MORE OUTPUT PER WORKER THAN OTHERS: Productivity Calculations by Country 3

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Our earlier paper, Hall and Jones (1996), compared results based on the Cobb-Douglas formulation with alternative results based on the application of Solow’s method with a spatial rather than temporal ordering of observations. In this latter approach, the production function is not restricted to Cobb-Douglas and factor shares are allowed to differ across countries. The results were very similar. We do not think that the simple Cobb-Douglas approach introduces any important biases into any of the results presented in this paper.

Our calculation of productivity across countries is related to a calculation performed by Mankiw et al. (1992). Two important differences are worth noting. First, they estimate the elasticities of the production function econometrically. Their identifying assumption is that differences in productivity across countries are uncorrelated with physical and human capital accumulation. This assumption seems questionable, as countries that provide incentives for high rates of physical and human capital accumulation are likely to be those that use their inputs productively, particularly if our hypothesis that social infrastructure influences all three components has any merit. Our empirical results also call this identifying assumption into question since, as shown in Table 1, our measure of productivity is highly correlated with human capital accumulation and moderately correlated with the capital-output ratio. Second, they give little emphasis to differences in productivity, which are econometric residuals in their framework; they emphasize the explanatory power of differences in factor inputs for differences in output across countries. In contrast, we emphasize our finding of substantial differences in productivity levels across countries.