G:\12e\Workload- All\Mel\April 3- Working Papers\2001-04 Eng.doc Labour or Total Factor Productivity: Do We Need to Choose?

The authors would like to thank Bing-Sun Wong, Jeremy Rudin and Benoit Robidoux for helpful comments. The views expressed in this paper are our own and should not be attributed to the Department of Finance. A shorter version of this paper was published in the first issue of the International Productivity Monitor. Labour or Total Factor Productivity: Do We Need to Choose? – 2 of 14 – Two competing measures of productivity are commonly used by both academics and policy makers. These are labour productivity—output per hour—and total factor productivity (TFP)—which measures productivity net of the contribution of capital. Which measure is the ‘best ’ has been the subject of recent debate in academic and policy circles. In this paper, we argue that both measures have their place, and that neither tells the whole story. TFP is more useful over the long run, assuming that one is confident about the underlying growth process and the quality of capital stock data, whereas labour productivity is more reliable in the short run, when there is doubt about the underlying growth process, or when capital stock data are unreliable