Labor Productivity, Capital Accumulation, and Aggregate Efficiency Across Countries: New Evidence for an Old Debate

This article studies the proximate sources of labor productivity differences across countries. Using a panel dataset for 74 countries covering the 1960-2010 period, it first documents that, relative to the US, labor productivity of the median country has been mostly stagnant, while cross-country disparities have drastically increased. Next, through the lens of a production function framework, it evaluates the proximate sources of labor productivity: physical capital, human capital, and aggregate efficiency. Results show stagnation and increasing disparities in physical capital, growth and decreasing disparities in human capital, and decline and increasing disparities in aggregate efficiency. By including the commonly unaccounted covariance between capital and aggregate efficiency into the analysis, disparities in aggregate efficiency explain most of the disparities in labor productivity across countries