The Components of Total Factor Productivity Change

This chapter delves into the components of (total factor) productivity change. By making minimal assumptions about underlying technologies it appears that productivity change, here defined as output quantity change divided by input quantity change, can be seen as the combined result of (technical) efficiency change, technological change, a scale effect, and input and output mix effects. Given a certain functional form for the productivity index, the problem is then how to decompose such an index into factors corresponding to these five components. A basic insight offered in this chapter is that meaningful decompositions of productivity indices can only be obtained for indices that are transitive in the main variables. Using a unified approach, decompositions for the classes of Malmquist, Moorsteen-Bjurek, Lowe, and Cobb-Douglas productivity indices are obtained. A unique feature of this chapter is that all the decompositions are applied to the same dataset, a real-life panel of decision-making units, so that the extent of the differences between the various decompositions can be judged.