Capital, Labor, and Productivity

Paul M. Romer

PMR

Paul M. Romer

IN A PREVIOUS PAPER I explored two suggestions about how to understand time-series and cross-country variations in measured total factor productivity growth: increases in the labor force might slow technological change and increases in capital might speed it up. Neither suggestion was new. The conjecture about the effect of labor dates back, at least, to attempts to explain the divergence in productivity growth rates observed in the United States and the United Kingdom. The suggestion that investment or savings is a fundamental determinant of the rate of growth dates back to Adam Smith. Neither possibility can be considered within the narrow theoretical confines of neoclassical growth theory, but more recent models of endogenous growth show that they can arise in richer economic environments. This paper presents new evidence and new theoretical arguments that bear on these matters.