MUCH OF THE TRADITIONAL analysis of productivity growth in manufacturing industries has been based explicitly or implicitly on a model in which identical, perfectly competitive plants respond in the same way to forces that strike the industry as a whole. The estimates of growth obtained with this framework are then used as the basis for discussions of policy concerning capital accumulation, research and development, trade, or other issues. This contrasts markedly with the literature of industrial organization in which perfect competition is seen as an unusual market structure and in which the differences among firms are examined in detail. The models of oligopoly that are the staple of the industrial organization literature are then used to examine antitrust policy.

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The Productivity Slowdown, Measurement Issues, and t he Explosion of Computer Power ALMOST TWO DECADES have now passed since U.S. productivity growth first showed signs of slowing, more than 15 years since the first paper on that topic appeared in this journal. 1 Overall, the slowdown continues with little relief; in the nonfarm business sector the annual growth rate for both output per hour and multifactor productivity was more than 1.5 percentage points slower during 1973-87 than during 1948-73.2 If the Baily's work is part of the program of research being carried out by the Center for Economic Progress and Employment at Brookings. The Center is financed by grants from the Ford Foundation and numerous corporate sponsors. Gordon's research is supported by the National Science Foundation. The authors are grateful to Hiranthi de Silva, Hensley Evans, and Gabriel Sensenbrenner for research assistance; to Paul Pieper for helpful discussions and indispensable aid in locating sources of construction data; to Edward Denison for many perceptive suggestions on an earlier draft; and to members of the Brookings Panel and the Northwestern University-Federal Reserve of Chicago Macroeconomics Workshop for helpful comments. 1. William D. Nordhaus, "The Recent Productivity Slowdown," BPEA, 3:1972, pp. 493-536.2. Multifactor productivity growth is computed (sqe equation 1 below) as the rate of growth of output minus the weighted average of the rates of growth of inputs (capital and labor when output is value added; energy and materials are included otherwise). The weights are the shares of the factors in total cost. 348Brookings Papers on Economic Activity, 2:1988 productivity slowdown continues, it must inevitably reduce the ability of the United States to increase its per capita income and wealth, just as it has already resulted in a near-total cessation in the growth of economywide real hourly compensation since 1973.3 In this sense the productivity growth slowdown might be described as America's greatest economic problem.Even as economists remain perplexed about the nature of the slowdown, a new puzzle has presented itself. Productivity has recovered strongly in part of the economy while worsening elsewhere. The revival is in manufacturing productivity, where growth in the past half-decade has been almost enough to wipe out the entire 1973-87 deficit compared with 1948-73. The worsening trend is in nonfarm nonmanufacturing, where output per hour has grown at close to a zero rate on average since 1973, while multifactor productivity growth has been negative. Key Measurement Problems in the Aggregate and Industry DataOne goal of this paper is to answer the perplexing question that arises again and again: "Can measurement errors 'explain' all, some, or none of the post-1973 U.S. productivity growth slowdown?" Our answer is "some, but not much." On the basis of hard evidence and some speculation, we conclude that measurement errors are unlikely to explain more than one-third of the post-1973 slowdown in nonfarm business private ...

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This content downloaded from 146.ON AVERAGE, manufacturing productivity (measured by real value added per hour) is higher in U.S. operations than in Japanese or European operations, but productivity by industry varies substantially from country to country.' What is not well established is why such international productivity differences exist. This paper explores international productivity differences in manufacturing industries across Germany, Japan, and the United States and offers an explanation for them.We develop an extension and a refinement of the industry-of-origin method to provide new measures of productivity in nine industries located in the three countries (automobiles, automotive parts, metalworking, steel, computers, consumer electronics, food, beer, and soap and detergent). Then we combine publicly available data with the industry knowledge and assessments by experts within McKinsey & Company to determine the reasons for productivity differences. The nature of the explanation takes place at two levels, the first of which is at the production process level. We look for differences in the use of capital, technology, and skills-how the variables that enter the production As an illustration, consider the following two examples. First, in the 1980s German industry, on average, fell behind best-practice methods despite the competition it faced within Europe. During the 1960s and 1970s, manufacturers in Germany raised productivity rapidly, achieving almost complete convergence with the United States in manufacturing productivity. But in the 1980s, German industries still concentrated on competition in Europe, where they had a significant productivity advantage, and did not compete against the emerging productivity leaders in Japan in the same way as U.S. companies did. For example, direct competition from leading Japanese producers caused the exposed U.S. automobile industry to respond with high productivity, while by 1990 the German industry-much more sheltered from Japanese competition-had done little to increase its productivity. Second, we observed marked productivity disparities within Japan. Those parts of Japanese manufacturing that competed in world markets had achieved best-practice methods or close to it. Those industries that competed domestically had relatively low productivity, even though the domestic industry could be quite competitive.This study parallels the findings of the earlier McKinsey study on productivity in the service sector and adds to the validity of those results by finding a similar effect of competition on productivity in the manufacturing sector.2 Moreover, we were able to be more specific and detailed in describing how productivity differenc...