March 3, 2026

The mystery of TFP

Key Points

Total factor productivity (TFP) growth analysis shows significant sectoral shifts in 18 countries.
During 1970-2007, data from the EU KLEMS dataset reflects ongoing TFP growth challenges and structural changes.
Errors in capital measurement and output elasticity could affect the understanding of TFP's role in growth.
Continued mysteries surrounding TFP indicate a need for improving measurement methods in the field.

Abstract

The objective of this article is to critically examine explanations of Total Factor Productivity (TFP) growth. TFP growth is analysed at the sectoral and aggregate level, using data for 10 industry groups covering the market sectors of 18 countries over the period 1970-2007 drawn from the EU KLEMS dataset. In all countries resources have been shifting away from industries with high TFP growth towards industries with low TFP growth. Nevertheless structural change has favoured TFP growth in most countries. Errors in measuring capital or in measuring the elasticity of output with respect to capital are unlikely to substantially reduce the role of TFP in explaining growth. The article concludes that the mystery of TFP is likely to remain as long as measurement error persists.

The mystery of TFP

Key Points

Abstract

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