Working Papers,
University of Aarhus, Aarhus School of Business, Department of Economics

Abstract: Firms in the same industry can differ in measured total factor productivity (TFP) by multiples of 3. Griliches

(1957) suggests one explanation: the quality of inputs differs across firms. Labor inputs are traditionally

measured only as the number of workers. We investigate whether adjusting for the quality of labor inputs

substantially decreases measured TFP dispersion. We add labor market history variables such as experience

and firm and industry tenure, as well as general human capital measures such as schooling and sex. We also

investigate whether an innovative structural estimator for productivity due to Olley and Pakes (1996) substantially

decreases measured residual TFP. Combining labor quality and structural estimates of productivity, the

one standard deviation difference in residual TFPs in manufacturing drops from 0.70 to 0.67 multiples. Neither

the structural productivity measure nor detailed input quality measures explain the very large measured

residual TFP dispersion, despite statistically precise coefficient estimates

Keywords: production function estimation; total factor productivity; input quality; structural estimates of productivity

JEL-codes: D24; L23; M11

40 pages, February 1, 2007

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