Output per worker varies enormously across countries. Why? On an accounting basis, our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker--we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language.

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Why Do Some Countries Produce so Much More Output Per Worker than Others

Output per worker varies enormously across countries. Why? On an accounting basis our analysis shows that differences in physical capital and educational attainment can only partially explain the variation in output per worker—we find a large amount of variation in the level of the Solow residual across countries. At a deeper level, we document that the differences in capital accumulation, productivity, and therefore output per worker are driven by differences in institutions and government policies, which we call social infrastructure. We treat social infrastructure as endogenous, determined historically by location and other factors captured in part by language. In 1988 output per worker in the United States was more than 35 times higher than output per worker in Niger. In just over ten days the average worker in the United States produced as much as an average worker in Niger produced in an entire year. Explaining such vast differences in economic performance is one of the fundamental challenges of economics. Analysis based on an aggregate production function provides some insight into these differences, an approach taken by Mankiw, Romer, and Weil [1992] and Dougherty and Jorgenson [1996], among others. Differences among countries can be attributed to differences in human capital, physical capital, and productivity. Building on their analysis, our results suggest that differences in each element of the production function are important. In particular, however, our results emphasize the key role played by productivity. For example, consider the 35-fold difference in output per worker between the United States and Niger. Different capital intensities in the two countries contributed a factor of 1.5 to the income differences, while different levels of educational attainment contributed a factor of 3.1. The remaining difference—a factor of 7.7—remains as the productivity residual. * A previous version of this paper was circulated under the title ‘‘The Productivity of Nations.’’ This research was supported by the Center for Economic Policy Research at Stanford and by the National Science Foundation under grants SBR-9410039 (Hall) and SBR-9510916 (Jones) and is part of the National Bureau of Economic Research’s program on Economic Fluctuations and Growth. We thank Bobby Sinclair for excellent research assistance and colleagues too numerous to list for an outpouring of helpful commentary. Data used in the paper are available online from http://www.stanford.edu/,chadj.

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Why do Some Countries Produce So Much More Output Per Worker than Others

We present a model embodying moderate amounts of nominal rigidities that accounts for the observed inertia in inflation and persistence in output. The key features of our model are those that prevent a sharp rise in marginal costs after an expansionary shock to monetary policy. Of these features, the most important are staggered wage contracts that have an average duration of three quarters and variable capital utilization.

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Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy

We develop a Ricardian trade model that incorporates realistic geographic features into general equilibrium It delivers simple structural equations for bilateral trade with parameters relating to absolute advantage, to comparative advantage (promoting trade), and to geographic barriers (resisting it) We estimate the parameters with data on bilateral trade in manufactures, prices, and geography from 19 OECD countries in 1990 We use the model to explore various issues such as the gains from trade, the role of trade in spreading the benefits of new technology, and the effects of tariff reduction

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Technology, Geography, and Trade

When average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This holds across regions, periods, income levels, and growth rates. But relatively little is known about the broad forces that account for the variations across countries and across time in the share of income accruing to the poorest fifth. When average incomes rise, the average incomes of the poorest fifth of society rise proportionately. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintile does not vary systematically with average income. Dollar and Kraay document this empirical regularity in a sample of 92 countries spanning the past four decades and show that it holds across regions, periods, income levels, and growth rates. Dollar and Kraay next ask whether the factors that explain cross-country differences in the growth rates of average incomes have differential effects on the poorest fifth of society. They find that several determinants of growth - such as good rule of law, openness to international trade, and developed financial markets - have little systematic effect on the share of income that accrues to the bottom quintile. Consequently, these factors benefit the poorest fifth of society as much as everyone else. There is some weak evidence that stabilization from high inflation and reductions in the overall size of government not only increase growth but also increase the income share of the poorest fifth in society. Finally, Dollar and Kraay examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that relatively little is known about the broad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society. This paper - a product of Macroeconomics and Growth, Development Research Group - is part of a larger effort in the group to study growth and poverty reduction. The authors may be contacted at ddollar@worldbank.org or akraay@worldbank.org.

Growth is Good for the Poor

A number of economists find that growth and schooling are highly correlated across countries. A model is examined in which the ability to build on the human capital of one's elders plays an important role in linking growth to schooling. The model is calibrated to quantify the strength of the effect of schooling on growth by using evidence from the labor literature on Mincerian returns to education. The upshot is that the impact of schooling on growth explains less than one-third of the empirical cross-country relationship. The ability of reverse causality to explain this empirical relationship is also investigated.

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Does Schooling Cause Growth

We examine the frequency of price changes for 350 categories of goods and services covering about 70 percent of consumer spending, on the basis of unpublished data from the Bureau of Labor Statisti...

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Some evidence on the importance of sticky prices

We examine the frequency of price changes for 350 categories of goods and services covering about 70% of consumer spending, based on unpublished data from the BLS for 1995 to 1997. Compared with previous studies we find much more frequent price changes, with half of prices lasting less than 4.3 months. The frequency of price changes differs dramatically across categories. We exploit this variation to ask how inflation for 'flexible-price goods' (goods with frequent changes in individual prices) differs from inflation for 'sticky-price goods' (those displaying infrequent price changes). Compared to the predictions of popular sticky price models, actual inflation rates are far more volatile and transient, particularly for sticky-price goods. The data appendix for this paper can be found at http://www.nber.org/data-appendix/w9069/

Some Evidence on the Importance of Sticky Prices

The author examines the cyclical behavior of price/marginal cost margins for U.S. manufac turing after 1956. Short-run marginal cost is markedly procyclical. This is primarily due to procyclical overtime payments, incurred beca use employment is not perfectly flexible. In most industries, output price fails to respond to the cyclical movement in marginal cost; so price/marginal cost margins are markedly countercyclical. The res ults contradict business cycle theories that explain low production i n a recession by a high real cost of producing; they support theories that explain low production in a recession by the inability of firms to sell their output. Copyright 1987 by American Economic Association.

The Cyclical Behavior of Marginal Cost and Price

One topic on which Keynes did not disagree with classical economists was the cyclical behavior of real wages. Keynes (1936) as well as various classical writers predicted that real wages should move countercyclically. Quoting the General Theory (p. 17): "in general an increase in employment can only occur through the accompaniment of a decline in real wages. Thus, I am not disputing this vital fact which the classical economists have (rightly) asserted as indefeasible." This prediction is based on the premise of competition and a given short-run capital stock. Increases in employment then correspond to more intensive use of capital and, through diminishing product, lower real wages. For this reason, evidence by Dunlop (1938) and Tarshis (1939) that real wages move procyclically was viewed as paradoxical. Both Dunlop and Tarshis based their findings on an observed positive correlation between real and money wages, which, given the procyclical movement of money wages, implies a positive correlation between

Mark Bils

Papers

Does Schooling Cause Growth

Some evidence on the importance of sticky prices

Some Evidence on the Importance of Sticky Prices

The Cyclical Behavior of Marginal Cost and Price

Real Wages over the Business Cycle: Evidence from Panel Data