If Factor Shares Are Not Constant, then we Have a Measurement Problem: Can we Solve it?

Recent evidence show that factor shares, if properly measured, are far from constant. Moreover, the shares of natural resources and raw labor seem to be negatively correlated with income per capita while the share of human and physical capital is positively correlated with income per capita. Now, if factor shares are not constant then (i) growth accounting exercises rely on a false assumption and (ii) there is admeasurement problem. The effect that changes in factor shares have on output depend on the relative abundance of factors and, for this reason, it is necessary to have correct measures. We propose an empirical methodology to solve the measurement issue and estimate TFP growth.

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