Decomposing technical change: comment.

• Author: Song, Frank
• Position: Comment on Michael Gort, et. al., Southern Economic Journal, July 1993, pp. 220 - Communications

1. Introduction

   In a recent paper in this Journal[2], Michael Gort, Byong H. Bahk and Richard A. Wall (GBW) provide an alternative approach to measuring the vintage effects of additions to capital utilizing cross-section of manufacturing plant level data made possible by the Census Longitudinal Research Database (LRD). They claim that their model differs in several respects from production functions that are commonly estimated. One principal innovation they claim is to include human capital (labor skills) as a separate argument in their production function rather than an adjustment to the measure of labor input. They find that the elasticity of output with respect to human capital was approximately the same as it was with respect to pure labor. However, it is argued in this note that their measurement of human capital in the production function is inadequate and their conclusions concerning the effect of human capital unjustified.

2. Conceptual and Measurement Issues

   The production function they estimate is of the following form:

   0 = A

   (1)

   where O is output, A is a shift parameter that is assumed to affect the productivity of all vintages of capital and all labor skills symmetrically, [e.sup.a[Tau]] is disembodied technical change at rate a, L is labor, Q is human capital, [K.sub.v] is capital and [e.sup.kv] is embodied technical change. Their labor variable was intended to approximate pure labor separate from human capital and was measured by the number of employees at each plant. The human capital variable Q is an index for the average amount of human capital associated with the labor input, which is simply the average wage rate for each plant (deflated by the CPI in the economy). The justification for this measure of human capital is based on a definition of human capital as any attribute of labor that increases its productivity. According to GBW, "Across plants at a point in time, we assume that average wage rates reflect primarily differences in the composition of the work force with respect to what Becket [1] has called general (as distinct from firm specific) human capital--that is, human capital the returns to which are probably captured by the employee." However, wage differences across plants within the same industry can be caused by many factors.(1) Although the authors dismiss the importance of factors such as unionization, historical peculiarities, or regional differences, many other factors could still be important to lead wage...