Total factor productivity and structural reforms: Evidence from advanced economies sector-level data

Abstract

This paper computes a new measure of capacity utilization-adjusted Total Factor Productivity (TFP) using sector-level data from a sample of 18 Advanced Economies and 24 industries between 1970 and 2014. We then empirically examine the impact of structural reforms (labor and product market) on TFP by means of the local projection method. Structural reforms follow a narrative-base construction which have several advantages in our context. Results show that structural reforms positively impact TFP, particularly the liberalization of employment protection legislation for regular workers. The effect of reforms affects both changes in resource misallocation across sectors (the between effect) and within sectors (the within effect). The TFP-effect of both types of reforms varies depending on the phase of the business cycle prevailing at the time the reform is implemented. Finally, our findings are robust to a wide range sensitivity checks.