Growth depends upon physical capital accumulation (that is investment), growth in GDP and labour productivity that includes human capital deepening
, physical capital deepening
, and technological gains, in a market-oriented economy with supportive government policies.
Those three components are: capital deepening
effect, skills upgrading and MFP growth.
The low level of business investment also helps us understand the limited extent of capital deepening
(the intensity of capital use per employee), despite large falls in the costs of capital and a lower rate of typical stock depreciation, and this reduction in capital employed contributes directly to lower levels of labour productivity.
That framework has two basic elements: (1) a decomposition of labor productivity growth into contributions from capital deepening
, labor quality, and MFP; and (2) a decomposition of MFP growth into contributions from different sectors.
He agreed that capital spending is endogenous, but noted that the recent recovery has been the slowest recovery in capital deepening
since 1948, or at least as long as capital deepening
has specifically been measured.
First, there is the hypothesis of capital deepening
: technological innovations of various kinds produce better and cheaper equipment--robots, ATM machines, powerful software--that replaces workers and redistributes income from labor to capital.
First, it can accelerate the capital deepening
process in the ICT user industries if it decreases the investment to output relative price.
higher growth rates following a boost in capital deepening
The basic measure of the pace of innovation in an economy is the growth rate of total factor productivity (TFP), which is calculated by subtracting from labor productivity growth both the contribution of growth in the capital-labor ratio (capital deepening
) and the effect of higher educational attainment.
Building on Malmquist (1953), Kumar and Russell (2002) show that labor productivity growth depends on capital deepening
, efficiency change, and technical change (5).