Economics Letters 69 2000 225–233
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Productivity slowdown due to scarcity of capital to scrap in a putty-clay model
Thomas Lindh
Department of Economics , Uppsala University, Box 513, 751 20 Uppsala, Sweden
Received 19 August 1999; accepted 7 March 2000
Abstract
The conditions for a productivity slowdown to take place simultaneously with accelerated technical change are investigated in a simple putty-clay macro model of the Johansen type. A capacity distribution such that the
resulting supply curve is concave at the scrapping margin means a high likelihood of a reversed relation. The relation between growth rates of wages and output is crucially dependent on the tail elasticity of the capacity
distribution. The need in a putty-clay economy to scrap in order to transfer labor to new investment is the key mechanism. The model emphasizes the decisive role of past investment in shaping the current relation between
technical change and productivity growth.
2000 Elsevier Science S.A. All rights reserved.
Keywords : Productivity slowdown; Putty-clay; Capacity distribution
JEL classification : O41
1. Introduction
If production is characterized by putty-clay technology and production units on the verge of scrapping are relatively scarce, relatively few low-productivity jobs are replaced by new high-
productivity jobs. Productivity growth slows down even if the rate of technical change in best-practice units remains at a high level. The productivity slowdown in the late 1960s or somewhat later,
experienced by almost all industrialized nations, could have to some extent depended on investment slumps in the 1930s and 1940s. Many other explanations have been offered, most often the rise in
energy prices in 1973, but declining knowledge production, slower rates of increase in labor skill, declining investment rates, shifts towards service production, and increasing government sectors and
distorting taxes have also been put forward as causes; cf. Fischer 1988. But the productivity
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2000 Elsevier Science S.A. All rights reserved.
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. Lindh Economics Letters 69 2000 225 –233
slowdown still remains largely a puzzle and none of the possible causes has been generally accepted to explain more than minor parts of the slowdown. Recently, the age of the capital stock has received
renewed attention as part of the explanation; see Wolff 1996. The work of Davis and Haltiwanger 1992 and their followers on gross job flows has also revived interest in putty-clay models, since the
actual gross flows observed in the economy are hard to reconcile with conventional aggregate production functions.
The point made in this paper is that the form of the capacity distribution in itself influences how technical change translates into productivity growth, and may temporarily make the relation negative.
A putty-clay model, where capital can be substituted for labor only prior to the actual investment, provides an analytical tool for the hypothesis that scarce capital to scrap may cause a productivity
