Unveiling the Hidden Impact of Urban Land Rents on Total Factor Productivity

IMF Working Papers, August 25, 2023

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Canonical URL: Unveiling the Hidden Impact of Urban Land Rents on Total Factor Productivity

The paper addresses the puzzling decline of Total Factor Productivity (TFP) levels in rapidly growing economies, such as Singapore, despite advancements in technology and high GDP per capita growth.
Central proposition: TFP growth is not negative; standard growth decompositions have underestimated TFP growth by overestimating the contribution of capital.
Mechanism: Standard decompositions fail to account for the substantial part of capital income directed to urban land rents, causing an overestimation of changes in capital stock's contribution to growth and thereby an underestimation of TFP growth.
Revised decomposition result: TFP growth in economies with high land rents and rapid capital stock growth, such as Singapore, has been considerably underestimated; TFP levels have not declined but increased rapidly.

Re-estimation involves adjusting standard growth decompositions to account for urban land rents embedded in capital income.
The revision contrasts with conventional attributions that allocate capital income entirely to capital services, highlighting the need to separate land rent components in capital income measures.

For rapidly growing, high-density urban economies, measured declines in TFP may be artefacts of misattributed capital income rather than true declines in technological progress or efficiency.
Policy and measurement implications:
- National accounts and growth accounting frameworks should account for urban land rents when decomposing income and attributing growth to capital and TFP.
- Reassessments of TFP trends in cities and dense economies are warranted, as corrected measures show rapid TFP increases rather than declines.

Source: IMF Working Papers — "Unveiling the Hidden Impact of Urban Land Rents on Total Factor Productivity" by Bas B. Bakker, August 25, 2023.