Question

During the recent 2007-08 recession, total factor productivity (TFP) dropped temporarily while labor productivity kept on increasing. Which one of the below statements is a plausible explanation?

a. TFP dropped because of less intensive use of factors of production.
b. Labor productivitiy increased because the capital-labor ratio increased.
c. TFP dropped and labor productivity increased because firms laid off the least productive workers.
d. TFP dropped because energy prices dropped. Labor productivity increased because of advances in information and communications technology (ICT).
e. TFP dropped because of technological regress. Labor productivity increased because of better education.

Answer 1

Answer:

TFP dropped and labor productivity increased because firms laid off the least productive workers.

Explanation:

Total factor productivity refers to the ratio of aggregate output to aggregate inputs. It is also known as multi-factor productivity.

It represents growth in real output which is more than the growth in inputs including labor and capital.

The concept of TFP was first developed by Tinbergen (1942) and Stigler (1947).

Statement c. is a plausible explanation