Measurement of TFP Growth for US Telecommunications

Abstract

Gains in productivity reflect the extent to which output from production processes grow at a faster rate than the inputs to these processes. Thus productivity growth is an indicator that measures productive efficiency over time. Various sources directly contribute to productivity gains, notably among them is technological progress. The significance of technological advance to national welfare implies that estimates of the rate of productivity growth shape views of the long-term productiveness of a firm, industry or national economy. The main focus of this study is to measure productivity growth for the US telecommunications industry for the period 1985 to 2001. Estimates of productivity growth rates also appear prominently in the regulation of the telecommunications industry. In the last decade and a half price-cap regulation has been adopted in the telecommunications industry by the US Federal Communications Commission (FCC) and in over thirty states.¹ Pricecap regulation typically specifies an average rate at which the prices that a firm charges for its regulated services must decline, after adjusting for inflation. This rate is called the X factor, or offset. An important element in determining the rate of change in inflation-adjusted regulated prices is the productivity growth of the industry.