Partial productivity measures and total factor productivity in the air transport industry: Limitations and uses

In recent years the measurement of productivity has increasingly focused on measuring total factor productivity or TFP. Additional research has investigated the reasons for differences in TFP between firms. The implicit assumption behind this work is that simpler measures of industry productivity (such as revenue ton-miles per employee) can seriously misstate both the level and growth rate of productivity. As a result, accurate analysis of productivity requires information on TFP. While this argument is not open to debate on a theoretical basis, the extent that simple measures of productivity inaccurately portray TFP has not been investigated in anything but a cursory manner. This paper investigates the relationship between typical industry measures of productivity and TFP using a data set of U.S. and non-U.S. airlines for the period 1970-1983. The paper examines both levels of productivity and growth rates. The results indicate the extent to which industry measures accurately or inaccurately reflect the more comprehensive measure of productivity (TFP). To the extent that industry measures are inaccurate, this paper investigates the possible sources of error in order to determine if slightly altered industry measures might more accurately reflect TFP.