Solow residual, a distributional approach: The case of Chile, 1985-2019

The primary goal of this paper is to present a distributive proposal for reinterpreting Solow’s residual and apply it within the Chilean context. We argue that Solow’s residual can only indirectly capture technological phenomena. This critique draws upon the contribution of Felipe and McCombie (2020), who contend that production functions merely reflect an identity account. Hence, the so-called Total Factor Productivity (TFP) mirrors the dynamic of real wages and the rate of profit. We adopt a descriptive approach to estimate and decompose the Solow residual growth for the Chilean economy, to discern the origins of distributional changes between 1985 and 2019. A key patterns is that throughout almost the entire period, the dynamic of the Solow residual is closely intertwined with fluctuations in the profit rate. Additionally, we decompose the profit rate to highlight that the decline in the Chilean economy’s profit rate stems from both distributional and technological factors.