Models of labour services and estimates of total factor productivity

This paper examines the manner in which labour services are modelled in the aggregate
production function, concentrating on the relationship between numbers employed and average
hours worked. It argues that numbers employed and hours worked are not perfect substitutes
and that conventional estimates of total factor productivity which, by using total hours worked
as the measure of labour services, assume they are perfect substitutes, will be biased when
there are marked changes in average hours worked. The relevance of the theoretical argument
is illustrated using data for the United States and the United Kingdom.