Multi-factor productivity

Growth accounting typically involves breaking down the growth of gross domestic product (GDP) into three components – the contribution of labour, the contribution of capital, and multi-factor productivity (MFP).

MFP is the change in GDP that cannot be explained by changes in the quantities of capital and labour that are made available to generate the GDP. MFP is sometimes described as disembodied technological progress, because it is the increase in GDP that is not embodied in either labour or capital. MFP comes from more efficient management of the processes of production through better ways of using labour and capital, through better ways of combining them, or through reducing the amount of intermediate goods and services needed to produce a given amount of output. Growth in MFP is a significant factor in explaining the long-term growth of real GDP.

Definition

The growth accounting framework, as applied here, decomposes annual growth in GDP into growth in labour and capital inputs and multi-factor productivity growth. The rate of growth of GDP is a weighted average of the rates of growth of capital and labour inputs. The weights attached to each input are the output elasticities for each factor of production. Since output elasticities cannot be directly observed, the factor shares of labour and capital are often used as weights. The rate of multi-factor productivity growth is the part of GDP growth which is not explained by the measured contribution of the factor inputs.

Comparability

The growth accounts for OECD countries are based on the OECD Productivity Database where the main problems of consistency of data sources and comparability across countries are addressed.

Output is measured as real GDP, compiled according to the 1993 System of National Accounts, although there may be some differences in how countries convert current price GDP to real GDP. Labour input is measured as total hours actually worked, and capital input is measured as the flow of capital services, based on an identical method for all countries.

Since MFP is obtained as a residual – i.e. that part of GDP growth that is left over when the growth of labour and capital inputs have been deducted – MFP necessarily contains any errors that may have been made in measuring GDP and labour and capital inputs. This is a particularly important issue as regards the measurement of capital inputs in the form of computers, software and communications equipment. To correct for differences in methods between countries, the OECD uses a standard method for these types of capital goods.

It must also be emphasised that the data used here relate to the total economy and therefore include the government sector. Measuring output and productivity for the government sector is difficult and statistical practices as well as the size of the government sector may vary between countries. This should be kept in mind when interpreting the present series.