What if productivity measurement could reflect more accurately a country’s economic performance?
Measurements could take into account the reliance of our economies on natural resources. Even better, our efforts to mitigate environmental damage could be fully considered. This requires a new approach to measuring productivity. The OECD introduces environmentally adjusted multifactor productivity.
Revisiting the traditional measurement of productivity
To better understand the drivers of economic growth, economists rely on measuring multifactor productivity. This indicator has been used by governments and research institutions for more than 50 years. Multifactor productivity (MFP) measures the residual output growth that cannot be explained by changes in inputs such as labour and capital. By comparing changes in the contribution of labour and capital with changes in GDP, we can understand how technological improvements or efficiency gains help a country become wealthier and improve its material living standards.
However, traditional multifactor productivity does not provide the full picture. It needs to be revisited to capture pollution emissions and the use of natural resources.
In fact, if a country extracts more of its natural resources such as coal or other materials, this can be wrongly interpreted under the traditional framework as a rise in productivity. At the other end of the process, GDP is considered to be the only output of economic activity under the traditional framework. However, there are other by-products of economic activity, such as pollution. If reducing pollution is not considered as a benefit, pollution abatement efforts can make productivity appear lower. Omitting pollution emissions and the use of natural resources when measuring economic growth can thus give a misleading idea of a country's growth prospects and potentially lead to inappropriate policy decisions.
On environmentally adjusted multifactor productivity