Multifactor productivity (MFP) reflects the overall efficiency with which labour and capital inputs are used together in the production process. Labour productivity growth represents a higher level of output for every hour worked. This can be achieved if more capital per labour unit, i.e. capital deepening, is used in production, or by improving the overall efficiency with which labour and capital are used together, i.e. higher MFP.
OECD Compendium of Productivity Indicators 2018
Over the past two decades, MFP growth varied considerably among OECD countries. Italy and Spain recorded the lowest (and negative) rates, lagging far behind the top performers Korea and Ireland. MFP growth decelerated in nearly all countries after the crisis compared with the period 2001-2007, with significant slowdowns in Austria, Belgium, Finland, Korea, Sweden, Switzerland, the United Kingdom and the United States.
Large differences in MFP growth heavily affected labour productivity growth differentials. Prior to the crisis, relatively high MFP growth in most OECD countries contributed strongly to labour productivity growth, compared with the contributions of ICT and non-ICT capital deepening. In the post-crisis period, MFP appears to have moved pro-cyclically in most countries, as reflected by the slowdown in MFP growth and its much lower contribution to labour productivity growth, notably in Austria, Belgium, Finland, Sweden, Switzerland, the United Kingdom and the United States.
Definition
By reformulating the growth accounting framework, labour productivity growth can be decomposed into the contribution of capital deepening and MFP. Capital deepening is defined as changes in the ratio of the total volume of capital services to total hours worked. Its contribution to labour productivity growth is calculated by weighting it with the share of capital costs in total costs (Chapter 7. ).
Comparability
Growth in MFP is measured as a residual, i.e. that part of GDP growth that cannot be explained by growth in labour and capital inputs. Traditionally, MFP growth is seen as capturing technological progress but, in practice, this interpretation needs some caution. Some part of technological change is embodied in capital input, e.g. improvements in design and quality between two vintages of the same capital asset, and so its effects on GDP growth are attributed to the respective factor. The measure of capital services in the OECD Productivity Statistics (database) takes explicit account of different productivities across assets, and price indices of ICT assets are adjusted for quality changes (Chapter 7. ). Therefore, MFP only picks up disembodied technical change, e.g. network effects or spillovers from production factors, the effects of better management practices, brand names, organisational change and general knowledge.
Moreover, MFP also captures other factors such as adjustment costs, economies of scale, effects from imperfect competition and measurement errors. For instance, increases in educational attainment or a shift towards a more skill-intensive production process, if not captured in the form of quality adjusted labour input – as is the case here – are captured by the MFP.
Sources and further reading
OECD Productivity Statistics (database), http://dx.doi.org/10.1787/pdtvy-data-en.
OECD (2001), Measuring Productivity – OECD Manual, http://dx.doi.org/10.1787/9789264194519-en.
Schreyer, P. (2004), "Capital Stocks, Capital Services and Multi-Factor Productivity Measures", OECD Economic Studies, Vol. 2003/2, http://dx.doi.org/10.1787/eco_studies-v2003-art11-en.
Wölfl, A. and D. Hajkova (2007), "Measuring Multifactor Productivity Growth", OECD Science, Technology and Industry Working Papers, No. 2007/05, http://dx.doi.org/10.1787/246367010342.
Total economy, percentage change at annual rate
Total economy, annual percentage point contribution
