Trends in multifactor productivity and capital deepening
Policymakers are interested in the structural factors that may have accentuated the recent slowdown in labour productivity growth. The declining trend labour productivity growth may be driven by declining investment in capital relative to hours worked (capital deepening) or could be indicative of factors that have hampered growth in multifactor productivity (MFP), such as subdued innovative activity, skills mismatches and inefficiencies due to barriers to competition. To shed light on these structural factors, one can decompose the time series of labour productivity growth as well as its drivers, i.e. the contribution of capital deepening and MFP, into a trend and a cyclical component.
While nearly all G7 countries show a decline in trend labour productivity growth since the end-1990s or before in some cases, the sources for this decline vary. In Canada, the downward trend of MFP growth since the mid-1990s contrasted with the relatively flat trend observed in the contribution of capital deepening. In Germany, trend MFP growth declined continuously since the beginning of the 1990s until the crisis, with tentative signs of an improvement emerging in recent years. In Italy, trend MFP growth has been negative since the early 2000s and has been coupled in recent years with a declining contribution of capital deepening. Japan saw a drastic decline in trend MFP growth over the second half of the 1980s and the 1990s coupled with a downward trend in the contribution of capital deepening. In the United Kingdom, the downward trend in labour productivity growth since the early 2000s was driven by a sharp decline in MFP growth up to the crisis and a flat-lining since then. In the United States, the decline in trend labour productivity growth since the early 2000 has reflected a combination of declining MFP growth and capital deepening.
Definition
Labour productivity is defined as GDP per hour worked and its growth rate is calculated as its first natural-log difference. The contribution of capital deepening is constructed as changes in the volume of capital services per hour worked (i.e. capital deepening) weighted by the cost share of the capital input. Growth in multifactor productivity is measured as a residual, i.e. that part of GDP growth that cannot be explained by growth in labour and capital inputs. The decomposition of these series into a trend and a cyclical component is done by applying the Hodrick-Prescott (HP) filter (Hodrick and Prescott, 1997), where the trend component is meant to capture the long-term growth of the series and the cyclical component is the deviation from that trend (Chapter 8. ).
Comparability
To ensure cross-country comparability of capital services and MFP data, the OECD applies a common computation method to all countries that uses harmonised ICT investment deflators and assumes the same average service lives for any given asset irrespective of the country.
MFP growth is the residual part of GDP growth that cannot be explained by growth in either labour or capital input. Conceptually, it can be seen as technological change. In practice, some part of technological change, including improvements in the design and quality of new vintages of capital, is embodied in physical, notably, ICT capital. Then, 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, linked to the assumptions of the production function and data constraints hampering a precise measurement of labour and capital inputs, MFP also captures other factors, e.g. adjustment costs, economies of scale, effects from imperfect competition and measurement errors.
Official data for Germany after unification are available only from 1991 onwards. Estimates for Germany as a whole back to 1970 have been derived by applying the relevant growth rates for West Germany to 1991 data.
References
Hodrick, R. and E. Prescott (1997), “Postwar U.S. business cycles: an empirical investigation”, The Journal of Money, Credit and Banking, Vol. 29, No. 1.
OECD Productivity Statistics (database), https://doi.org/10.1787/pdtvy-data-en.
OECD (2001), Measuring Productivity – OECD Manual, https://doi.org/10.1787/9789264194519-en.
