Trends in multifactor productivity and capital deepening

Policy makers 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 hampered growth in multifactor productivity (MFP), such as low innovative activity, slow diffusion of frontier technologies, 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.

Key facts

While nearly all G7 countries show a decline in trend labour productivity growth since the end-1990s or indeed before in some cases, the sources for this decline vary. In Canada, the downward trend of MFP growth contrasted with the flat trend observed in the contribution of capital deepening. In Germany and Italy, trend MFP growth has declined continuously since the beginning of the 1990s and flattened after the crisis. Japan saw a drastic decline in trend MFP growth over the second half of the 1980s and the 1990s and has seen a flat trend since then, coupled with a downward trend in the contribution of capital deepening. In France, the United Kingdom and the United States, the downward trend of labour productivity growth since the early 2000s was driven by a slowdown in MFP growth in France, a sharp decline in MFP growth in the United Kingdom and by a combination of declining MFP growth and capital deepening in the United States.

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 (annex G).

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.

Figure 5.2. Labour productivity growth trend and its components, Canada
Total economy, percentage change at annual rate
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 http://dx.doi.org/10.1787/888933346696

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. In order to estimate data for the whole of Germany back to 1985, the secretariat has estimated data for the whole of Germany back to 1970 by linking in 1991 the data for Germany to historical data for West Germany.

Sources and further reading

Hodrick R. and E. Prescott (1997), ”Postwar U.S. business cycles: an empirical investigation”, Journal of Money, Credit and Banking, Vol. 29, No. 1.

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.

Figure 5.3. Labour productivity growth trend and its components, France
Total economy, percentage change at annual rate
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 http://dx.doi.org/10.1787/888933346702

Figure 5.4. Labour productivity growth trend and its components, Germany
Total economy, percentage change at annual rate
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 http://dx.doi.org/10.1787/888933346719

Figure 5.5. Labour productivity growth trend and its components, Italy
Total economy, percentage change at annual rate
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 http://dx.doi.org/10.1787/888933346729

Figure 5.6. Labour productivity growth trend and its components, Japan
Total economy, percentage change at annual rate
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 http://dx.doi.org/10.1787/888933346735

Figure 5.7. Labour productivity growth trend and its components, United Kingdom
Total economy, percentage change at annual rate
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 http://dx.doi.org/10.1787/888933346747

Figure 5.8. Labour productivity growth trend and its components, United States
Total economy, percentage change at annual rate
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 http://dx.doi.org/10.1787/888933346754