Growth accounting

Economic growth can be fostered either by raising the labour and capital inputs used in production, or by improving the overall efficiency with which these inputs are used together, i.e. higher multifactor productivity growth (MFP). Growth accounting involves decomposing total output growth, measured here as GDP growth, into these three components. As such, it provides an essential tool for policy makers to identify the underlying drivers of growth.

Key findings

Over the past 20 years, capital services and MFP accounted for the largest part of GDP growth in most OECD countries. ICT capital services represented between 0.2 and 0.6 percentage point of growth in GDP, with the largest contributions recorded in New Zealand and Sweden, and the smallest in Finland and Italy. Growth in labour input was important for very few countries between 1995 and 2016, notably Australia, New Zealand and Spain, while non-ICT capital accounted for almost 40% of GDP growth in Spain and 60% in Portugal. Over the same period, MFP growth was a significant source of GDP growth in Finland, Germany, Japan and Korea, but was negligible in Belgium, Denmark and Portugal, and negative in Italy and Spain.

However, when contributions to GDP growth are analysed before and after the crisis, important differences arise. The slowdown in GDP growth over the period 2010-2016 was driven by the negative contribution of labour input in Italy, Portugal, Spain, and, to a lesser extent, Ireland, and by the smaller contribution of MFP in Austria, Belgium, Finland, Korea, Sweden, the United Kingdom and the United States. However, over the same period, GDP growth was driven by the larger contribution of labour input in Sweden, Switzerland, the United Kingdom and the United States, partly reflecting higher employment rates, and by higher MFP growth in Australia, Canada, Ireland, and, to a lesser extent, Denmark, Germany and Japan.

Definition

GDP growth can be decomposed into a labour input component, a capital input component and MFP growth, computed as a residual (Chapter 7. ). The contribution of labour (capital) to GDP growth is measured as the growth in labour (capital) input, multiplied by the share of labour (capital) in total costs of production. In the figures below, the contribution of capital to GDP growth is further broken down to highlight the contribution made by information and communication technologies (ICT) as compared with more traditional assets (non-ICT).

Comparability

In productivity analysis, the appropriate measure for capital input is the flow of capital services, this is, the flow of productive services that can be drawn from the cumulative stock of past investments in capital assets. Conceptually, capital services reflect a quantity, or physical concept, not to be confused with the value, or price concept of capital. To illustrate, the services flows provided by a taxi relate to the number of trips, distance driven, comfort of the taxi, etc., rather than the value of the motor vehicle. These services are estimated using the rate of change of the productive capital stock of different capital goods (Chapter 7. ).

The measure of total hours worked is an incomplete measure of labour input because it does not account for changes in the skill composition of workers, such as those due to higher educational attainment and work experience. In the absence of these adjustments, as is the case in the series presented here, more rapid output growth due to a rise in workers skills is captured by the MFP, rather than being attributed to the labour input.

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.

OECD (2009), Measuring Capital – OECD Manual, http://dx.doi.org/10.1787/9789264068476-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.

Figure 2.19. Contributions to GDP growth
Total economy, annual percentage point contribution
picture

 StatLink http://dx.doi.org/10.1787/888933733923