5260.0.55.001 - Information paper: Experimental Estimates of Industry Multifactor Productivity, 2007
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Contents >> Methodology and interpretation >> Multifactor productivity theory

MULTIFACTOR PRODUCTIVITY THEORY

The three measures of productivity that the ABS currently publishes for the market sector footnote 1 of the economy are:

• labour productivity (LP), estimated by dividing an index of the volume of value added (VA) by an index of labour input (L), that is, LP = VA / L
• capital productivity (KP), estimated by dividing an index of the volume of value added by an index of capital inputs (K), that is, KP = VA / K
• multifactor productivity (MFP), estimated by dividing an index of the volume of value added by a combined index of labour and capital inputs, that is, MFP = VA / (IKL).

These can also be calculated at an industry level.

There is also a gross output measure of MFP, estimated by:

• dividing an index of the volume of gross output (GO) by a combined index of labour, capital and intermediate inputs (I), that is, MFP = GO / (IKLI).

Labour and capital productivity measures are partial productivity measures and provide a measure of growth in output to growth in one of the factor inputs, either capital or labour. The most obvious limitation of labour and capital productivity measures is that they attribute to one factor of production - labour or capital - changes in output attributable to all factors of production. For example, the effects of technical progress, improvements in management practices and economies of scale, could affect measures of both capital and labour productivity. Also, a labour productivity measure takes no account of the amount of capital available to labour, or how this amount changes over time. A change in the amount of capital available per unit of labour is reflected in the concept of capital deepening.

The limitations of partial productivity measures gives rise to the development of MFP, which is a more comprehensive productivity measure. MFP measures the ratio of growth in output to growth in two or more factor inputs and represents that part of the change in output that cannot be explained by changes in the inputs. The ABS approach to measuring MFP is based on neoclassical economic theory using a translog production function in conjunction with two assumptions, constant returns to scale and that marginal products of capital and labour are equal to their respective real market prices. This forms the basis of the growth accounting approach to estimating MFP.

However, these assumptions may not hold in practice. If there are scale efficiencies then this will also be captured as an increase in MFP. This possibility is likely as there would be many firms operating in an environment of increasing returns to scale, especially over short periods. The assumption that the marginal products of capital and labour are equal to their market price, is based on perfect competition existing in factor markets. As a result, growth in MFP may contain the impact of various phenomena in addition to disembodied technological change, such as economies of scale and scope, and efficiency gains relating to changes in resource allocation. That is, resources such as capital and labour may shift between or within industries, which would affect measured MFP growth.

For the market sector as a whole, the ABS compares MFP growth rates over productivity cycles, which involves identifying and dividing the data into peaks in MFP growth. The reason for this is it is assumed that these peaks represent similar levels of capacity utilisation. One important issue that arises is that individual industries will not necessarily have the same cycles as either the market sector or each other. The industry average MFP growth estimates contained in this paper are not calculated on a peak to peak basis. The ABS will conduct further research on this issue.

1 There are 17 industries under the current ANZSIC classification system. The market sector comprises Agriculture, forestry & fishing; Mining; Manufacturing; Electricity, gas & water; Construction; Wholesale trade; Retail trade; Accommodation, cafes & restaurants; Transport & storage; Communication services; Finance & insurance; and Cultural & recreational services. The non-market sector includes Property & business services; Government administration & defence; Education; Health & community services; and Personal & other services. Industry MFP estimates are available for the 12 market sector industries only. back

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