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Firms everywhere know that to lift earnings and stay competitive they should produce more, and more efficiently. So they try to raise the productivity of their labour and their capital. But it is the combination of these two factors together that policy interest is turning to. This is multi-factor productivity (MFP), also sometimes called total factor productivity, and it is becoming a valuable yardstick of performance.
MFP differs from the more commonly cited labour productivity because it reflects the combined efficiency of both labour and capital. It embodies inputs, like knowledge and management. Unlike labour productivity growth, it cannot be boosted simply by using more capital or dismissing unproductive workers. MFP is more difficult to measure, though.
Yet, it seems clear that the acceleration in MFP accounts for some of the pick-up in growth in the 1990s in some OECD countries. MFP growth accelerated in Australia, Canada, Finland, France, Greece, Ireland and the US. But in countries such as Germany, Italy, Japan, the UK, Denmark and Spain, MFP growth slowed. The improvements may reflect better skills and technology, while organisation and innovation may also have enabled given labour/capital combinations to produce more efficiently. MFP may be a tricky concept, but in a way, it captures the diverse factors that fuel productivity in the firm. And governments can make a difference by investing in the conditions needed for business to thrive.
© OECD Observer No. 245, November 2004
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