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Recent developments in productivity measurement

Paul SchreyerOECD Statistics DirectorateCanberra, 20 November 2012

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• Productivity = output/input• Issues:

– Identifying, measuring and aggregating inputs and outputs

– Level of measurement (economy, industry, firm)

• Academic community dealing with productivity measurement and analysis

• World KLEMS network• NSOs: no clear trend

Introduction

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1. Bringing nature into the productivity picture

2. The firm level: productivity measurement with micro-data

No claim for comprehensive presentation of recent developments

This presentation

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Bringing nature into the productivity picture

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• Typical inputs: labour, produced capital, intermediate inputs

• Often neglected: non-produced natural assets:– Mineral resources– Soil/land– Timber– Aquatic resources– Water

Bringing nature into the picture – input side (1)

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• Why important?– Assessing contribution of natural assets

to economic growth– Measuring productivity correctly– Policy implication: is growth driven by

MFP or by natural assets– Note: without measurement, direction

of bias unknown

Bringing nature into the picture – input side (2)

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Volume index of subsoil asset removals, Australia, 1989=100

0,0

50,0

100,0

150,0

200,0

250,019

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

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Source: OECD calculations, based on ABS data.

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Effect of including natural resource input on measured productivity growth:

• Traditional MFP > adjusted MFP if :– natural resource input growth >

traditional input growth – i.e., total input growth has been

understated– i.e., traditional MFP growth has been

overstated• And vice versa

No unambiguous direction

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Norway – Difference between adjusted and traditional MFP growth

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

-4

-3

-2

-1

0

1

2

3

4

Time

Diffe

renc

e in

per

cent

age

poin

ts

Traditional MFP over-stated

Traditional MFP under-stated

Source: OECD, work in progroess.

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• Capture changing marginal extraction costs (which may be increasing)

• Capturing changing quality in the resource itself eg declining soil quality

failing to do so will overstate measured contribution of natural resource to output and understate MFP

Challenge: quality of natural resource input

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• Study by Productivity Commission (Topp, Soames, Parham, Bloch 2008):

• Similar in spirit except that mining output is adjusted for declining yields

• Underlying rate of productivity growth is around 2.5 per cent p. a., compared with stagnant standard MFP (1974 to 2007)

Natural resource input has grown less quickly than other inputs, so MFP was understated by traditional measure

Effects on productivity measures: Australia’s mining industry

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• Production processes often accompanied by undesirable outputs, e.g., emissions

• From producer and MFP measurement perspective:

• Relevant in presence of environmental policies:– explicit price (e.g., tax) or– implicit price (marginal abatement costs

due to regulation)• Are traditional MFP measures over-

or understated?

Bringing nature into the picture – output side (1)

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Example:• Given inputs (labour, capital,…)• Rising traditional output• Constant emissions

adjusted MFP > traditional MFP

Productivity growth was required to keep emissions at bay

Again, no unambiguous effect on measured productivity (1)

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• But overstatement of traditional MFP if emissions grow quicker than traditional output

• For many pollutants (NOx, Sox, CO2,…) relative decoupling in many OECD countries

Understatement of traditional MFP

Again, no unambiguous effect on measured productivity (2)

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• Producer perspective = private valuation– marginal abatement cost for producer

• Welfare perspective = social valuation– marginal cost to society = producer costs +

consumer costs + externalities• Both perspectives meaningful but should

not be mixed up• If productivity measurement is based on

producer theory, producer perspective is called for

Private and social valuation

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• As part of green growth indicator work

– MFP adjustment with natural asset inputs

– MFP adjustment with undesirable outputs

– Index of natural resources

OECD work in this area…

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• System of Integrated Environmental and Economic Accounts

• Adopted at UN level in 2012• Consistent accounting for

environment-economy interaction• Basis for indicator work• Unifying element: balance sheets

– Stocks, additions, removals– Physical and monetary valuation

• Major task ahead: implementation

Important international development: SEEA

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The firm level: productivity measurement with micro-

data

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• Drawbacks– No prices, capital proxy, employees,

incomplete sector coverage, short time-spans

• Avantages– Entry, exit, reallocation– Within-firm cycle/growth– Understanding/measuring both firm-

level levers and environmental factors driving growth

Firm-level measurement

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• Huge productivity dispersion– Even within very narrowly defined

industries– Firm size plays an important role– But how accurately are outputs

measured?

Stylised facts from micro estimates (1)

UK: Labour productivity by firm size

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2003 2004 2005 2006 2007 2008 2009 201075

80

85

90

95

100

105

110

Indices: 2007 = 100

Medium businesses(50-249 employees)

Small businesses (0-49 employees)

Large enterprises (250+ employees)

Source: J. Saleheen, Bank of England 2012

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• Reallocation or resources to high-productivity producers important

• Competition—consumers can easily switch suppliers

• Labor and capital market flexibility• Summary measure of reallocation:

correlation between productivity and market share

Stylised facts from micro estimates (2)

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0

0.1

0.2

0.3

0.4

0.5

0.6

Germ

any

UK

Argen

tina

Nethe

rland

s

Franc

e

Portu

gal

Chile

US

Taiwan

Korea

Correlation between Productivity and Market Share

Source: Ch. Syverson November 2012

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• Large volumes of data• Confidentiality issues

– Small countries– Narrowly defined industries

• No international standards – reduced comparability

• NSOs have taken up issue

Firm-level measurement requires dealing with…

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Conclusions

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• Nature of productivity implies cumulation of measurement challenges

• Quality of source data (national accounts, firm-level data) key

• Integrating productivity measurement into official statistics important but not yet widespread

Conclusions (1)

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• Tricky output measurement in particular in:– Financial services– Health, education, general administration– Undesirable outputs

• Tricky input measurement:– Hours worked by industry and by skills– R&D capital (new in national accounts)– Natural capital

• Intangibles

Conclusions (2)

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Thank you!