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Productivity measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. It is considered a key source of economic growth and competitiveness and, as such, internationally comparable indicators of productivity are central for assessing economic performance.
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Four years after the start of the financial crisis, GDP growth in the OECD area is beginning to gradually strengthen. Nevertheless, the pace has varied across countries and a sustainable recovery does not appear to have yet been established, with several OECD countries facing the challenge of slower trend growth. A good understanding of the role and the drivers of productivity growth is thus crucial to strengthening the recovery and improving growth and living standards in the longer term. The OECD Compendium of Productivity Indicators provides the ingredients for this by examining both longer term trends of productivity and how the crisis has affected patterns of productivity growth and its components across countries.
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Productivity is commonly defined as a ratio between the volume of output and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is considered a key source of economic growth and competitiveness and, as such, internationally comparable indicators of productivity are central for assessing economic performance.
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Gross Domestic Product (GDP) per capita measures economic activity or income per person and is one of the core indicators of economic performance. Per capita GDP growth can be broken down into a part which is due to growth in labour productivity (GDP per hour worked) and a part which is due to increased labour utilisation (hours worked per capita). A slowing or declining rate of labour utilisation combined with high labour productivity growth can be indicative of a greater use of capital and/or of a decreasing employment of low-productivity workers.
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Economic growth can be increased either by raising the labour and capital inputs used in production, or by improving the overall efficiency in how these inputs are used together, i.e. higher multifactor productivity growth (MFP). Growth accounting involves decomposing total output (GDP) growth into these three components. As such, it provides an essential tool for policy makers to identify the underlying drivers for growth.
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Sectors differ from each other with respect to their productivity growth. Such differences may relate for instance to the intensity with which sectors use capital and skilled labour in their production; the scope for product and process innovation and the absorption of external knowledge; the degree of product standardisation; the scope for economies of scale; and the exposure to international competition.
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Labour productivity is a key driver of economic growth and living standards. Understanding how much actual labour productivity growth is driven by structural factors and how much by reactions to the productivity cycle or the economic cycle is hence important for policy makers. This requires decomposing the time series of actual annual labour productivity growth into a trend (or structural) component and a cyclical component.
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