Labour productivity is a key driver of economic growth and living standards. Understanding whether the slowdown in productivity growth has been driven by structural factors and/or by reactions to the economic cycle is therefore 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.

Policymakers are interested in the structural factors that may have accentuated the recent slowdown in labour productivity growth. The declining trend labour productivity growth may be driven by declining investment in capital relative to hours worked (capital deepening) or could be indicative of factors that have hampered growth in multifactor productivity (MFP), such as subdued innovative activity, skills mismatches and inefficiencies due to barriers to competition. To shed light on these structural factors, one can decompose the time series of labour productivity growth as well as its drivers, i.e. the contribution of capital deepening and MFP, into a trend and a cyclical component.

A number of studies indicate that multifactor productivity growth (MFP) behaves cyclically, i.e., it increases in upturns and declines in downturns. This has sometimes been interpreted as a paradox, as MFP has traditionally been perceived as exogenous technological change, which should typically not behave cyclically.