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 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.
OECD Compendium of Productivity Indicators 2018
OECD Compendium of Productivity Indicators
Trends in labour productivity growth
Key findings
The slowdown in labour productivity growth is a common feature of all major advanced economies and underlying long-term trends suggest that it was underway prior to the crisis. Indeed, over the 10 years preceding the crisis, trend labour productivity growth declined in all G7 countries, particularly in France, Italy and the United Kingdom. In the case of Canada, the United Kingdom and the United States, the decline since the end of the 1990s marked a reversal of growth that coincided with the IT revolution. In other countries, trend labour productivity growth has shown a gradual decline over the past 45 years from relatively high rates. While the volatility in the cycle introduced by the crisis necessitates some caution in interpreting recent trends, tentative signs of improvement are emerging in France and Germany.
Definition
Labour productivity is defined as GDP per hour worked and its growth rate is calculated as its first natural-log difference. The decomposition of labour productivity growth into a trend and a cyclical component is done by applying the Hodrick-Prescott (HP) filter (Hodrick and Prescott, 1997), where the trend component is meant to capture the long-term growth of the series and the cyclical component is the deviation from that trend. In the HP filter, the smoothness of the trend depends on a parameter usually identified as λ. The larger the value given to λ, the smoother is the trend.
Comparability
Like other filters, one limitation of the HP filter is that the estimated trend is more sensitive to transitory shocks or short-term fluctuations at the beginning and at the end of the sample period. This results in a sub-optimal performance of the HP filter at the endpoints of the series (Baxter and King, 1999). In view of this property, trend series are not published for the first and last two years for which data on actual labour productivity growth are available.
An important aspect of the HP filter is the value of the smoothing parameter λ. While for quarterly data it has been typically assumed a value of λ=1600 (as recommended by Hodrick and Prescott, 1997), there is less agreement on the value to be used when the filter is applied to other frequencies (e.g. annual, monthly). The value of λ selected here is 54.12 and has been determined by calibrating the Hodrick-Prescott filter in such a way that cycles shorter than 9.5 years are attenuated by 90% or more (Chapter 7. ).
Official data for Germany after unification are available only from 1991 onwards. Estimates for Germany as a whole back to 1970 have been derived by applying the relevant growth rates for West Germany to 1991 data.
Sources and further reading
Baxter and King (1999), “Measuring business cycles: approximate band-pass filters for economic time series”, The Review of Economics and Statistics, Vol. 81, No. 4.
Hodrick R. and E. Prescott (1997), “Postwar U.S. business cycles: an empirical investigation”, Journal of Money, Credit and Banking, Vol. 29, No. 1.
OECD Productivity Statistics (database), http://dx.doi.org/10.1787/pdtvy-data-en.
OECD (2001), Measuring Productivity – OECD Manual, http://dx.doi.org/10.1787/9789264194519-en.
Figure 6.1. Trend labour productivity growth in G7 countries
