On Productivity: The Influence of Natural Resource Inputs

The production function underlying standard estimates of multifactor productivity (MFP)typically restricts the list of explicitly measured inputs to capital, labour and intermediate inputs (energy, materials and services). These inputs are measured in the national accounts, and in most industries are the most important or significant inputs to production. All other influences on output are captured by the MFP ‘residual.’ However in some industries – mining, agriculture, and utilities – output can also depend significantly on unmeasured inputs of natural resources. Rainfall in agriculture is an obvious example, but so too is the issue of mineral resource deposits in the mining sector, particularly where mining is a mature industry and the richest and most accessible deposits have already been developed. In this article we attribute a substantial part of recent large negative changes in MFP growth in the mining, agriculture and utilities industries in Australia to unmeasured natural resource input changes. As MFP growth estimates derived from the application of the usual production function are generally interpreted as measuring improvements in the ‘technology’ used to convert standard inputs into output, where there are significant changes in natural resource dependent industries this interpretation of MFP needs to be adjusted.