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Total or Multi Factor Productivity – TFP, MFP:

  • Academics have tried to evolve total productivity measures for both nations and organisations – inevitably, they’ve been given TLAs (Three Letter Acronyms) viz:
    • TFP = Total Factor Productivity
    • MFP = Multi Factor Productivity – essentially the same as TFP
  • Both seek to measure the efficiency with which all inputs – labour, materials, energy and capital – are being used
  • Somehow, they claim to take account of factors such as synergy, economies of scale, new technology and the mix of skills and experience
  • Others claim TFP caters for the ‘substitution’ problem that arises when the productivity of one input resource is improved but only at the expense of another
  • At national level, TFP is said to be a gauge of an economy’s use of all its resources – an assessment of the efficiency with which both capital and labour are used
  • According to Jon Cunliffe of the Bank of England: “TFP is the extra efficiency with which a given amount of labour and capital can be used to produce output – it exists, but we can only estimate it by looking at the part of productivity growth our equations can’t explain”
  • Robert Gordon, the famous US economist, claims TFP:
    • Measures how quickly output is growing relative to the capital and labour used
    • Is a measure of innovations’ contribution to growth, noting that it grew much more rapidly from 1920 to 1970 than before or since
  • TFP is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour – so if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%
  • Whatever their disciples might say, TFP and MFP offer no easily understandable measures to managers – so they don’t use them
  • I’ve never met a front-line manager that could even explain either TFP or MFP to me, never mind make use of them
  • They’re too aggregated anyway
  • Managers need much better productivity measures which identify specific areas where action is needed 
  • TFP is pretty mysterious by definition – it is sometimes referred to by economists as ‘magic fairy dust’  e.g. Jon Cunliffe, Deputy Governor, Bank of England