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tex

Journal of Construction Research, Vol. 6, No. 2 (2005) 209–222

c World Scientific Publishing Company

MULTIFACTOR PRODUCTIVITY MEASURES

OF CONSTRUCTION SECTORS USING OECD
INPUT-OUTPUT DATABASE

CHUNLU LIU∗
School of Architecture and Building
Deakin University, Geelong Waterfront Campus, 1 Gheringhap Street
Geelong, Vic 3217, Australia
Chunlu@deakin.edu.au

YU SONG
School of Architecture and Building
Deakin University, Geelong Waterfront Campus, 1 Gheringhap Street
Geelong, VIC 3217, Australia
yso@deakin.edu.au

Received 14 June 2005

Revised 11 July 2005

This research develops a new productivity measurement framework for the construction
sector in the light of an input-output table. Three group multifactor productivity indica-
tors are formulated based on the multiplier concepts in the input-output analysis. This
measurement framework focuses on the intro-industry flows of products and considers the
direct and indirect effects of input and output. Moreover, this framework enables us to
measure the multifactor productivity of a specific sector systematically. Historical analyses
and international comparisons are carried out to indicate the differences of the produc-
tivity of the construction sectors in seven selected countries, using the newly published
OECD input-output database. Research findings are expected to clarify how technologi-
cal, organizational and political factors affect the productivity growth, enabling the policy
makers, construction businesses and researchers to quantify the competitive ability of the
construction sector.

Keywords: Construction sector; OECD input-output database; multifactor productivity.

1. Introduction
Productivity measurement of the construction sector establishes a connection
between the micro and macro levels of the economy and provides answers to
the questions regarding the contribution of individual industries to the produc-
tivity growth, since productivity improvement in the construction industry has a

∗ Corresponding author.

209
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210 C. Liu & Y. Song

significant impact on improving gross domestic product (Arditi and Mochtar, 2000).
Improved international comparisons of the construction sector’s productivity levels
are also needed in order to achieve a better comprehension of the structural change,
technological progress, comparative advantage and competitiveness in this sector
across the developed countries (Gullickson and Harper, 1999). Moreover, a histori-
cal comparison on productivity at the industry level will assist us in understanding
the nature of long-term trends in productivity.
Multifactor productivity measure is an important tool for reviewing the past
economic growth patterns as well as for assessing the potential for future economic
growth, useful for unweaving the direct growth contributions of labor, capital, inter-
mediate inputs and technology. Mathematically, the multifactor productivity is a
ratio to measure the efficiency in the utilization of a bundle of inputs. With the
multifactor productivity indicator, the industry and sectoral productivity trends
could be compared and analyzed. Multifactor productivity measures could be com-
puted for two different representations of the production process. One is a measure
of gross output in relation to primary and intermediate inputs. Whereas another
relates to the value addedness of primary inputs (OECD, 2001). Input-output table
provides a consistent accounting tool where individual cells of matrices show the
flow of different intermediate products to individual industries. When the input-
output tables are integrated with the system of national accounts, they provide
powerful tool for obtaining measures of productivity. The multifactor productivity
framework based on the input-output table, which measures the changes in out-
put per unit of combined inputs, is well suited to calculate the productivity of the
construction sector since it allows for accounting of capital inputs and intermedi-
ate flows between industries (Gullickson and Harper, 1999). Nevertheless, minimal
work has been done on the multifactor productivity measurement of the construc-
tion sector due to data limitation and the complexity of international comparisons
(Proverbs et al., 1999; Tan, 2000; Zhi et al., 2003). However, the recent availability
of international data on the sector has allowed for a much more rigorous analysis of
this field. The Organization for Economic Co-operation and Development (OECD)
input-output database, being the most comprehensive database, provides appropri-
ate multinational economic data (Liu et al., 2005; Pietroforte and Gregori, 2003;
OECD, 1995).
This paper aims to develop an input-output table framework for the multifactor
productivity measurement of the construction sector. Three groups of multifactor
productivity indicators are developed, based on the OECD input-output database.
Historical analyses and comparisons have also been carried out to indicate the dif-
ferences in productivity of the construction sectors across seven selected countries.
The next section provides a review of related literature, followed by a description
of the research methodology and data; the multifactor productivity of construction
sectors are measured and compared, before the summation and conclusion of this
research in the last section.
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Multifactor Productivity Measures of the Construction Sector 211

2. Literature Review
Many studies have been done on the multifactor productivity measures, but little
research used the input-output analysis (Liu et al., 2004). This section reviews these
two aspects.

2.1. Multifactor productivity measures

Multifactor productivity model, project-specific model and activity-oriented model
are commonly used in the productivity measurement field in the industry (Oglesby,
1988). The multifactor productivity model defines productivity as the ratio between
total outputs and total inputs, including labour, materials, equipment, energy, and
capital. Both the total outputs and inputs are expressed in dollars. This definition
is used by policy-making agencies to formulate policies and evaluate a country’s
state of economy. The project-specific model (total productivity) defines produc-
tivity as the ratio between the outputs expressed in a physical unit and the inputs
expressed in dollars. The activity-oriented model (labor productivity) codes to pro-
ducers, calculating the project cost and monitoring the field activity. The outputs
are expressed in specific physical units and inputs are expressed in man-hours,
including only labor. This paper focuses on the multifactor productivity model.
Early research efforts formulated multifactor productivity measures in a pro-
duction function context. The multifactor productivity concept was first adopted
by Solow (1957) and a set of formulae was developed for multifactor productivity
on the assumptions that the competitive input market and constant returns to scale
are in production. Diewert (1976) developed the production theoretical approach
to measure productivity, as well as integrated the theory of the firm, index number
theory and national accounts. The research led to the publication of multifactor
productivity measures by the USA government in 1983. Jorgenson et al. (1987)
linked these formulae to the economic growth, via investigating the relationship
between productivity and post-war USA economic growth. Gullickson and Harper
(1999) concluded that the multifactor productivity trend is a more reliable indicator
for tracing technical change, identifying efficiencies and inefficiencies, and in recog-
nizing the economies scale of a sector. Parham (2004) investigated the multifactor
productivity of all industries in Australia from 1964 to 1999 and commented that
complementary research at the aggregate, industry and micro levels are required.
Previous research on the international measures of productivity has also been
fulfiled by many researchers. The productivity and economic growth in Japan and
USA from 1960 to 1973 are compared by Jorgenson (1988). Ark et al. (1993) explored
the comparative productivity performance in the manufacturing of the three coun-
tries — Germany, Japan and the United States since 1950, using detailed infor-
mation from censuses of manufactures for each country. Bernard and Jones (1996)
examined the multifactor productivity convergence for 14 OECD countries during
1970–1987. The major finding on manufacturing shows insubstantial evidence of
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212 C. Liu & Y. Song

either labor productivity or multifactor productivity convergence; while other sec-

tors, especially services, drive towards aggregate convergence. Moreover, Ark and
Monnikhof (1999) dealt with measures of productivity differentials in the manufac-
turing sector of five countries, namely, Canada, France, Germany, Netherlands and
USA. Gu and Ho (2000) arrived at a consistent international productivity compar-
ison of the patterns of growth in the manufacturing sectors of Canada and USA
within the period 1961–1995.

2.2. Construction productivity

In the construction field, productivity is defined as “to measure the effectiveness
with which management skills, workers, materials, equipment, tools and working
space are employed at, or in support of, work-face activities, to produce a fin-
ished building, plant, structure or other fixed facilities at the lowest feasible cost”
(Oglesby et al., 1989). Moreover, Rau (1988) argued that construction productivity
measurement should include the assessment of a range of functions and factors such
as design, specification, standards and standardization, quality, economy regulation
and inspection. In the construction productivity field, total productivity focuses on
the individual project, without meeting the requirement of macroeconomic anal-
ysis. Labor productivity measurements in the construction industry appear easy
to understand yet misleading, involing only one factor of production insufficient in
explaining why productivity has increased or decreased. However, multifactor pro-
ductivity is widely employed in the construction sector to evaluate the efficiency in
the use of resources (Islam, 1999; Zhi et al., 2003).

2.3. Multifactor productivity measures using input-output table

Many different methods of productivity measures, calculation and interpretation
were adopted in previous researches (Kravis, 1976; Diewert, 1976; Islam, 1999).
Kravis (1976) surveyed the majority of research based on the international compar-
isons of productivity up to 1976 and compared the differences in productivity across
the agriculture, mining and manufacturing sectors. Diewert (1976) reviewed ten
classes of multilateral methods from both the viewpoint of the axiomatic approach
and the economic approach, in order to derive at the aggregate price and quan-
tity comparisons between different countries and regions. Islam (1999) reviewed
the time-series approach, the panel approach and the cross-section approach in the
international comparison of total factor productivity and concluded that the choice
of productivity measures depends on the purpose of productivity measures and, in
many instances, on the availability of data. The input-output based approach pro-
vides a unified framework by which the industry multifactor productivity growth
can be estimated. Rymes (1983) presents his analysis in one-sector as well as multi-
sector models to compare multifactor productivity based on input-output table. This
empirical application of the HRR concept of technical change was later exploited and
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Multifactor Productivity Measures of the Construction Sector 213

developed by Cas and Rymes (1991) in their pioneer work on the input-output based
industry MFP measures for Canada. Their work is further extended by Durand
(1994, 1996) to form the basis of the statistics of Canada’s input-output based
multifactor productivity accounts. In the construction industry, the pioneer of the
multifactor productivity measurement on the input-output basis was pursued by
Bon (2000), who first defined a productivity formula in the context of input-output
and supplied a historical comparison of the construction industry across different
countries.

2.3.1. Technical and allocation efficiencies

The concept of productivity is closely linked to the issue of efficiency. Theoretically,
rising efficiency implies rising productivity. Efficiency is normally defined as con-
sisting of two components: technical and allocation efficiency. Technical efficiency
occurs when a firm obtains maximal output from a set of inputs. Allocation effi-
ciency occurs when a firm chooses the optimal balance of inputs given the outputs.
The basic structure of input-output table is shown in Fig. 1. The symbol Xij repre-
sents the intermediate flow from sector i to sector j. The total output of the sector
is divided into intermediate output Xi . and final demand Yi for its goods and ser-
vices such as consumption, investment, government expenditures and so forth. The
total input of the sector is divided into intermediate input X.j and value added Vj ,
which represents the supply of primary inputs or factors of production needed by
the sector such as labor, capital, land and so forth. The total output Xi equates
with total intermediate output plus final demand, while the total input Xj equates
with total intermediate input plus value added.
Bon (2000) initially defined the technical and allocation efficiencies in the domain
of input-output as follows;

Technical efficiency indicator = X.j /Xj (1)

Fig. 1. Fundamental structure of input-output table.

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214 C. Liu & Y. Song

Equation (1) demonstrates the industrialization of the j sector and the proportion
of the intermediate input to the total input of the j sector. It also represents the
strength of the j sector’s economic pull. The larger the value, the higher is the
national technologies level of the intermediate inputs and the stronger is the pull of
the j sector.

The allocation efficiency indicator = Xi ./Xi (2)

Equation (2) shows the allocation efficiency of the output of the i sector and the
push strength towards the national economy. It represents the intermediate demand
to the total output ratio of the i sector. A higher value implies that the allocation
efficiency of i sector is higher and the push strength is larger.
Bon (2000) subsequently proposed a gross productivity indicator:

Gross productivity indicator = Yi /Vj (3)

Equation (3) denotes the final demand to the value added ratio for sector j. In terms
of national product and income accounting conventions, total final demand repre-
sents gross national product, whereas total value added represents gross national
income. The gross productivity indicator is the only productivity indicator based
completely on the input-output table. It is worthwhile extending the indicators to
explore the multifactor productivity at a macro level.

2.3.2. Multipliers
Multipliers have been plentifully used in economic analysis and in the input-output
industry, multipliers offer a quick way to estimate the economic impact. In the
context of the input-output table, the sum of all the column elements of Leontief
inverse matrix (I − Aij )−1 is defined as the output multiplier for measuring the total
effect of $1.00 change in the final demand for the sector on the output of all sectors.
That is:
n


Output multiplier = (I − Aij )−1 (4)
i=1

where I is the identical matrix.

The sum of all the row elements of Ghosh inverse matrix (I − Bij )−1 is defined
as the input multiplier for measuring the effect of $1.00 change in primary inputs
available to that sector, on the input of all sectors. That is:
n


Input multiplier = (I − Bij )−1 (5)
j=1

The output and input multipliers will be used in the rest of this research.
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Multifactor Productivity Measures of the Construction Sector 215

3. Methodology and Data Description

3.1. Methodology
Previous study of the input-output table supplies a convincing theocratical under-
pinning for this research. Built on the basic theory of multifactor productivity, sec-
toral, intermediate aggregate productivity indicators are proposed in this research.
The sectoral, intermediate and aggregate outputs are compared with primary (value
added) and total inputs respectively. The indicators in the first two groups decom-
pose Bon’s gross productivity indicator actually and describe the output efficiencies
further. The indicators in the third group adopt the multiplier concept and reflect
an aggregate effect.
The sectoral productivity indicators, including the sectoral output to primary
input indicator and the sectoral output to total input indicator, denote the ratio
of the sectoral outputs to the primary and total inputs, in order to measure the
contributions of labor, capital and total inputs from the point of the sectoral output.
A higher value implies higher sectoral output efficiencies.
Sectoral Productivity Indicators
Sectoral output to primary input indicator = Xij /Vj (6)
Sectoral output to total input indicator = Xij /Xj (7)
The intermediate productivity indicators, including the intermediate output to pri-
mary input indicator and the intermediate output to total input indicator, denote
the ratio of intermediate output to primary and total inputs. From the point of
the intermediate output, the contributions of labor, capital and total inputs are
measured. A higher value implies higher intermediate productivity.
Intermediate Productivity Indicators
Intermediate output to primary input indicator = Xi. /Vj (8)
Intermediate output to total input indicator = Xi. /Xj (9)
The aggregate productivity indicators contain the total output to primary input
indicator and the multiplier productivity indicator. The former is a measure of the
total output to the primary input and reflects the efficiency of the primary input to
the total output. The latter represents the ratio of the output multiplier, multiplying
the final demand of the construction sector to the input multiplier, by multiplying
value added. The output multiplier shows the effect of one monetary unit change
in the final demand of the sector i on the total output of all the other sectors. The
output multiplier that multiplys the final demand shows the total effect of change
in the final demand of sector i. The input multiplier represents the effect of one
monetary unit change in value added by the sector j, on the total input of all other
sectors and is a symbol of technical relationships between sectors at a particular
point in time. The input multiplier that multiplys value added represents the total
effect of change in the value added by the sector j.
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216 C. Liu & Y. Song

Aggregate Productivity Indicators

Total output to primary input indicator = Xi /Vj (10)

n
(I − Aij )−1 × Yi
Multiplier productivity indicator = i=1
n (11)
j=1 (I − Bij ) × Vj

3.2. Data description

The OECD input-output database used in this research is the latest version pub-
lished by OECD. It is also the most comprehensive source for comparing structural
productivity internationally in industries. Due to limited, comparable and available
data in the construction sector, Italy and the United Kingdom have not been con-
sidered and the data before 1980 from France are discarded as well. The data from
both Australia and German are unavailable in the mid 1980s and the data of the
early 1970s is unavailable in Germany. It is observed that the OECD input-output
database does not constantly provide the data for all countries. Generally, an input-
output table is available approximately once in five years. The examined period is
divided into five comparative periods as shown in Table 1: early 1970s (1970–1972),
mid/late 1970s (1975–1978), early 1980s (1980–1982), mid 1980s (1985–1986) and
late 1980s (1989–1990). In order to avoid the effect of non-uniform inflation rises in
the 1970s and 1980s, the data are adopted at constant prices.

4. Multifactor Productivity Measures

Using the OECD input-output database, the productivity indicators of the three
groups above are examined and the construction sectors are measured particularly.

4.1. Sectoral productivity indicators

The sectoral productivity indicators are a measure of the sectoral outputs on the
primary and total inputs. The primary inputs include labor and capital inputs

Table 1. OECD input-output database coverage of the construction sector.

Early 1970s Mid/Late 1970s Early 1980s Mid 1980s Late 1980s

Australia 1968 1974 N/A 1986 1989

Canada 1971 1976 1981 1986 1990
Denmark 1972 1977 1980 1985 1990
France N/A N/A 1980 1985 1990
German N/A 1978 N/A 1986 1990
Japan 1970 1975 1980 1985 1990
USA 1972 1977 1982 1985 1990
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Multifactor Productivity Measures of the Construction Sector 217

and consist of salaries, wages, capital consumption allowances, profits, net interest
charges and taxes. The total input is a sum of intermediate and primary inputs. The
indicator shows the capital and labor employed efficiencies, given the output flow
from a sector to the other. A higher value means a higher capital and labor employed
efficiencies and higher productive level as well. Table 2 measures the sectoral output
between one construction sector and the next, given the primary inputs calculated
from Eq. (6).
The Canadian construction sector had the highest sectoral productivity, whereas
the French construction sector had the lowest sectoral productivity. With the excep-
tion of Australia and France, all other countries showed an upward trend. The dif-
ferences amongst these countries largely depend on the price of labor and that of
the cost of capital. For instance, in USA where the primary input cost is higher, the
construction sector had comparatively low sectoral productivity. Similarly, Table 3
measures the sectoral output between one construction sector and the next, given
the total input in Eq. (7). The sectoral output to the total input indicator showed
the same trend as the sectoral output to primary input indicator amongst these
countries. The indicator showed a lower value because the costs of intermediate
inputs were considered. Intermediate inputs such as raw material, energy and so
forth significantly affected the sectoral productivity.

Table 2. Sectoral output to primary input.

Early 1970s Mid/Late 1970s Early 1980s Mid 1980s Late 1980s

Australia 2.783% 0.944% N/A 0.248% 0.253%

Canada 2.765% 3.386% 9.446% 7.434% 5.355%
Denmark 0.308% 0.293% 0.287% 2.620% 1.329%
France N/A N/A 0.125% 0.096% 0.104%
German N/A 3.900% N/A 3.040% 3.868%
Japan 0.362% 0.058% 0.282% 0.473% 1.037%
USA 0.053% 0.246% 0.219% 0.353% 0.334%

Table 3. Sectoral output to total input.

Early 1970s Mid/Late 1970s Early 1980s Mid 1980s Late 1980s

Australia 1.444% 0.418% N/A 0.121% 0.121%

Canada 1.175% 1.567% 4.287% 3.440% 2.414%
Denmark 0.151% 0.126% 0.130% 1.067% 0.539%
France N/A N/A 0.057% 0.045% 0.046%
German N/A 1.850% N/A 1.431% 1.632%
Japan 0.139% 0.025% 0.108% 0.193% 0.392%
USA 0.027% 0.113% 0.103% 0.163% 0.155%
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218 C. Liu & Y. Song

4.2. Intermediate productivity indicators

The intermediate productivity indicators measure the contributions of labor, capital
and total inputs from the point of the intermediate output. A higher value implies
higher intermediate productivity. Figure 2 shows the intermediate output to primary
input indicators as per Eq. (8), for the construction sectors of the seven selected
countries.
The construction sector of Denmark had the highest value, with a higher interme-
diate output. The construction sector of France had the lowest value, with a higher
input, smaller final demand and larger imports. Most of values of the intermediate
output to primary input indicator are below 50%, since the construction industry
produced relatively little for intermediate use. In fact, the construction industry
consists of two sub-sectors: new construction and maintenance. The former serves
only final demand, whereas the latter produces a small portion for intermediate use.

Fig. 2. Intermediate output to primary input.

30%

25%

20%

15%

10%

5%

0%
Early 1970s Mid/Late 1970s Early 1980s Mid 1980s Late 1980s

Australia Canada Denmark France Germany Japan USA

Fig. 3. Intermediate output to total input.

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Multifactor Productivity Measures of the Construction Sector 219

The intermediate output to total input indicators stemmed from Eq. (9), presented
the same trend as shown in Fig. 3, describing a lower value compared with the
intermediate output to primary input indicators.

4.3. Aggregate productivity indicators

The total output to primary input indicator is a measure of the total output to pri-
mary input, reflecting the efficiency of primary input to the total output. Figure 4
shows the total output to primary input indicator of the construction sectors in
seven countries as per Eq. (10). The Japanese construction sector had the highest
value, whereas the Australia construction sector had the lowest value. The multi-
plier productivity indicator represents the ratio of the output multiplier, multiplying
the final demand of the construction sector, to the input multiplier, multiplying the
value added and measures the total efficiency of the industry’s production resulting
from all final demand sales by the sector. The final demand of construction refers

280%

260%

240%

220%

200%

180%
Early 1970s Mid/Late 1970s Early 1980s Mid 1980s Late 1980s

Australia Canada Denmark France

Germany Japan USA Average

Fig. 4. Total output to primary input.

600%

500%

400%

300%

200%
Early 1970s Mid/Late 1970s Early 1980s Mid 1980s Late 1980s

Australia Canada Denmark France

Germany Japan USA Average

Fig. 5. Multiplier productivity.

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220 C. Liu & Y. Song

to consumption, investment and government expenditures for new buildings. The

output multiplier, multiplying the final demand, shows the total effect of change in
the final demand of the construction sector. The input multiplier, multiplying the
value added, represents the total effect of change in value added by the construction
sector. A higher value means higher outputs such as reduced cost, improved ser-
vices and increased volume, or lower (efficient) inputs for instant materials, human
resources and management systems in the construction sector (SCRCSP, 1997).
Figure 5 shows the multiplier productivity indicator of the construction sectors in
the seven countries as per Eq. (11). The average value of this indicator is also shown
in this figure. The multiplier productivity demonstrated a slightly increasing trend
over the exam period. In the construction area, many factors can affect produc-
tivity growth, including capital-labor ratio, composition of output, increase in the
corporate share of contract construction, labor quality, economics of scale, intro-
duction of new techniques in building and the substitution of labor-saving building
materials for others. In fact, worldwide technology progress been had contributed
significantly to the construction productivity. However, the steep rise in energy price
and inflation had offset its growth during this same study period.

5. Conclusions
Based on the newly published OECD input-output database, this research has
developed a new productivity measurement framework for the international com-
parison of the construction sector. Sectoral productivity, intermediate productivity
and aggregate productivity indicators are formulated based on previous research
and multiplier concepts. This measurement framework concentrates on the intro-
industry flows of products and considers the direct and indirect effects of input
and output. Moreover, this framework enables us to measure the multifactor pro-
ductivity of a specific sector systematically. Historical analyses and comparisons
are also conducted to indicate the differences of productivity of the construction
sectors across the seven selected countries. The Canadian construction sector had
the highest sectoral productivity, whereas the French construction sector had the
lowest sectoral productivity. With the exception of Australia and France, all other
countries’ sectoral productivity showed an upward trend. The construction sector of
Denmark had the highest intermediate productivity, with a higher intermediate out-
put. The construction sector of France, on the other hands had the lowest value with
a higher input, smaller final demand and larger imports. Most of the values of the
intermediate output to primary input indicator are below 50%, since the construc-
tion industry produces minimal for intermediate use. The Japanese construction
sector had the highest aggregate productivity and the Australia construction sector
had the lowest value. Findings can improve our understanding of how technological
and organizational and policies influences combine to affect the productivity growth
and aid policy makers, construction businesses, as well as researchers in evaluating
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Multifactor Productivity Measures of the Construction Sector 221

the competitive ability of the construction sector. Meanwhile, the framework can
also be used in the other sectors for multifactor productivity measurement.

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