Intermediate inputs and economic productivity

Abstract

Many models of economic growth exclude materials, energy and other intermediate inputs from the production function. Growing environmental pressures and resource prices suggest that this may be increasingly inappropriate. This paper explores the relationship between intermediate input intensity, productivity and national accounts using a panel dataset of manufacturing subsectors in the USA over 47 years. The first contribution is to identify sectoral production functions that incorporate intermediate inputs, while allowing for heterogeneity in both technology and productivity. The second contribution is that the paper finds a negative correlation between intermediate input intensity and total factor productivity (TFP)—sectors that are less intensive in their use of intermediate inputs have higher productivity. This finding is replicated at the firm level. We propose tentative hypotheses to explain this association, but testing and further disaggregation of intermediate inputs is left for further work. Further work could also explore more directly the relationship between material inputs and economic growth—given the high proportion of materials in intermediate inputs, the results in this paper are suggestive of further work on material efficiency. Depending upon the nature of the mechanism linking a reduction in intermediate input intensity to an increase in TFP, the implications could be significant. A third contribution is to suggest that an empirical bias in productivity, as measured in national accounts, may arise due to the exclusion of intermediate inputs. Current conventions of measuring productivity in national accounts may overstate the productivity of resource-intensive sectors relative to other sectors.

Material Services with Both Eyes Wide Open

“…As a result, "material services" have no consensus as to their definition and scope [15], hence the need for this paper, which defines the term and expands the aforementioned concepts. …”

Resilient and Inclusive Prosperity within Planetary Boundaries

“…The first is to reduce the subsidies spent annually on materials and resource use. Such subsidies provide incentives for firms to increase the use of natural resources, which may be associated with lower total factor productivity (Baptist and Hepburn, 2013). By one estimate, US$1 trillion may be spent every year on directly subsidizing the consumption of resources (Dobbs et al, 2011).…”

“…Third, countries should consider shifting their tax base away from labor, which correlates with higher total factor productivity (Baptist and Hepburn, 2013), and towards rents, materials and resources. Taxing environmental externalities and mineral rents are obviously economically rational.…”

Material efficiency: providing material services with less material production

“…This is the opposite effect than would be required to promote material efficiency, and reinforces the suggestion long-made by Stahel [54] that governments should shift the burden of taxation away from the renewable resource of labour, and onto the non-renewable resources of materials and fossil fuels. Baptist & Hepburn [41] re-echo this suggestion, but as yet it remains largely hypothetical, and has not entered political thinking or implementation. In fact implementation could be extremely difficult: given the current high ratio of labour tax to energy/material taxes, a new tax on materials would have to be set at an extremely high level in order to maintain net government income, and this would give a significant first-mover disadvantage to industries in any country beginning the switch.…”

“…A further complication from the difference between economic and physical measures of material efficiency arises when the word 'material' is used to describe the intermediate inputs of production, rather than physical materials. Baptist & Hepburn [41] stated this difference as follows:…”