Multifactor productivity estimates for France: what does it change to take capital and labour quality into account?

Potential growth estimates and forecasts generally rely on a decomposition of GDP growth into three production factors: the volume of labour, the volume of capital and a residual term called multifactor productivity (MFP). This residual term is often considered as the contribution to growth of technical progress even if it represents, more generally, all sources of growth not already taken into account by the first two production factors. The amplitude of this residual term may be reduced if the contribution to growth of labour and capital quality is also measured, i.e. by taking into account that different capital and labour types may have different productivities. From 1979 to 2010, on the whole economy excluding agriculture, real estate and non-market services, net capital stock grows at a rate of 2.5% a year and capital quality at 0.4% a year. The contribution of capital quality is higher when firms invest more. Over the same period, aggregate hours of work remain globally stable whereas labour quality grows at 0.5% a year. From 1994 to 2007 on the whole economy, taking quality effects into account reduces the MFP growth rate from 1.3% to 0.9% a year and subtracting business cycle effects further reduces it to 0.7% a year. Starting from this new MFP estimate and making different assumptions on the evolution of quality effects, on capital accumulation and on the evolution of the labour force, we propose three potential growth scenarios over 2015-2025. Most of the uncertainty comes from MFP projections. If one assumes that MFP will recover its pre-2008 growth rate or that it will be reduced by a small or large extent, potential growth can be projected between 1.2% and 1.9% a year.