Explanatory Writing

Where potentially useful as supporting material, I will create an infographic to encapsulate a concept, topic, theme covered in a podcast.

Infographics referenced and retrievable as supporting material for the relevant podcast.

Total Factor Productivity

TFP Infographic

An infographic titled 'Total Factor Productivity' explaining key concepts such as overview, production factors, labor productivity, capital deepening, and a conclusion, with sections including text, formulas, and images.

TFP Pocket Reference

Overview

Total Factor Productivity (TFP) is a powerful explanatory model, foundational to economic growth and organizational efficiency.

TFP measures the level of output from a known set of inputs - labour and capital, as well as a residual factor representing the remaining proportion of output left unexplained by hours worked or capital invested.

Its possible to increase output per unit (hours) of work through increased capital investment. But achieving productivity gains through capital investment alone is subject to the law of diminishing returns.

By contrast, the potential for increased productivity attributable to TFP’s residual factor is essentially unlimited. That’s pretty awesome - and if successfully harnessed - it’s like catching lightning in a bottle.

Production Factors

TFP is typically expressed as two known input factors, labour (L) and capital (C), plus a third residual factor (A), which together produce output (Q).

  • The basic TFP function can be expressed as: L + C + A = Q

  • Labour (L) represents the total employment hours required to produce a given level of output (Q).

  • Capital (C) is the total investment made in equipment, tools, and infrastructure, to support that same output.

(A) stands for "awesome" (technically, no but it helps make the point). It represents everything else leading to output Q left unexplained by labour and capital.

Labour Productivity

The term “labour productivity” is often misunderstood as a measure of how hard employees are working to achieve a given level of output.

But economists aren’t that cruel. Labour productivity is simply: Q ÷ L

This turns “one hour of work” into a constant.

So, if we want more output per hour, we need more capital (C), more of mystery factor (A), or both.

Capital Deepening

Investing more capital to increase output per unit of labour is known as capital deepening.

Imagine equipping a worker with a backhoe instead of a shovel. More capital per worker leads to greater output per hour.

But there’s a catch. Once the best, most up-to-date equipment has been sourced through capital investment (i.e. you’ve bought the biggest backhoe), labour productivity stalls. Economists call this the law of diminishing returns.

Once at this threshold, something else is needed to yield additional productivity gains: Factor A.

A is for Awesome

Let’s assume we have maxed out on capital investment to upgrade tools and equipment, and are planning for next year. What other options are there for increased productivity per hour of work?

Enter, Factor A.

So, what is A? It could be:

  • New technologies or trade secrets;

  • Implementing better operating or management processes;

  • A healthier, more skilled workforce;

  • Broad-based infrastructure improvements (e.g., rural broadband); or even

  • Successful public policy initiatives (e.g., reduced trade barriers).

Conclusion

Total Factor Productivity helps us measure something fundamentally important: value per unit of effort.

TFP is not a pretext for working longer or harder. Quite the opposite. It’s a roadmap for how to generate more value from the time, effort, and resources we’ve already committed to invest.

It’s not just about shovels and backhoes. It’s about building stronger economies, delivering affordable healthcare, earning higher wages, and improving living standards.

From boardrooms to bureaucracies, whenever we invest time or money to create value, TFP should be top of mind.