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Material intensity, productivity and economic growth

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Many models of economic growth exclude materials from the production function. Growing environmental pressures and resource prices suggest that this may be increasingly inappropriate.

This paper explores the relationship between material intensity, productivity and national accounts using a panel data set of manufacturing subsectors in the United States over 47 years. The first contribution is to identify sectoral production functions that explicitly incorporate material inputs while allowing for heterogeneity in both technology and productivity. The second contribution is that the paper finds a negative correlation between material intensity and total factor productivity (TFP) — sectors that are less material-intensive have higher rates of productivity. This finding is replicated at the firm level. We propose tentative hypotheses to explain this association, but testing is left for further work. Depending upon the nature of the mechanism linking a reduction in material intensity to an increase in TFP, the implications could be significant: policies that reduce material intensity, such as shifting taxation from labour to natural resources, would increase productivity and economic growth. A third contribution is to suggest that an empirical bias in productivity, as measured in national accounts, may arise due to the exclusion of material inputs. Current conventions of measuring productivity in national accounts may overstate the productivity of resource-intensive sectors relative to other sectors.