How price indexes affect BLS productivity measures (EXCERPT), Monthly Labor Review Online, Feb. 1999

How price indexes affect BLS productivity measures

Lucy P. Eldridge

Productivity growth for the U.S. business sector has been slow since 1973, compared with that of earlier periods. From 1959 to 1973, for example, estimates prepared by the Bureau of Labor Statistics showed that labor productivity (output per hour) in the business sector increased by about 3 percent per year. Since 1973, by contrast, the growth rate has been just slightly more than 1 percent per year. Interestingly, however, during this recent period of relatively slow productivity growth, industrial technology advanced considerably, and the financial markets were healthy as well, phenomena often associated with increases in the rate of productivity growth.

As a result of this apparent contradiction, many economists and government officials have begun to question whether the slower growth was real or the result of measurement problems in the official government productivity statistics. In particular, recent discussions have focused on the issue of possible upward bias in the Consumer Price Index (CPI), leading some economists to assert that productivity growth has been understated as a result. This article attempts to add to these discussions by examining the relationship between price indexes and productivity statistics, gauging the relative importance of each of the various indexes used.

The Office of Productivity and Technology publishes productivity statistics for major sectors and subsectors of the U.S. economy, as well as for many domestic industries and foreign countries.¹ In this article, the focus is on labor productivity statistics for the business sector of the U.S. economy. These statistics relate the real output of an aggregate sector of the U.S. economy to the labor resources used to produce that output. Hence, data series on labor productivity, or output per hour, capture changes in output that cannot be attributed to changes in labor inputs. Growth in labor productivity can be a result of many influences, including changes in technology, capital investment, purchased inputs from outside the sector, capacity utilization, returns to scale, and workforce skill and effort.

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Footnotes

1 The major-sector and industry-level measures are developed independently. Measures of productivity for industries are based on the production of an industry and thus rely heavily on industry producer price indexes. Relatively few industry measures, approximately 14 percent of industries published by BLS, make use of consumer price indexes. In addition, BLS industry productivity statistics do not use input data to measure output and they do not use input data to construct output deflators. For more information, see BLS Handbook of Methods, Bulletin 2490 (Bureau of Labor Statistics, 1997), pp. 89–121.

Possible measurement bias in aggregate productivity growth.—Feb. 1999.

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