Technical Notes
The simplified methodology for preparing preliminary estimates of MFP is
outlined in the June 2005 Monthly Labor Review article, “Preliminary
estimates of multifactor productivity growth” located at
http://www.bls.gov/opub/mlr/2005/06/art3abs.htm. This methodology is
applied to both the private nonfarm business and private business
sectors and measures are calculated only for the most recent year.
Data for all previous years are identical to the March 21, 2012
“Multifactor Productivity Trends” news release (USDL-12-0494).
Capital Services
Capital services are the services derived from the stock of physical
assets and software. Capital services measures constructed for the
preliminary MFP measures are based on less detail only for the most
recent year. The preliminary measures consist of eight asset types as
opposed to the 86 asset types for fixed business equipment and
software, structures, inventories, and land included in estimates for
all previous years. The assets included in the preliminary estimates
are computers, software, communications and other information processing
equipment, other fixed business equipment, structures, inventories,
rental residences, and land. Investments, depreciation, and capital income
are estimated for each of these eight aggregates. Capital services are
calculated by a chained superlative Tornqvist index combining stocks of
the eight asset categories, weighted by capital income shares.
Labor Input
Labor input in private business and private nonfarm business is obtained
by chained superlative Tornqvist aggregation of the hours at work by all
persons, classified by age, education, and gender with weights determined
by each group’s share of the total wage bill. The preliminary estimates
of 2011 hours worked for the private nonfarm business and private business
sectors are extrapolated based on the hours worked reported in the nonfarm
business and business sectors, respectively, in the February 2, 2012
“Productivity and Costs” news release (USDL-12-0162).
The labor composition index estimates the effect of shifts in the age,
education, and gender composition of the work force on the efficiency of
hours worked. The preliminary MFP labor composition measure estimates the
number of hours worked by each type of worker based on Current Population
Survey (CPS) data. The estimate of the 2011 labor composition index assumes
relative wages across groups remain constant between 2010 and 2011.
Additional information concerning data sources and methods of measuring
labor composition can be found in Cindy Zoghi, 2007,
“Measuring Labor Composition: A Comparison of Alternate Methodologies”
http://www.bls.gov/bls/fesacp1121407.pdf.
Combined Inputs
Labor input and capital services are combined using chained superlative
Tornqvist aggregation, applying weights that represent each component's
share of total costs. The chained superlative Tornqvist index uses changing
weights; the share in each year is averaged with the preceding year's share.
Total costs are defined as the value of output less a portion of taxes on
production and imports. Most taxes on production and imports, such as excise
taxes, are excluded from costs; however, property and motor vehicle taxes
remain in total costs.
Capital Intensity
Capital intensity is the ratio of capital services to hours worked in the
production process. The higher the capital to hours ratio, the more capital
intensive the production process is.
In a production process, profit maximizing/cost-minimizing firms adjust the
factor proportions of capital and labor if the price of one factor falls
relative to the price of the other factor; there would be a tendency for the
firms to substitute the less expensive factor for the more expensive one.
In the short run, changes in hours worked are more variable than changes
in capital services. Changes in hours worked in business cycles can result
in volatility of the capital intensity ratio over short periods of time. In
the long run an increase in wages relative to the price of capital will induce
the firm to substitute capital for labor, resulting in an increase in capital
intensity.
Output
Private business sector output is a chain-type, current-weighted index
constructed after excluding from gross domestic product (GDP) the following
outputs: general government, nonprofit institutions, private households
(including owner-occupied housing), and government enterprises.
This release presents data for the private business and private nonfarm
business sectors. The private business sector accounted for approximately
74 percent of gross domestic product in 2010. Additionally, the private
nonfarm business sector excludes farms from the private business sector,
but includes agricultural services. Multifactor measures exclude government
enterprises, while the BLS quarterly Productivity and Cost series include
them. The output measures reflect the National Income and Product Accounts
(NIPA) data released by the Bureau of Economic Analysis (BEA) on
January 27, 2012 but do not reflect the revised data released by BEA on
February 29, 2012. The preliminary estimates of 2011 output for the
private nonfarm business and private business sectors are extrapolated
based on the output reported in the nonfarm business and business sectors,
respectively, in the February 2, 2012 “Productivity and Costs” news release
(USDL-12-0162).
Multifactor Productivity
Multifactor productivity measures describe the relationship between output
in real terms and the inputs involved in its production. They do not measure
the specific contributions of labor or capital, or any other factor of
production. Rather, multifactor productivity is designed to measure the joint
influences of technological change, efficiency improvements, returns to scale,
reallocation of resources, and other factors on economic growth, allowing for
the effects of capital and labor.
The multifactor productivity indexes for private business and private nonfarm
business are derived by dividing an output index by an index of labor input
and capital services. The output indexes are computed as chained superlative
indexes (Fisher Ideal indexes) of components of real output.
