Academic journal article Monthly Labor Review

Multifactor Productivity in the Utility Services Industries

Academic journal article Monthly Labor Review

Multifactor Productivity in the Utility Services Industries

Article excerpt

This article introduces a new BLS measure of multifactor productivity for the utility services industries, that is, electric, gas, and sanitary services.(1) The measure relates output to inputs of capital, labor, energy, materials, and purchased business services. By contrast, the previously available BLS labor productivity measure relates output to labor input only.(2) It is important to consider factors other than labor in measuring productivity for the utilities because capital, energy, and matenals each account for a larger portion of utilities' total costs than does labor; thus, it is reasonable to expect the industry to strive for productivity gains in the use of these inputs. In particular, the heavy use of fossil fuels by utilities offers a unique opportunity to study the impact of past energy price increases on productivity.

After 1973, labor productivity growth slowed by 1.7 percent per year in the nonfarm business sector.(3) A much larger slowdown of 6.4 percent per year occurred in electric, gas, and sanitary services. This finding is consistent with the view that the productivity slowdown partly reflected rising energy prices. Given the extensive consumption of fossil fuels by electric and gas utilities, large increases in the relative cost of energy would be expected to alter the optimal mix of inputs in this industry. Moreover, passing on higher energy costs would tend to reduce demand for the industry's output, limiting some important sources of productivity growth. Capacity utilization could fall, compromising existing scale economies. But also, acquisitions of new plant and equipment could be delayed, along with any technical improvements associated with them.

It is important to know whether multifactor productivity growth, like labor productivity growth, has slowed significantly over the years. Average annual rates of growth in multifactor productivity are reported here for 1948 through 1988. Data for the pre- and post-1973 periods reveal the extent of the productivity slowdown in utility services industries. The multifactor productivity framework is also used to examine single-factor productivity ratios for inputs other than labor and whether they rose or fell following the energy price increases.

This article contributes to our understanding of productivity and costs in the services sector generally. For example, 12 percent of capital income in the nonfarm, nonmanufacturing sector of the economy accrued to utility services industries in 1988, and electric utilities have accounted for more than one-third of annual energy consumption in the United States since 1981.(4) Thus, examination of productivity gains stemming from these and other factors in utility services industries is an important component of an effort to understand multifactor productivity trends in services as a whole.(5)

Methodology

Measurement framework. Multifactor productivity is defined as output per unit of combined inputs of capital, labor, energy, materials, and purchased business services. Since multifactor productivity growth is being measured for a small group of industries in this study, it is important that intermediate inputs - energy, materials, and services - are explicitly included. Measures of productivity for large sectors of the economy may reasonably be defined in terms of real value-added output relative to labor and capital inputs. This is because most intermediate inputs are both produced and consumed within large sectors; therefore, intermediates would be counted as both inputs and outputs in gross output measures. It follows that value-added measures avoid double counting intermediate transactions. By contrast, for multifactor productivity measures of smaller groups of industries, such as the utilities sector, it becomes more important to consider the effects of intermediate inputs. If intermediates were omitted, economies or diseconomies in their use would not be reflected correctly in the productivity measure. …

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