Academic journal article Monthly Labor Review

Problems Encountered in Measuring Single- and Multifactor Productivity

Academic journal article Monthly Labor Review

Problems Encountered in Measuring Single- and Multifactor Productivity

Article excerpt

Problems encountered in measuring single-and multifactor productivity

The slowdown in productivity growth since the early 1970's in many countries has stimulated and renewed interest in the causes of productivity change. The observation that there has been a slowdown has generally centered on the traditional indicator of productivity--output per unit of labor input, or labor productivity.

Labor productivity--the relationship between output and labor input--has been the most prevalent measure of productivity for a variety of reasons. First, labor is involved in all aspects of production and generally has been the most important factor in the production process. Second, labor input is the most readily measurable of the various production factors.

Labor productivity measures are useful in that they provide quantitative indicators of the amount of change in labor expended to produce real goods and services of an enterprise, industry, or economy. Changes in output per hour, however, do not measure the specific contribution of labor or any other factor of production. Instead, they reflect the joint effects of many influences which affect the use of labor, including changes in technology, capital investment, utilization of capacity, economies of scale, energy substitution, organization of production, and managerial skills, as well as changes in the characteristics and efforts of the work force.

To provide insights into some of the factors influencing labor productivity changes, other measures of productivity have been developed which include additional inputs, such as capital services and intermediate items (purchased materials, fuels, and business services). The difference in the movements of these multifactor productivity measures and the output per hour measures provides a look at the effect of the substitution of other factors on labor productivity movements. The multifactor measures themselves reflect changes in the use of many factors of production per unit of output over time.

The problems in developing multifactor productivity measures are much more severe than those present in deriving the traditional single-factor productivity measures. All the difficulties of defining and measuring output and labor input in the labor productivity measures are present in the development of the multifactor measures. But the additional problems of defining and quantifying the other inputs, such as capital, energy, and other intermediate inputs, are vastly more complex. This article discusses some of the problems the Bureau of Labor Statistics has encountered in developing productivity measures and explains the approaches taken to solve them.

Derivation of output

The output indexes for the measures of labor and multifactor productivity for the private business economy and its major sectors are derived from data on real gross product published in the National Income and Product Accounts (hereafter, national accounts) by the Bureau of Economic Analysis, U.S. Department of Commerce. Output measures for the detailed industries at the SIC (Standard Industrial Classification) two-, three-, and four-digit levels are prepared from basic data developed by various public and private agencies, using the greatest level of detail available.

Several major issues must be examined in the derivation of the output measures. These involve (1) selecting the appropriate output concept to be measured, (2) adjusting output so that it is consistent with available input measures, (3) obtaining quantity data on production, (4) developing appropriate weights for aggregating heterogeneous items into a single output measure, and (5) separating value change into price change and real output change.

The output concept used for the business and major sector measures is a net output or a value-added type of measure. The concept used for industries is a gross output measure that includes the value of purchased goods and services. …

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