Performance of Multifactor Productivity in the Steel and Motor Vehicles Industries
Sherwood, Mark K., Monthly Labor Review
Performance of multifactor productivity in the steel and motor vehicles industries
For many decades, the Bureau of Labor Statistics has published indexes of output per hour, or labor productivity, for specific industries. It now provides these measures for approximately 150 industries.1 Movements in output per hour indexes reflect changes in capacity utilization, the composition of the labor force, and technology; economies of scale; research and development; and the substitution of other factors for labor.
A new BLS index, multifactor productivity,2 relates output to the combined input of capital and intermediate purchases (materials, fuels, electricity, and services) as well as of labor. The movement of this index represents the change in output not accounted for by the directly measurable inputs. The difference between the movement of the multifactor productivity measure and the output per hour measure indicates the impact of changes in the amount of capital services per hour (capital-labor ratio) and the amount of intermediate purchases per hour (intermediate purchases-labor ratio) on output per hour.
This article focuses on the relationship between output per hour and multifactor productivity in the steel and motor vehicles industries. The performances over time of both measures are used to examine the post-1973 slowdown in output per hour in the steel industry (SIC 331). This slowdown coincided with the productivity slowdown that occurred in the major sectors of the economy. The motor vehicles industry (SIC 371) did not experience much of a post-1973 slowdown in output per hour, but the measures help explain that industry's performance. Concepts and methods of deriving the output per hour and multifactor productivity measures are explained in the appendix.
The output per hour relationship
Output per employee hour reflects many influences on the use of labor in the production of goods and services in an industry. Two influences are the capital-labor ratio, or capital per hour, and the intermediate purchases-labor ratio, or intermediate purchases per hour. The remaining influences on output per hour movements are also reflected in the multifactor productivity movements. In fact, the multifactor productivity index is actually an index of output per hour adjusted for the influences of capital per hour and intermediate purchases per hour. Indexes of output per hour, multifactor productivity, and related indexes for the steel and motor vehicles industries are shown in table 1.
For both industries, output per hour grew faster during the 1958-84 period than did multifactor productivity. (See chart 1.) The differences in growth rates are accounted for by the capital-labor and intermediate purchases-labor ratios.
Over the 1958-84 period, the steel industry experienced a 0.7-percent average annual growth in output, while labor hours fell at a 1.9-percent rate. To measure the contribution of capital-labor and intermediate purchases-labor ratios to this output hour growth, it is necessary to weight the growth rates of these two variables by the respective nonlabor input's share of output. For example, the weight applied to the growth of the capital-labor ratio is equal to capital income divided by the value of output. Output per hour is equal to the products of these weights times the growth rates of the explanatory variables plus multifactor productivity. Of the 2.7-percent annual growth in output per hour over the 1958-84 period in the steel industry, 0.1 percent was contributed by capital and 1.2 percent by intermediate purchases. Multifactor productivity grew 1.4 percent.3
Although capital's relatively low share reduces the contribution of the capital-labor ratio, the ratio itself grew about 2 percent a year. Capital services did decline from the late 1950's through the first half of the 1980's, but labor hours also declined. The myriad factors in multifactor productivity accounted for about half the growth in output per hour. …