Economic News Release

Technical notes

Technical Notes

Beginning with this release, historical data for multifactor productivity
in all sectors and industries reflect several important changes and revisions
to the data sources used to develop these series. In "Preview of the 2013 
Comprehensive Revision of the National Income and Product Accounts: Changes
in Definitions and Presentations,” Survey of Current Business, March 2013, 
and the 2014 Comprehensive Revision of the Industry Economic Accounts, the
Bureau of Economic Analysis (BEA) described several important changes to 
the national and annual industry accounts. Principal changes include the 
introduction of research and development and artistic originals as fixed 
investment, the capitalization of ownership transfer costs of residential
fixed assets, and revisions to the annual industry accounts. 

Capital Services

Capital services are the services derived from the stock of physical assets
and intellectual property assets. There are 90 asset types for fixed business
equipment, structures, inventories, land, and intellectual property products.
Data on investment for fixed assets are obtained from BEA. Data on inventories
are estimated using BEA and additional information from IRS Corporation Income
Returns. Data for land in the farm sector are obtained from USDA. Nonfarm 
industry detail for land is based on IRS book value data. Current-dollar 
value-added data, obtained from BEA, are used in estimating capital rental
prices. 
	
BLS provides additional detail in tables 5 and 6 on information processing
equipment and intellectual property products. Information processing equipment
is composed of three broad classes of assets: computers and related equipment,
communications equipment, and other information processing equipment. 
Computers and related equipment includes mainframe computers, personal 
computers, printers, terminals, tape drives, storage devices, and integrated
systems. Communications equipment is not further differentiated. Other 
information processing equipment includes medical equipment and related 
instruments, electromedical instruments, nonmedical instruments, photocopying
and related equipment, and office and accounting machinery. Intellectual
property products are composed of three broad classes of assets: software,
research and development, and artistic originals. Software is comprised
of pre-packaged, custom, and own-account software. Research and development
is creative work undertaken to increase the stock of knowledge for the 
purpose of discovering or developing new products or improving existing 
ones. Artistic originals include theatrical movies, long-lived television
programs, books, music, and other forms of entertainment. Structures 
include nonresidential structures and residential capital that are rented 
out by profit-making firms or persons.

Financial assets are excluded from capital services measures, as are 
owner-occupied residential structures. The aggregate capital services 
measures are obtained by Tornqvist aggregation of the capital stocks for
each asset type within each of 60 NAICS industry groupings using estimated
rental prices for each asset type. Each rental price reflects the nominal
rate of return to all assets within the industry and rates of economic
depreciation and revaluation for the specific asset; rental prices are 
adjusted for the effects of taxes. Current-dollar capital costs can be 
defined as each asset’s rental price multiplied by its constant-dollar 
stock, adjusting for capital composition effects. 

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. Hours paid of employees are
largely obtained from the Current Employment Statistics program (CES). 
These hours paid are then converted to an at-work basis by using information
from the Employment Cost Index (ECI) of the National Compensation Survey 
(NCS) benchmarked to the Hours at Work Survey. Hours at work for 
nonproduction and supervisory workers are derived using data from the Current
Population Survey (CPS), the CES, and the NCS. The hours at work of 
proprietors, unpaid family workers, and farm employees are derived from 
the Current Population Survey. Hours at work data reflect Productivity and
Costs data as of the February 6, 2014 “Productivity and Costs” news release 
(USDL-14-0167). The growth rate of labor composition is defined as the 
difference between the growth rate of weighted labor input and the growth 
rate of the hours of all persons. 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. 

Rising labor costs are, in fact, an incentive for firms to introduce 
automated production processes. Industry estimates of capital to hours 
ratios can be obtained at http://www.bls.gov/mfp/mprdload.htm.


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 2012. 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
are based on the revised National Income and Product Accounts (NIPA) data 
released by BEA on January 30, 2014. 

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 capital 
services and labor input. The output indexes are computed as chained 
superlative indexes (Fisher Ideal indexes) of components of real output.

Research and Development 

The stock of research and development in private nonfarm business is derived
by cumulating constant dollar measures of research and development 
expenditures and allowing for depreciation. Current dollar expenditures for
privately financed research and development are obtained from annual issues 
of Research and Development in Industry published by the National Science 
Foundation. BLS develops price deflators and estimates of the rate of 
depreciation. 

The research and development data in the private nonfarm business sector 
presented here show the effect of spillovers from economic units that conduct
research and development. BEA publishes measures of research and development 
investments in each industry that include estimates of the direct returns to
firms conducting such research and development activities. By combining the 
direct returns to firms conducting research and development with the spillover 
effect of other firms, a picture of the total overall effects of research and
development can be drawn. 

Further description of these data and methods can be found in BLS Bulletin
2331 (September 1989), "The Impact of Research and Development on 
Productivity Growth." BLS measures of year-to-year contributions of research 
and development to the private nonfarm business sector and measures of the 
stock of research and development are available at 
http://www.bls.gov/mfp/rdtable.pdf .

Other Information 

Comprehensive tables containing additional data beyond the scope of this press
release are available upon request at 202-691-5606 or at 
http://www.bls.gov/mfp/mprdload.htm . More detailed information on methods, 
limitations, and data sources of capital and labor are provided in BLS 
Bulletin 2178 (September 1983), “Trends in Multifactor Productivity, 1948-81” 
and on the BLS Multifactor Productivity website under the title “Technical 
Information About the BLS Multifactor Productivity Measures” for Major Sectors
and 18 NAICS 3-digit Manufacturing Industries at 
http://www.bls.gov/mfp/mprtech.pdf. General information is available on the
BLS Multifactor Productivity website at http://www.bls.gov/mfp/mprover.htm.
Additional data not contained in the release can be obtained in print or at
http://www.bls.gov/mfp. A number of comprehensive tables set up as zip files
can be obtained at http://www.bls.gov/mfp/mprdload.htm. Included in the
additional data available in the home page is a zip file containing selected
multifactor productivity data that links 1948-87 SIC data to NAICS data from
1987 forward. This file includes data for the private business and private 
nonfarm business sectors. 

Table of Contents

Last Modified Date: April 03, 2014
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