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.  Measures for all previous years
are not different from the March 30, 2011 “Multifactor Productivity Trends”
news release (USDL-11-0435).

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 is composed of hours worked and labor composition
for the private business and private nonfarm business sectors. It is calculated
by the 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 2010
hours worked for the private nonfarm business and private business sectors are
extrapolated from the hours worked reported in the nonfarm business and
business sectors, respectively, in the February 3, 2011 “Productivity and
Costs” news release (USDL-11-0128).  
	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 index calculates the number of
hours worked by each type of worker based on Current Population Survey (CPS)
data.  The estimate of the 2010 labor composition index assumes relative wages
across groups remain constant between 2009 and 2010.  
	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 of the 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 is less
than 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 capital
intensity 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 the following outputs from gross domestic product
(GDP): 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 76 percent of gross
domestic product in 2005.  Additionally, the private nonfarm business sector
excludes farms from the private business sector, but includes agricultural
services.  Multifactor productivity 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 28, 2011 but do not reflect
the revised data released by BEA on February 25, 2011.  The preliminary
estimates of 2010 output for the private nonfarm business and private business
sectors are extrapolated from the output reported in the nonfarm business and
business sectors, respectively, in the February 3, 2011 “Productivity and
Costs” news release (USDL-11-0128).  
 
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, 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.