Economic News Release

Technical notes

Technical Notes

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 a chained superlative Tornqvist aggregation of the
hours at work, 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 4, 
2016 “Productivity and Costs” news release (USDL-16-0209). 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 and in “Changes in the Composition
of Labor for BLS Multifactor Productivity Measures, 2014” 
http://www.bls.gov/mfp/mprlabor.pdf. 

Combined Inputs

Labor input and capital services are combined using a 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.
 
Value-added 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 2014. 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 29, 2016.

Multifactor Productivity

Multifactor productivity measures describe the relationship between output
in real terms and the combined 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 aggregating different vintages of 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." http://www.bls.gov/mfp/mfparchive.htm. 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” http://www.bls.gov/mfp/mfparchive.htm, 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 downloaded 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 sector. 
 

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Last Modified Date: March 24, 2016
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