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 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 5, 2015 "Productivity and Costs" news release 
(USDL-15-0157). 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, 
2013" 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.
 
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 2013. 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, 2015.

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 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." 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 26, 2015
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