The labor productivity, multifactor productivity, and related cost measures are useful in investigating the relationships between productivity, wages, prices, profits, and costs of production. As noted above, gross domestic product represents the sum of all production costs: labor compensation, profits, depreciation, interest, rent, indirect business taxes, and other minor items. Unit labor costs, or compensation per unit of output, represent a major portion of total unit costs and reflect the combined effect of changes in output per hour and compensation per hour; thus, an increase in compensation per hour tends to increase unit labor costs while an increase in output per hour tends to reduce them, other things being equal. Therefore, through its impact on unit labor costs, output per hour is an important element in the wage-price relationship because it is an indicator of the extent to which compensation gains can occur without putting pressure on prices or reducing payments to other input factors.
Certain characteristics of the productivity and related cost data should be recognized in order to apply them appropriately to specific situations. First, the data for aggregate sectors reflect changes within various constituent industries as well as shifts in the relative importance of these industries: a portion of labor productivity growth from 1947 to the mid-1960s is attributable to the shift of workers from farm to nonfarm occupations. Second, the relationships among variables are often difficult to identify over short time periods. Third, data and other resources available for their preparation somewhat limit the productivity, output, compensation, and employment measures which can be constructed. In several sectors where output is difficult to define in a satisfactory way, productivity measures are correspondingly weak. Examples are the construction industry and the financial services sector, where output is an imputed value of labor and other inputs. The productivity and costs measures for these sectors should be interpreted with caution.
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