Technical note

Technical Note

Labor Productivity: Labor productivity describes the relationship between real output and the labor 
hours involved in its production. These measures show the changes from period to period in the amount 
of goods and services produced per hour worked. Although the labor productivity measures relate output 
in a state to hours worked of all persons in that state, they do not measure the specific contribution of labor 
to growth in output. Rather, they reflect the joint effects of many influences, including: changes in 
technology; capital investment; utilization of capacity, energy, and materials; the use of purchased services 
inputs, including contract employment services; the organization of production; the characteristics and 
effort of the workforce; and managerial skill. 

Output: Measures of real value-added output for the private nonfarm sector are created using GDP by 
state and industry data published by the Bureau of Economic Analysis (BEA). BEA does not produce a 
private nonfarm sector measure of real output by state. To create the necessary output series, several 
industry components are subtracted — the farm sector, private households, and owner-occupied housing 
- from GDP by state using a Fisher ideal index formula. 

Labor Hours: Labor hours are measured as annual hours worked by all workers in the private nonfarm 
sector of each state. All workers include the sum of BLS Current Employment Statistics (CES) data on the 
number of jobs held by wage and salary workers in nonfarm establishments and Current Population Survey 
(CPS) data on the number of self-employed and unpaid family workers. Labor hours worked for wage and 
salary workers are estimated using CES data on hours paid of all employees. Paid hours are adjusted to an 
hours worked concept using ratios of hours worked to hours paid based on data from the National 
Compensation Survey (NCS) and off-the-clock hours incorporated from CPS data. Hours worked of self-
employed and unpaid family workers are directly from the CPS. Hours worked are estimated separately for 
different types of workers and then are directly aggregated; no adjustments for labor composition are 
made.

Unit Labor Costs: Unit labor costs represent the cost of labor required to produce one unit of output. The 
unit labor cost indexes are computed by dividing an index of nominal industry labor compensation by an 
index of real industry output. Unit labor costs also describe the relationship between compensation per 
hour worked (hourly compensation) and real output per hour worked (labor productivity). When hourly 
compensation growth outpaces productivity, unit labor costs increase. Alternatively, when productivity 
growth exceeds hourly compensation, unit labor costs decrease.

Labor Compensation: Labor compensation, defined as payroll plus supplemental payments, is a 
measure of the cost to the employer of securing the services of labor. Labor compensation measures are 
constructed using BEA nonfarm compensation less private household compensation. Compensation for 
self-employed and unpaid family workers are imputed by assuming that hourly compensation for these 
workers is the same as the average wage and salary worker in each state. 

Contributions to Labor Productivity: Each state’s contribution to national productivity growth is 
calculated by multiplying the state’s productivity growth rate by its average share of total current dollar 
national output. Adding up these contributions will approximate, but may not exactly equal, growth rates 
of national productivity. Contributions measures used in this release capture the effects of within-state 
productivity changes but do not include the effects of shifting shares of output and labor among states.

Annual Percent Change: The annual percent change is the change in a series from one year to the next 
as a percent of the series value in the previous year. Over a period of more than one year, the annual 
percent change is the compound annual growth rate in an index series, or an annualized average growth 
rate. Because the change of an index series varies from year to year, the annual percent change for a long 
time period reflects the constant rate that can be applied to each year in a period, from the start to the end, 
that would give the same total result. It is calculated as (Ending Value/Starting Value)^(1/Number of 
Years)-1.