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.