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Economic News Release
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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 
the Bureau of Economic Analysis (BEA). Data on inventories are estimated
using information from BEA and the Internal Revenue Service (IRS) Corporation
Income Returns. Data for land in the farm sector are obtained from the
U.S. Department of Agriculture (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 table C 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 and custom. 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. Research and Development
also includes own-account R&D for software which had previously been 
classified in software. 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. 

Capital services measures constructed for the most recent year are 
preliminary and are based on less detail than the rest of the series. 
These measures consist of 6 asset types as opposed to the 90 asset types
for fixed business equipment, structures, inventories, land, and 
intellectual property products included in estimates for all previous years.
The assets included in the most recent year are structures, fixed business 
equipment, intellectual property products, inventories, rental residences,
and land. Investments, depreciation, and capital income are estimated for 
each of these six aggregates. Capital services are calculated by a chained
superlative Tornqvist index combining stocks of the six asset categories, 
weighted by capital income shares. See the June 2005 Monthly Labor Review 
article, “Preliminary estimates of multifactor productivity growth” 
located at www.bls.gov/opub/mlr/2005/06/art3full.pdf. 

Labor Input

Labor input in private business and private nonfarm business is obtained
by a chained superlative Tornqvist aggregation of the hours worked, 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 (CES) program. Weekly paid hours are adjusted 
to hours worked using data from the National Compensation Survey (NCS) for 
1996 forward and data from the BLS Hours at Work survey, conducted for this
purpose, prior to 1990. Between 1990 and 1995, weekly paid hours are adjusted
to hours at work using a combination of NCS and Hours at Work survey data. 
Hours worked for nonproduction and supervisory workers are derived using data
from the Current Population Survey (CPS), CES, and NCS. The hours worked of 
proprietors, unpaid family workers, and farm employees are derived from the 
CPS. Hours worked data reflect estimates in the March 5, 2020 
“Productivity and Costs” news release 
(www.bls.gov/news.release/archives/prod2_03052020.htm).


The estimates of 2019 hours worked for the private nonfarm business and 
private business sectors are extrapolated from the hours worked reported 
in the nonfarm business and business sectors, respectively, in the
March 5, 2020 “Productivity and Costs” news release 
(www.bls.gov/news.release/archives/prod2_03052020.htm). 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. The 
index of hours worked of all persons including employees, proprietors, and
unpaid family workers, classified by age, education, and gender are weighted 
together using median wages to compute the labor composition estimates 
reflecting the different skillset of the work force. These cell estimates
are smoothed using a three year moving average to address missing 
observations and reduce volatility.

Additional information concerning data sources and methods of measuring 
labor composition can be found in “Changes in the Composition of Labor 
for BLS Multifactor Productivity Measures, 2014” 
(www.bls.gov/mfp/mprlabor.pdf). 

Combined Inputs

Labor input and capital services are combined using chained superlative 
Tornqvist aggregation, applying weights that represent each component's 
average 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 becomes. 

In a production process, profit-maximizing/cost-minimizing firms adjust the 
factor proportions of capital and labor when the price of one factor is less
than the other factor; there is 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 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.
Additionally, the private nonfarm business sector excludes farms from the 
private business sector, but includes agricultural services. Multifactor 
productivity measures exclude government enterprises, while the BLS quarterly
Productivity and Costs series include them. 

The output measures are based on the National Income and Product Accounts 
(NIPA) data released by BEA on February 27, 2020. The estimates of 2019 
output for the private nonfarm business and private business sectors are 
extrapolated from the output reported in the nonfarm business and business
sectors, respectively, in the March 5, 2020 “Productivity and Costs” news
release (www.bls.gov/news.release/archives/prod2_03052020.htm). 
 
Multifactor Productivity

Multifactor productivity measures describe the relationship between output
in real terms and the 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 
combined inputs 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" at 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 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 
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” (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” (www.bls.gov/mfp/mprtech.pdf). 
General information is available on the BLS website at 
www.bls.gov/mfp/mprover.htm. Additional data not contained in the
release can be obtained at www.bls.gov/mfp. Comprehensive tables 
can be downloaded at www.bls.gov/mfp/mprdload.htm, including 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. 

Table of Contents

Last Modified Date: March 24, 2020