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Handbook of Methods Industry Productivity Measures Concepts

Industry Productivity Measures: Concepts

This section defines key terms and concepts that are central to understanding how BLS produces measures of productivity for U.S. industries.

Productivity is a measure of economic performance that compares the amount of goods and services produced (output) with the amount of inputs used to produce those goods and services. BLS publishes measures of two types of productivity: labor productivity and multifactor productivity.

Measures of industry productivity are useful for tracking changes in efficiency and for determining the effects of technological improvements in particular industries. Individuals and companies also use these data as benchmarks to judge how their firms perform compared with others in the industry.

Industry productivity trends provide information that helps researchers and policymakers better understand how industries and sectors contribute to aggregate productivity growth. Industry productivity analysis also can provide information to assess the impact of policy changes or external shocks on particular industries, and the resulting impact on economic growth of the larger economy.

Output is the total amount of goods and services produced in an industry for sale either to consumers or to businesses outside that industry. This concept is known as sectoral output.^⁠1

Inputs are any resources used to create goods and services and include hours worked, capital services, energy, materials, and purchased services.

Labor productivity describes the relationship between the changes in the amount of output with the amount of labor used to produce that output. Labor productivity is expressed as an index, which is derived as a ratio of output growth to that of hours worked. Therefore, a change in labor productivity reflects the change in output that is not explained by the change in hours worked. Labor productivity can increase over time for many reasons, including technological advances, improved worker skills, improved management practices, economies of scale in production, and increases in the amount of nonlabor inputs used (capital, energy, materials, and purchased services).

Multifactor productivity is a measure of economic performance that compares the amount of output to the amount of combined inputs used to produce that output. Combined inputs are hours worked, capital services, and intermediate purchases. Changes in multifactor productivity do not reflect the specific contributions of capital services, labor, and intermediate purchases. Rather, they reflect the joint influences on economic growth of a number of factors that are not specifically accounted for on the input side, including technological change, returns to scale, improved skills of the workforce, better management techniques, or other efficiency improvements.

Hours worked is the total number of annual hours worked of all people in an industry. This includes paid employees, the self-employed (partners and proprietors), and unpaid family workers (those who work in a family business or farm without pay).

Capital services measure the flow of productive benefits from physical assets. These include equipment, structures, land, and inventories. Financial capital is excluded.

Intermediate purchases are the materials, purchased services, fuels, and electricity consumed by each industry.

Combined inputs is a Törnqvist index of separate quantity indexes of hours worked, capital services, and intermediate purchases. The difference between annual changes in output and combined inputs is expressed as multifactor productivity.

Törnqvist index is an annually chained index that is an aggregation of the growth rates of various components between two adjacent periods, with weights based on the components’ share of industry value of production. When aggregating industry output, the components are the various products provided for sale outside the industry. When aggregating combined inputs, the components are capital services, hours worked, and intermediate purchases.

Labor compensation is a measure of the cost to the employer of securing the services of labor. It is defined as payroll plus supplemental payments. Payroll includes salaries, wages, commissions, dismissal pay, bonuses, vacation and sick leave pay, and compensation in kind. Supplemental payments include legally required expenditures and payments for voluntary programs. The legally required portion consists primarily of Social Security, unemployment compensation, and workers’ compensation. Payments for voluntary programs include all programs not specifically required by legislation, such as the employer portion of private health insurance and pension plans.

Unit labor costs represent the labor compensation businesses pay to produce one unit of output. Unit labor costs are calculated as the ratio of nominal labor compensation to output. Unit labor costs also can be expressed as 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.

Unit labor costs are used to analyze trends in production costs. Trends in unit labor costs clarify the relationship between labor productivity, hourly compensation, and the cost of production. These data are used to assess the changing efficiency, cost structure, and competitive position of individual industries.