Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter.
Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.
Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.
OCR for page 122
The Measurement
of Inputs
The previous chapter discussed ways to improve the measurement of
output. The next task is to identify and measure the factors that explain
changes in output: these factors include both tangible and intangible
inputs. This chapter examines three types of tangible inputs: labor,
physical capital including land, and intermediate inputs, and also includes
a brief final section on combining these factors to construct measures of
multi-factor productivity. Intangible inputs, which include such factors as
technology and economies of scale and which are generally harder to
measure, are discussed in the next chapter.
LABOR
The input of labor into a production process is usually measured in hours
of all people engaged in production. These labor-hours can be considered
to be a homogeneous input and simply added together, or they can be
differentiated and weighted according to some index of labor composition
or type.
UNWEIGHTED LABOR INPUT
Unweighted labor input is usually obtained by multiplying together the
number of workers engaged in production and average hours per worker.
Where no adequate hours data are available, the number of workers alone
can be used to measure labor input. For example, international compari
122
OCR for page 123
The Measurement of Inputs
123
sons of productivity in coal mining are often made in tons per worker-
shift, with no adjustment for possible differences between countries in the
length of shifts.
The usual method of obtaining unweighted labor input (combining
hours per worker and numbers of workers by multiplying them together)
implicitly assumes that output is unaffected by the proportions in which
hours and numbers of workers are combined. It assumes that two workers
each working 70 hours per week make the same contribution to output as
four workers each working 35 hours per week. In both cases the input is
simply 140 labor-hours.
This assumption is not necessarily correct, especially for extreme cases
like the example just given. If fatigue or boredom reduces the intensity of
work effort as hours per day or per week exceed some customary level,
then two patterns of labor input with equal aggregate hours need not make
an equal contribution to output. For this reason, Denison in his analysis of
the sources of economic growth introduces an explicit offset to the
reduction of labor input represented by a shortening of the average
workweek. The offset is based on an estimate of increased efficiency per
hour as the workweek is decreased. It is also possible that very short
workdays contribute less per hour to output than somewhat longer ones,
because of the time lost in starting up and ending the workday. Such an
effect is suggested by the fact that part-time workers are sometimes paid
less per hour than full-time workers doing otherwise similar work. Despite
these possibilities, we proceed on the usual assumption that labor input
can be adequately measured by multiplying numbers of workers and
average hours.
Number of Workers
The employment component of present official productivity measures is
probably the best measured major component. Employment data come
largely from the current employment statistics (CES) program of monthly
establishment reports, adjusted to benchmarks from unemployment
insurance buts data as these become available. Current Population Survey
(cPs) household data are used to measure both employment and hours for
the parts of the economy for which establishment statistics are not
available.
Both establishment and household employment measures, as well as the
corresponding hours measures, refer to one week of the month.2 The
output measures that form the numerator of productivity ratios generally
refer to the whole month. This discrepancy in reference periods can be a
source of error in productivity measures if, for example, a major strike or
OCR for page 124
124
REPORT OF THE PANEL
unusually bad weather occurs during part of a month. Low output and
employment concentrated in the employment reference week bias the
productivity ratio upward; low output and employment concentrated in
the rest of the month bias the productivity ratio downward. This source of
error could be corrected by measuring employment and hours in each
week, but the costs of doing so would be high and would probably not be
justified by the modest benefits involved.
There are areas in which the CES program could be substantially
improved by enlarging the sample of reporting establishments, particularly
in industries with many small establishments and high establishment
turnover. This issue falls within the charge of the National Commission on
Employment and Unemployment Statistics and so the Panel did not
examine it.
Hours
The hours component of present official measures of productivity, as noted
in Chapter 4, is based largely on current data on the paid hours of
production and nonsupervisory workers as collected in the CES program.
For hours, unlike employment, the accuracy of CES data is not checked
against a benchmark. Hours of nonproduction workers in manufacturing
and mining and of supervisory workers elsewhere are estimated by various
assumptions.
Two aspects of the present procedure are unsatisfactory. These are the
absence of any direct data on hours for an important and growing portion
of the work force and the inclusion of paid leave in the measure of labor
input.
In 1977, there were 66,945,000 employees on private nonagricultural
payrolls, of whom 54,930,000 were production or nonsupervisory workers.
This leaves 12,015,000 employees, or 17.9 percent of the total, not covered
by current hours data. For 1947, the portion not covered (nonproduction
or supervisory employees) was only 12.7 percent of the total.
For manufacturing and mining, the ratios of nonproduction workers to
all employees are higher than those for all private nonagricultural
employment. In 1947, there were 2,639,000 nonproduction workers in
mining and manufacturing, or 16.0 percent of total employment; by 1977,
the number of nonproduction workers had risen to 5,699,000 or 28.0
percent of total employment. Thus we lack a direct measure of hours for
more than one employee in every four in these important industries.
Although the Panel believes that it is important to collect direct data on
the hours of nonproduction workers, it is not necessary to collect them as
frequently as for production workers. The hours of nonproduction workers
OCR for page 125
The Measurement of Inputs
125
do not fluctuate from month to month in response to changes in demand
as much as the hours of production workers do. It would seem to be
sufficient to have an annual supplement to the CES, requesting data- on the
actual hours of nonproduction workers for one month of the year or on the
regularly scheduled or usual hours of such workers. This would not place a
substantial reporting burden on employers, most of whom are required by
the Fair Labor Standards Act to keep hours records for all nonexempt
employees.
Recommendation 7. The Panel recommends that the Bureau of Labor
Statistics develop an annual supplement to the current employment
statistics (CES) program requesting data on the actual hours of
nonproduction and supervisory workers.
The second unsatisfactory aspect of current hours data is the use of
hours paid for rather than hours spent at the workplace. The difference
between the two concepts is leave time paid for directly by employers; this
consists primarily of vacations, holidays, and paid sick leave. Hours of
paid leave are not direct inputs into the production process and
conceptually should not be included in computing a productivity measure.
Data from the Survey of Employer Expenditures for Employee Compensa-
tion, shown in Table 6-1, indicate that hours at the workplace have been
gradually declining as a percentage of hours paid for. The change is small
in any one year, but cumulated over many years it could produce a
substantial bias in productivity measures.
Recommendation 8. The Panel concurs with the recommendation of
a 1976 BES task force that recommended that a separate annual
survey of hours at the workplace be administered to a subsample of
the establishments currently responding to the CES.
In principle, hours spent at the workplace but not actually at work (for
example, coffee breaks) are also not direct inputs into the production
process. Data on hours actually at work as a percentage of hours spent at
the workplace have been collected by the Survey Research Center of the
University of Michigan for 1965-1966 and 1974-1976 from a small sample
of time records kept by workers. The data for married men show that in
the 1965-1966 period the ratio of hours actually worked to hours at the
workplace was 0.944, and in the 1974-1976 period it was 0.921. For
married women the corresponding ratios were 0.926 and 0.854 (Stafford
and Duncan 1977~.
If this decline in the ratio of hours actually worked to hours at the
OCR for page 126
126
REPORT OF THE PANEL
TABLE 6-1 Hours at the Workplace as a Percentage of Hours Paid for,
Private Nonfarm Economy, 1966-1974
1966
1968
1970
1972
1974
All Industries 94 93.8 93.4 93.4 92.8
Office 93 92.1 91.8 91.6 91.2
Non-office 95 94.7 94.3 94.4 93.7
Manufacturing 93 92.7 92.0 92.1 91.4
Office 92 91.1 90.6 90.6 90.2
Non-office 94 93.3 92.5 92.7 91.9
Nonmanufactunng 95 94.5 94.2 94.0 93.5
Office 93 92.6 92.3 91.9 91.5
Non-office 96 95.7 95.5 95.4 95.0
SOURCE: Bureau of Labor Statistics, Survey of Employer Expenditures for Employee
Compensation (EEC Survey). For a description of this survey, see "Report of the BLS
Task Force on Hours Worked," March 1976, and U.S. Department of Labor, Bureau of
Labor Statistics (1975) BLS Handbook. Chapter 24.Washington, D.C.: U.S. Department
of Commerce.
workplace is representative of workers generally, it represents another
source of downward bias in measured productivity growth. It would be
difficult and costly, however, to collect data regularly on hours actually
worked based on a large sample of workers. The Panel believes that this is
a fruitful subject for private research but does not recommend any attempt
at this time to incorporate the concept of time actually worked into official
productivity measures.
WEIGHTED LABOR INPUT
Measures of labor input in which hours of different kinds of labor are
added together without any differentiation of the kind of labor being
furnished, or the occupations in which it is used, are used in most official
measures of productivity. Many private researchers, on the other hand,
have weighted labor inputs in various ways to reflect differences in kinds of
labor.
The case for the use of weighted rather than unweighted labor input
data in productivity measurement can be made in several ways. First, it
can be argued that different kinds of labor are often distinctly different
inputs into a production process. For example, in many production
processes, capital is a substitute for unskilled labor, and skilled labor is a
complement to capital and therefore itself a substitute for unskilled labor
(Rosen 1968~. This line of reasoning suggests the use of occupations as the
kinds of labor to be weighted.
OCR for page 127
The Measurement of Inputs
127
Second, it can be argued that even when two kinds of labor are
complements, the more skilled labor represents a larger number of input
units per hour of work. This line of reasoning suggests the use of weights
based on some skill-related dimension of labor input, such as years of
schooling, formal on-thejob training, or years of experience (for an
example involving journeymen and apprentices, see Chapter 2~.
When one measures multi-factor productivity, the capital input is
automatically weighted in the sense in which we are using this term here.
This must be so because there is no common physical unit, such as
machine hours, in which capital inputs of various kinds can be measured.
The components of measures of capital stock are therefore always
combined with value weights, and this weighting carries over into
measures of the flows of services that capital provides. This observation
suggests a third reason for the weighting of labor inputs in measures of
multi-factor productivity, namely, that there will then be greater conceptu-
al consistency between the measures of labor and capital inputs.
A final reason for the use of weighted labor input is that in some cases a
measure based on weighted labor input is appropriate to compare to a
measure of wage change. When the mix of types of labor used is changing,
an unweighted productivity measure can overstate or understate the rise in
the wage of each type of labor that is consistent with constant unit labor
cost (see Chapter 24.
Although most private productivity researchers use weighted measures
of labor input, there has been great variation in the particular kinds of
weights selected by different investigators; a review of these weighting
schemes is provided in Kunze (in this volume). Whatever scheme is chosen
for weighting labor input, the weights used are generally based on the
wages or earnings of the kinds of workers distinguished in the weighting
scheme. Thus if one decided to weight by educational attainment, the
weights would be derived from data on differences in wages or earnings
between individuals with different numbers of years of school completed.
The rationale for this choice is that in a competitive labor market, wage
differences reflect differences in marginal productivity, that is, differences
in the value of the contribution to production of the different types of
labor.
In some cases, however, differences in wages between kinds of labor may
not represent differences in marginal productivity that would exist in a
perfectly competitive labor market, but may reflect instead imperfections
in the labor market. The clearest such cases are differences in wages by
race and sex, part of which reflect labor market discrimination. If wage
differences reflect a mixture of differential productivity and other unrelated
factors, it becomes harder to decide whether their use in weighting labor
OCR for page 128
128
REPORT OF THE PANEL
input is appropriate. Sex has frequently been used as a weighting factor,
while the use of race has generally been avoided.
If it is decided to use a weighted measure of labor input, the level of
detail in the weighting scheme becomes important. The finer the categories
used, the heavier the burden placed on the underlying data sources to
provide accurate wage or hourly earnings data for use as weights. The
largest differences in earnings can often be seen between fairly broad
categories; this suggests diminishing returns to increasing levels of detail in
the weighting scheme.
Given the lack of consensus among productivity researchers on which of
several possible schemes for weighting labor input is best suited to
productivity statistics, the Panel does not recommend the use of any
particular scheme at this time.
Recommendation 9. The Panel recommends that the Bureau of Labor
Statistics devote more resources to studying the use of weighted labor
input measures. The purpose of this effort would be the preparation of
one or more weighted measures of labor input for broad aggregates of
economic activity, such as the private business sector. Such weighted
labor input measures could be used alone and could. also be used in
combination with measures of capital input to measure changes in
multi-factor productivity. Both of these measures could help in
explaining the changes in the single-factor unweighted measure of
labor productivity.
Such weighted productivity measures should be considered as comple-
ments to, rather than replacements for, the unweighted measures now
published.
It should be noted that BES has a comparative advantage over private
investigators in making estimates of weighted labor inputs since most of
the data used for weighting are from BES sources. The preparation of such
estimates by a government agency will also have the advantage of
converting them from an intermittent effort to a continuous program.
PHYSICAL CAPITAL
The concept of physical capital input is analogous to that of labor, which is
sometimes called human capital. Both represent a time rate of use (or
availability for use) in production of the various types of labor and capital,
which can be aggregated by weighting each type by its base-period
compensation per hour or other time unit. Thus, as pointed out in the
OCR for page 129
The Measurement of Inputs
129
previous section, labor input may be measured by combining the hours
worked by different categories of workers, weighting each kind by its base-
period average hourly compensation.
For physical capital it is conceptually possible to combine the machine-
hours, plant-hours, etc., weighting each kind of capital by its base-period
average hourly compensation (its rental price). In practice, however, this is
not how capital input is measured. For labor we have the common
denominator of the worker, and we can group workers by occupational or
industrial attachment or other categories related to differences in pay and,
presumably, in productivity. We can multiply the number of workers by
average hours worked to obtain the flow of services. This service flow, in
turn, can be multiplied by base-period average hourly compensation to
obtain labor input at base-period efficiency (that is, labor productivity)-
the share of output obtained (and presumably contributed) by labor. For
tangible capital, however, there is no simple physical common denomina-
tor such as the worker. Instead, there is a wide variety of each of the major
types of tangible capital-structures, machinery and equipment, invento-
ries, and land or other natural resources. In addition, there are few
markets in which the rental prices of the various types of equipment can be
observed. For most capital, only the purchase price or cost at time of
acquisition is observable. For capital goods sold in competitive markets,
however, the purchase price represents both the cost of production,
including a normal profit to the producer, and the present value of the
estimated future income stream to the purchaser (under equilibrium
conditions). Therefore, these purchase prices (as of a common base year)
can be used to aggregate the various types of capital to get a measure of the
real gross stock of capital. The common denominator for physical capital
is thus the constant dollar or other monetary unit.
In practice, the real capital stock is measured either by converting book
values to base-period prices through deflation by an appropriate price
index or by cumulating real investment and subtracting either retirements
to obtain real gross stocks or real capital depreciation to obtain real net
stocks.
Real capital stock can be adjusted for changes in rates of utilization to
reflect the actual flow of capital services (the question of whether or not
this adjustment is desirable is discussed below). The adjusted real capital
stock can then be multiplied by the base-period rate of return to obtain
capital input at base-period efficiency (that is, capital productivity)-the
share of output contributed by capital. This multiplication means that both
labor and capital inputs are weighted by base-period average compensation
so they add to total factor input in constant dollars. As noted in Chapter 3,
since the weights reflect the base-period efficiency of the factors, changes in
OCR for page 130
130
REPORT OF THE PANEL
the ratio of output to real factor inputs measure changes in productive
efficiency over time.
An alternative approach to measuring inputs, which should give the
same results as the approach just described, is to deflate factor compensa-
tion by an appropriate index of the average price of the factor. Thus if total
labor compensation is deflated by average hourly compensation, the
quotient reflects the change in hours worked. Analogously, capital
compensation may be deflated by an index of the average rental price of
capital goods, and the quotient reflects changes in real capital hours used.
Since rental price data for the many types of capital goods that are leased
are not generally available, Jorgenson and others have constructed implicit
rental price indexes (described below). But since the prices of capital goods
and the rates of return on capital stocks are components of such
constructed indexes, the problems of estimating capital stocks in current
and constant prices are also encountered in this alternative approach.
Before we describe the Jorgenson approach, therefore, we discuss the
conceptual and statistical problems of measuring capital stocks.
CONCEPTUAL PROBLEMS IN ESTIMATING REAL CAPITAL STOCKS
There are several specific conceptual problems involved in estimating real
capital stocks, to which alternative approaches have been suggested. The
major problems are reviewed in this section. Throughout, the term
"capital" relates to non-human capital.
The Basic Units of Real Stocks of Capital
Most estimates of real stocks of capital, gross of depreciation in the case of
structures and equipment, seek in principle to approximate measures of
the numbers of various types of physical capital goods in their own units
(numbers of machines of specified types), combined by base-period price
weights. This is true of the occasional estimates that have been prepared by
Kuznets, Goldsmith, and Kendrick, and of the continuing estimates
published by the Bureau of Economic Analysis (BEA). However, since
physical unit data are available for relatively few types of reproducible
capital goods, weighted aggregate estimates are generally obtained by
directly deflating book values at acquisition prices, taking account of the
age structure of the assets. They are also obtained by cumulating real
investment estimates for depreciable assets, by type, over a period of years,
with allowance for the retirements of capital goods reaching the end of
their estimated economic lives in successive years. This is the so-called
perpetual inventory method. Given ideal value and price data, deflated
OCR for page 131
The Measurement of Inputs
·31
values will give the same result as weighting quantities by base-period
prices.
In a sense, the constant dollar is the common denominator for real
capital, as it is for diverse outputs and for diverse labor inputs. For capital,
the constant dollar (or other monetary unit) represents the base-period
prices of the own-units of the various types of capital goods, which reflect
the present values of the expected future income streams and, for
reproducible capital, base-period costs including the producer's profits.
Changes over time in models or qualities of specific capital goods
present problems. In most existing estimates, explicit or implicit adjust-
ments are made to allow for the quality change associated with higher cost
per unit of the new model at the time of changeover. Some economists
have suggested going further and making quality adjustments based on the
change in the output-producing capacity of the new model of the capital
good (see Chapter 5~. However, Denison pointed out long ago that if
capital is measured in terms of its output-producing capacity, the
output/capital ratio becomes an uninteresting statistic, since it will tend to
show no change between years of comparable rates of capacity utilization
and no change in all years if the real capital stock is adjusted for changing
utilization rates.
It has also been suggested that the value of capital be deflated by a
consumer price index in order to measure the real consumption foregone
or by average hourly earnings to reflect real labor costs. But the usual
approach is to measure real stocks of capital in terms of own-units rather
than in terms of substitute variables, whether output-producing capacity,
consumption foregone, or real resource costs reflecting productivity
changes in capital goods industries (see Kendrick 1961b).
Gross Versus Net Depreciable Stock Measures
Estimates of the value of depreciable assets (structures and equipment) net
of depreciation reflect the decline in value (depreciation) of fixed assets as
they age. Assets depreciate primarily because of the shortening of their
remaining economic lives as reflected in income-producing capacity, rather
than a reduction of annual output-producing capacity, assuming adequate
maintenance. The length of economic life of a capital good is usually
determined less by physical decay than it is by technological changes that
result in new models or types of the capital good, or in competing capital
goods, which reduce the net income from the old item by lowering the
price of its output. This eventually makes the old equipment obsolete.
Creeping obsolescence may also make it optimal to spend less on
maintenance, which hastens physical decay. Technological advances and
OCR for page 132
132
REPORT OF THE PANEL
obsolescence can occur suddenly and unexpectedly for particular goods,
but they occur more gradually and predictably for broad categories of
capital goods, so that it is possible to make reasonable estimates of average
economic lives and mortality distributions. The estimates of average life
are necessary for estimating both retirements and depreciation, although
for the latter one must also approximate the time rate of depreciation
(straight-line, declining balance, etc.~.
When the net income-producing capacity of capital goods declines as
they age, the shortening of their remaining economic lifetimes usually
causes their present value (net stock) to decline even faster. For analysis of
capital values and rates of return, the net stock estimates in current prices
are clearly appropriate. But in real terms, the output-producing capacity of
capital goods generally does not decline much as they age. Since
productivity has to do with the relationship of output (not net income) to
inputs, a considerable body of expert opinion favors basing measures of
inputs of capital services on estimates of real gross stocks, or some variant
of them, rather than on real net capital stocks.
A variant form of real gross stock estimates may be desirable because
the annual output-producing capacity of many types of depreciable assets
probably declines somewhat with age because of increasing amounts of
downtime for maintenance and repair. Some investigators adjust the real
gross stocks of individual depreciable assets downward somewhat over
their lifetimes to reflect this phenomenon. Denison (1974) and Gorman
(1972), for example, weight real gross stocks two thirds and real net stocks
one third to arrive at an adjusted real gross stock series for purposes of
productivity estimation. Faucett (1974) has developed an efficiency-decline
function for the same purpose. If such an adjustment is not made, the
change in the age composition of depreciable assets becomes a variable of
potential importance in explaining changes in the output/capital ratio.
The issue of which real stock measures to use in productivity ratios is
not settled. Some Panel members favor a gross-of-depreciation measure,
possibly adjusted for efficiency decay, while others prefer a net-of-
depreciation measure. In practice, real gross and net stocks show much the
same trends in the U.S. business economy (see Table 6-2~. During
recessions, the gross/net ratio tends to rise.
Adjustments for Rates of Utilization
A strict analogy of capital input to labor input (hours worked) suggests
that the real gross stocks of capital should be adjusted to reflect rates of
utilization so that the adjusted stocks would approximate the movements
of "real capital hours" used. Jorgenson made an adjustment for utilization
OCR for page 135
135
Treatment of Financial Assets
When the balance sheets of all sectors of a national economy are
consolidated, financial assets and liabilities of its residents cancel, and net
worth (wealth) consists of tangible capital plus net claims on foreigners. If
net income from abroad is included in output-and it is part of the GNP-
then net foreign assets must be included in the associated inputs. These net
assets represent a net claim of domestic residence on the productive assets
of foreign economies. One approach to deflating net foreign claims in
current dollars is to use the implicit price deflator for all domestic tangible
capital stocks, on the basis that the opportunity cost of foreign investments
is the domestic investment foregone.
Similarly, for any individual domestic sector of industry, financial assets
less liabilities represent a net claim (plus or minus) on the productive
capital of other sectors or industries. It can be argued that deflated net
financial assets should therefore be added to the real tangible capital stocks
of each sector or industry. This would be appropriate if the output
measure includes the income from these assets and not appropriate if the
output measure is confined to income from the industry's own operations.
In effect, then, the real capital stock becomes the real net worth of the
sector or industry, gross of depreciation. An additional reason for this
treatment is that, at the margin, financial assets may be substituted for
physical assets, particularly inventory stocks.
Treatment of Leased Capital Goods
Firms and other organizations have always rented structures and the
associated site land from others (usually the real estate industry), and
equipment leases have become increasingly prevalent because of tax
advantages. It would be possible to treat the rental payments, deflated by a
rental price index, as a real intermediate expense. This treatment causes
changes in the output/capital ratio because of changes in institutional
practices concerning the purchase or lease of capital goods. An alternative
procedure is to shift leased capital to the industry of use in order to obtain
more meaningful output/capital ratios. If the real capital stock estimates
are the basis for capital input estimates, the rental payments can be
capitalized and the capital shifted from the lessor to the using industry
Otherwise, the real rental payments can be shifted and added to the real
cost (input) of the owned capital used in the several industries or sectors.
OCR for page 136
136
ESTIMATING REAL CAPITAL INPUT
REPORT OF THE PANEL
As discussed earlier, factor compensation may be viewed as the product of
quantities of factor services and their prices, the prices reflecting the value
of the marginal products of the various types of services. To estimate real
factor input, the quantities of services are multiplied by base-period factor
prices. For labor, either labor-hours of various categories are multiplied by
base-period average hourly compensation, or (what is approximately the
same thing) index numbers of hours worked, by category, are weighted by
the base-period proportions of labor compensation accounted for by each
category (occupational or industry groupings). Analogously, index num-
bers of real capital stocks (possibly adjusted for changes in rates of
utilization) by significant categories may be weighted by base-period
proportions of capital compensation in each category. The real capital
indexes approximate the flow of capital services (machine-hours, etc.),
while the capital compensation reflects the rental prices of the capital
services.
There are two major questions regarding real capital input: What are the
significant categories of capital stocks and services that should be
distinguished? How should the capital compensation (rental price) be
measured? For the second question, a major issue is whether capital
compensation should be measured gross or net of capital consumption
allowances (chiefly depreciation). This is closely related to the question of
whether GNP or net national product (NNP) is the preferable output
measure. Denison argues that since capital consumption is not desired for
its own sake, net capital compensation is the proper weight for capital
input, irrespective of whether the real capital stock indicator of services
provided is net or gross or some combination of the two. This is consistent
with his view (see Chapter 5) that NNP is the appropriate measure of
output, given the welfare-oriented definition of final product as consump-
tion plus additions to stock (net investment). Jorgenson points out, on the
other hand, that no deduction from labor compensation is made for
depreciation of human capital, so for the sake of consistency, capital
compensation should be measured gross. Jorgenson also emphasizes that
differences in the ratio of gross to net flows of capital inputs from different
assets mean that gross capital inputs are not proportional to capital stocks.
For example, if one considers two assets of equal original cost, one with a
useful life of 5 years and the other with a useful life of 10 years, the first
must be expected to contribute more gross input per year for its costs to be
recovered during its shorter life.
Technically, the gross compensation of each factor is the actual cash
flow from the factor services, and the estimates of depreciation deducted to
OCR for page 137
The Measurement of Inputs
137
obtain the net are, at best, somewhat arbitrary or "stylized." Gross capital
compensation is also a more stable variable through time than net capital
compensation, for which the volatile profit return is relatively more
important.
It is interesting that the gross rate of return on gross stocks is generally
quite close to the net rate of return on net stock because the ratio of
current depreciation allowances to accumulated depreciation reserves does
not differ greatly from the ratio of net income to net depreciable capital
stocks in years of a high level of economic activity. But the use of gross
rather than net capital compensation as a measure of the contribution of
the capital input obviously assigns a significantly greater weight to capital
input relative to labor input. It also makes it important to distinguish
between depreciable and other tangible assets prior to weighting.
Although Jorgenson and his associates use gross capital compensation
(including property as well as income taxes) as a control total for
estimating rental prices, they assume that the net after-tax rate of return is
the same on all types of assets within given sectors or industries. For firms,
one assumes that managers adjust the amount of investment in each type
of asset to equalize marginal rates of return. For industries, even if rates of
return to different types of assets differed somewhat, there are no data on
that basis. The corporate after-tax rate of return on all assets is imputed to
the assets of the noncorporate segment of each industry. Given the net
rates of return, prices of assets, rates of replacement, and average tax rates
in each industry, Jorgenson is able to determine the rental price of each
type of asset by industry. The types of tangible assets he distinguishes are
structures, equipment, land, and inventories. In a recent work, he uses 44
different industry groupings of assets (Gollop and Jorgenson 1980~.
In distinguishing categories of capital, Jorgenson, like Kendrick and
others, measures capital on an industry basis because rates of return differ
among industries, even in years of a high level of activity. Presumably this
reflects differing productivities of capital and entrepreneurship, although
part of the differences in rates of return may be due to temporary
disequilibria. The alternative of not weighting by industry, assuming that
capital commands equal rates of return in all industries under equilibrium
conditions, ignores the existence of differing degrees of risk and uncertain-
ty among industries, which require different rates of return to investors.
The use of industry weights also causes the aggregate capital input
measures to reflect improvements in allocative efficiency.
Gollop and Jorgenson compute capital input estimates for sectors by
weighting proportionate changes in their indexes of real capital stocks by
industry (cross-classified by asset class and legal form of organization) by
the average share of each component in sectoral property compensation in
OCR for page 138
138
REPORT OF THE PANEL
successive pairs of years. Their sectoral indexes thus reflect changes in the
composition of capital stock with respect to industry, legal form of
organization, and type of asset. Sectoral capital "quality" rises if
components with higher flows of capital input (rental price) per unit of
capital stock are growing more rapidly. Although Gollop and Jorgenson
describe such shift effects as quality change, they do not encompass
changes in quality as represented by changes in the output-producing
capacity of capital goods associated with innovation. Advances in applied
knowledge still show up in the productivity residual.
When the real capital input estimates are divided back into the gross
capital compensation estimates in current prices, an implicit index of
rental price emerges. This index reflects changes in the prices of tangible
capital assets; changes in rates of returns on assets (which can be separated
into the after-tax rate of return and the average income tax rate); changes
in rate of replacement (capital consumption); and changes in the average
rate of indirect taxation on property. In principle, the rental price indexes
could be constructed to use as deflators for capital compensation, by
category; however, the use of capital compensation as weights for the real
capital service indexes, by categories, is the more direct procedure.
STATISTICAL PROBLEMS
For some years, the Bureau of Economic Analysis has prepared annual
estimates of real gross and net stocks of structures, equipment, and
inventories in current and constant prices for the U.S. private domestic
business economy and the farm, manufacturing, and residual nonfarm
nonmanufacturing sectors. The stock of residential structures has been
estimated in the aggregate and with data permitting, a break between the
rental and owner-occupied segments. The BEA iS gradually expanding its
wealth estimates to cover all sectors and to provide more industrial detail
for the business sector. It will be very useful analytically to have industry
capital estimates that are consistent with sector tables. However, BEA does
not prepare estimates of the flow of capital inputs from the estimated gross
or net stocks.
To estimate fixed capital stocks, BEA uses the perpetual inventory
method pioneered by Raymond Goldsmith for wealth estimates. This
method involves deflating outlays on fixed capital by as many types of
capital as the data distinguish and then cumulating this constant-dollar
gross investment and subtracting real capital consumption allowances to
obtain real net stocks. The price deflators can then be used if desired to
inflate the real stocks by type to current replacement costs.
The quality of the real gross stock estimates thus depends on the
OCR for page 139
The Measurement of Inputs
·39
accuracy of the capital outlay estimates, the capital goods price deflators,
and the estimates of the lengths of life of the various types of equipment
and structures. The recommendations of the Gross National Product Data
Improvement Project (Office of Federal Statistical Policy and Standards
1977) for improving the investment estimates and expanding and
strengthening the price indexes for producers durable equipment and new
construction are directly relevant for improvement of the capital estimates.
In addition, current information on the economic lives of capital goods
and their decline in efficiency with time would be desirable, not only to
improve estimates of the capital stock but also to assist in estimating gross
flows of capital inputs from stocks of assets of different kinds. Several
studies have been made in the past by the Office of Tax Analysis and Office
of Industrial Economics of the U.S. Department of the Treasury as
background for the tax codes relating to depreciation allowances. The
earth Inventory Planning Study (U.S. Congress, Joint Economic
Committee 1974) recommended a special sample survey of discarded
assets in the prior year by type of asset by age, which would update and
supplement information from older studies.
An alternative approach to estimating stocks of fixed capital is to
revalue the book values of plant and equipment from original cost to
constant and current prices. This method has been used by Kuznets,
Creamer, and others (see, for example, Kuzuets 1961~. It involves
estimating the age composition of assets by major type and then applying
appropriate price indexes to each vintage to value it in the prices of the
base or current year. The real stocks based on book values have generally
shown much the same trends as those estimated by the perpetual inventory
method. The balance sheet data should be more accurate, however, since
they comprise assets actually on the books, and presumably firms write off
capital goods that are prematurely retired but carry those that are used
beyond their estimated economic lives.
The Wealth Inventory Planning Study recommended that estimates
based on the perpetual inventory approach be benchmarked to estimates
developed from book-value data from the various economic censuses, IRS
balance sheets, and reports of regulatory agencies. The study recommend-
ed that, where necessary, the book-value data be obtained by major
categories of equipment and structures, including certain functional
groupings that cut across industry lines antipollution, power, construc-
tion, transportation, and communications equipment. The study also
recommended that the economic census program be expanded to cover
several industrial areas that are not now included. In addition, the study
recommended that for each major industrial grouping, small sample
surveys be conducted to determine the composition of depreciable assets
OCR for page 140
140
REPORT OF THE PANEL
by type by age. This would obviously permit a more accurate revaluation
of book values to constant prices, although rough age distributions can be
made on the basis of investment series. Better capital goods price indexes
would help in the revaluations of book values and also in the deflation of
investment series used in the perpetual inventory approach.
Although the Wealth Inventory Planning Study was carried out almost
15 years ago and considerable progress has been made since then, many of
its detailed recommendations are still pertinent. They can still provide
helpful guidance to the agencies concerned with improving data and
estimates on capital. As noted in the report of the study, Measuring the
Nation's Wealth, the central role of leadership and coordination must be
provided by the Office of Federal Statistial Policy and Standards, now
located in the U.S. Department of Commerce.
As capital estimates are improved and expanded, it will be analytically
useful to have regular official estimates of output/capital ratios to
supplement the labor productivity ratios. This will make possible the
quantification of savings of capital as well as of labor per unit of output, by
industry. It will also make possible experimentation with estimates of
multi-factor productivity (see below).
Recommendation 10. The Panel recommends that the Census Bu-
reau, in its quinquennial economic censuses and annual economic
surveys, collect data on beginning and end-of-year inventories by
method of valuation. The censuses and surveys should also provide
fuller coverage and greater detail on capital outlays, book values of
invested capital (gross and net of depreciation), and on depreciation
allowances and retirements. The data should distinguish major types
of equipment by major industry. The Panel also recommends that a
sample survey of the age distribution of fixed assets, by type, and of
retirements, by age, during the previous year be taken in order to keep
current the retirement factors used in estimating capital stocks.
Recommendation 11. The Panel recommends that government agen-
cies make use of available estimates of real capital stocks to develop
ratios of output per unit of capital in order to determine the savings
that have been achieved over time in physical capital per unit of
output.
INTERMEDIATE INPUTS
Intermediate inputs are purchases of goods and services by one firm or
industry from another. Examples of intermediate goods are raw materials,
OCR for page 141
The Measurement of Inputs
141
such as coal or iron ore used in making steel and wood pulp used in
making paper, semifinished goods that require further fabrication, and
fuel. Examples of intermediate services include purchased electricity,
repair services to equipment, and purchased business services, such as
those of lawyers and auditors. At the level of the individual industry,
intermediate inputs are often a larger fraction of the value of output than
are inputs of labor, capital, and land. That is, value added can be a small
fraction of total output.3
Final output of the entire economy is produced by capital and labor
inputs, combined through some technology and organization of produc-
tion. (See Chapter 3 for a discussion of the factors of production for the
whole economy and for portions of the economy.) But for firms and for
aggregates of firms that are subsectors of the whole economy, there are
three tangible factors of production the basic factors, labor and capital,
and intermediate inputs.4
The two models that take all three factors into account for productivity
analysis and measurement are the gross output model and the value-added
model. The ways in which these models differ in their treatment of
intermediate inputs, and the resulting differences in the proper interpreta-
tion of productivity change, are discussed in Chapter 3. The important
point here is that a measure of intermediate inputs is needed for both
models. In the value-added model the value of intermediate inputs is
subtracted from gross output to obtain the numerator of the productivity
ratio. In the gross output model, intermediate inputs enter into the
denominator of the productivity ratio as a separate input.
The smaller the sector of the economy, the more important estimates of
intermediate inputs are likely to be for productivity analysis. Industry
productivity estimates can be of interest themselves or for tracing the
ejects of price changes or other disequilibrating factors through the
economy. For example, when the prices of some materials rise sharply, as
occurred recently for wood and more dramatically for coal and oil,
industries that use these materials substitute cheaper materials if possible
or they cut down on their use by reducing waste (which often involves
substituting capital or labor). The probable result of these economizing
actions is that the ratio of the value of intermediate inputs to gross output
changes or, alternatively, the ratio of net to gross output changes. A
productivity ratio with gross output in the numerator and with labor and
capital in the denominator is biased downward if the use of real
intermediate inputs is falling relative to other inputs, and it is biased
upward if their use is rising.5
In a study of the four industries that manufacture primary paper
products, Myers and Nakamura (in this volume) made estimates of real
OCR for page 142
142
REPORT OF THE PANEL
intermediate inputs, including energy, and found that the ratio of net
output to gross output fluctuated in the quinquennial censuses between
1958 and 1972. Their result is expected since these industries are intensive
users of energy. Federal and state pollution regulations that influence the
rate of installation of new capital goods also affect the choice among inputs
in these industries.
MEASUREMENT PROBLEMS
Because intermediate inputs to one firm are the output of another firm, the
problems in their measurement are conceptually the same as the problems
of measuring output discussed in Chapter 5, but in practice there are
special data and measurement problems. BEA iS the only agency that
regularly makes estimates of real intermediate inputs for the nonfarm
economy; it uses those estimates to compute annual real gross product
originating in manufacturing and mining, in gas and electric utilities, and
in railroads (that is, for about 34 percent of gross domestic product in
1977~.6 These estimates do not cover all intermediate inputs consumed in
production (see below). BEA uses its estimates, because of their limited
coverage, only to calculate an implicit deflator for the double deflation
process, and not directly to estimate real value added. (For a discussion of
double deflation, see Chapter 4.)
The BEA estimates of real intermediate inputs are made at the level of
the 85-order input-output table and are available upon request. More up-
to-date annual input-output tables are prepared by the INFORUM project of
the University of Maryland, under the direction of Clopper Almon. For
the more detailed 4-digit industries, there are not yet estimates of
intermediate inputs to complement the real gross output per hour measure
published by BES and the Census Bureau.7 In the agencies' view, the data
for making estimates of intermediate inputs are inadequate at present at
this level of industry detail.
The most complete source of information on intermediate inputs is the
quinquennial economic censuses compiled by the Census Bureau. Estab-
lishments are asked to report their consumption of materials and energy by
detailed categories in physical units and current-dollar values, although for
some portion of materials, such as those not classified by kind, the Census
Bureau only reports the dollar value. No information is collected for
services except for purchased electricity.
OCR for page 143
The Measurement of Inputs
CONCLUSIONS
143
It is unsatisfactory to know so little about the use of intermediate inputs.
Without collecting further data, it is possible to construct estimates of real
inputs of intermediate materials for 4-digit manufacturing and mining
industries, and aggregates of these industries, as Myers and Nakamura (in
this volume) demonstrate using Census Bureau data on current-dollar
value of consumption of materials and unit-value relatives or BES producer
price indexes. These estimates might be prepared by the Census Bureau in
collaboration with the BEA.
Recommendation 12. The Panel recommends that the Census Bureau
in its periodic reports on real gross output for detailed industries
based on successive quinquennial censuses, include estimates of the
real amount of intermediate purchases of materials, including energy,
for those detailed industry categories for which data are available.
Improvement of benchmark estimates of intermediate inputs require
that the Census Bureau expand its coverage of both inputs and industries.
The Census Bureau has already taken steps for the 1977 economic
censuses to expand its coverage of material inputs in manufacturing and
mining for selected industries, but the lack of information on service inputs
is a major gap in the data.
The Census Bureau currently collects information on total purchased
materials and supplies in several of the economic censuses construction,
wholesale trade, retail trade, and selected services. At this time there is not
enough detail in these censuses to permit reliable estimates of real value
added, but as a beginning for more complete coverage, data on purchases
of services should be collected for these industries as well as for
manufacturing and mining.
Recommendation 13. The Panel recommends that, in order to
improve the quality of the annual measures of industry productivity,
the Census Bureau augment the Annual Survey of Manufactures (and
other annual surveys) to include subcategories of the materials input
categories.
Recommendation 14. The Panel endorses the recommendation of the
GNP Data Improvement Project calling for the Census Bureau to
collect, as an integral part of each economic census, data on the
purchases of intermediate services as well as materials by establish-
ments.
OCR for page 144
144
REPORT OF THE PANEL
Currently, the Census Bureau collects only a lump sum value for
materials purchased, except for energy, for which it maintains its
quinquennial breakdown. More detail on materials in the annual survey
would permit more accurate annual estimates of real intermediate
purchases for 4-digit and more aggregated industries. These annual
estimates, which might be made by BEA, the Census Bureau, or private
researchers, would give a clearer indication of what is happening in the
economy as the result of changes in material prices or other changes
between census years.
There is nothing comparable to the Annual Survey of Manufactures
(ASM) for the sectors covered by the other economic censuses, which do
not collect data on detailed materials even quinquennially. Since manufac-
turing is still a large part of the total economy, 24 percent in 1977, and
since so many data are already collected for this sector, more annual detail
for manufactures is potentially the most useful for productivity measure-
ment and research.
MULTI-FACTOR PRODUCTIVITY MEASURES
By combining two or more measures of inputs (capital, labor, and
intermediate purchases) by some appropriate weighting scheme and
dividing this combined measure of inputs into a measure of output, one
can obtain a measure of multi-factor productivity. Changes over time in
this ratio show the savings in the use of inputs per unit of output that are
brought about by technical change and other sources of productivity
growth.
Multi-factor productivity measures are useful in a number of ways.
They help in understanding changes in output per unweighted labor-hour.
If the growth rate in the multi-factor measure is less than that of the
single-factor labor-hour measure, we know that some of the increase in the
labor-hour measure is due to increases in the amount of other inputs per
unweighted labor-hour. Multi-factor measures are also useful in monitor-
ing and studying the sources of output growth other than those resulting
from growth of inputs, including technical change, managerial innova-
tions, and improved resource allocation. Changes in multi-factor produc-
tivity measures are due entirely to these non-input sources.
Recommendation 15. The Panel recommends that the Bureau of
Labor Statistics experiment with combining labor and other inputs
into alternative measures of multi-factor productivity.
OCR for page 145
The Measurement of Inputs
NOTES
145
1. It is not always clear in which category of inputs a particular factor
belongs: for example, there are discussions of education both in this and the
following chapter.
2. The employment concepts used in the establishment and household surveys
are not identical. In the household survey each person is counted only once in the
establishment and industry where he or she worked the most hours during the
survey reference week. In the establishment survey, a worker with more than one
job in the reference week will be counted once in each establishment in which he or
she worked.
3. For estimates of changes in intermediate inputs by 2-digit industries, see
Gollop and Jorgenson (1980~.
4. Note that there are no official productivity estimates for the entire U.S.
economy. Even the BES measure for the private business sector excludes some
portions of the economy, general government and not-for-profit institutions, from
which the private business sector receives intermediate inputs. General government
is the largest of the two omitted sectors, and perhaps the inputs of government
services, especially if adjusted for quality, are important enough to consider. But
public service inputs are more likely to be of interest at a subnational level, that is,
for cities and regions where the quality of roads, water, and other locally provided
public services may affect production.
5. A labor productivity ratio with gross output in the numerator would also be
biased when the use of intermediate inputs is changing.
6. The U.S. Department of Agriculture estimates and publishes real interme-
diate purchases as part of its multi-factor input measure for farms. The purchases
are broken down into detailed categories of goods (fertilizer, seed, etc.) and
services.
7. The BEA plans to begin deflation of materials at the 4-digit level in
constructing gross product originating by major sector. These estimates may some
day be available on request even if they are not published.
Representative terms from entire chapter:
intermediate inputs
