Measurement and Interpretation of Productivity (1979) / Chapter Skim
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3 Basic Productivity Concepts: Meaning and Measurement
3 Basic Productivity Concepts: Meaning and Measurement
Pages 35-49
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From page 35... ...
This chapter develops the concept of productivity more systematically within the framework of production theory, by means of empirical production functions. It explains how partial productivity and multi-factor productivity may be measured within the framework of the economic accounts.
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From page 36... ...
Even though the assumption of competitive markets is often not true, analysts prefer to use objective market prices as weights rather than to attempt adjustments that inevitably involve subjective judgments. In practice, it is more convenient to weight index numbers of inputs by their base-period percentage shares of total costs rather than by physical units of each type of input by unit compensation of price, which gives the same result.
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From page 37... ...
In technical jargon, changes in partial productivity reflect movements along production functions as factor proportions are changed as well as shifts in production functions due to technological change. When relative input prices change as a result of changing supply and demand forces in factor markets, managers alter input proportions in order to minimize unit cost given the changed set of relative prices.
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From page 38... ...
First, the exclusion of intermediate inputs from industry measures restricts the generality of the basic model of production, since in principle it is possible to substitute a primary input for a secondary one and vice versa. Second, productivity measures based on total output and inputs explicitly indicate the savings achieved over time in intermediate products, including energy per unit of output as well as the savings in primary factor inputs.
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From page 39... ...
MEASURES OF PARTIAL PRODUCTIVITY Historically, partial productivity measures, particularly ratios of output to the associated labor inputs, were the first type of productivity measures to be developed. Beginning in the 1880s, occasional studies of output per unit of labor input were prepared in the Bureau of Labor and its successor agency, the Bureau of Labor Statistics (BLS)
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From page 40... ...
In the U.S. economy and in almost all of its industry divisions, nonlabor factor inputs have risen significantly faster than labor inputs.
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From page 41... ...
The general method used to eliminate the eject of shifts of production among industries or products on partial productivity ratios is to weight the component output measures by their base-period requirements for the input to which output is being related. Where possible, BES in its program for measuring productivity in detailed industries weights outputs by unit labor requirements.
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From page 42... ...
The relationship of national product to factor costs, when expressed in constant product prices and constant factor prices, respectively, provides a measure of changes in the efficiency with which resources are used in production.3 Finally, in the 1950s there was an upsurge of interest in the development of production function theory and its application to the empirical analysis of multi-factor productivity. Statistical production functions for manufacturing had first been developed by Charles W
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From page 43... ...
private domestic economy.4 The basic concept of multi-factor productivity underlying this work is simple: multi-factor productivity = 0~+Q bK In this formulation the capital letters denote index numbers: Q is the real product of the sector (in eject, a price-weighted quantity aggregate) ; L is labor input, measured as labor-hours in component industries weighted by base-period average hourly labor compensation; K is capital input, assumed to change proportionately to real capital stocks in the various industries, weighted by base-period rates of return; and a and b are the percentage shares of labor and of capital (including land)
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From page 44... ...
Following Solow's initial work, there has been considerable further development of the production function approach using both the CobbDouglas function and other functions involving different concepts of the production process.7 The Cobb-Douglas formulation assumes competitive markets, constant returns to scale, neutral technological change, and constant coeffcients equal to unity, which mean constant shares of the factors in national income. Other formulations allow for economies of scale, variable elasticities of substitution between the factors, and "biased technological change," which means that changing technology may increase the demand for one factor relative to another.
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From page 45... ...
The goods or services whose output has grown most tend to have lower relative price weights in a recent period, so their aggregate growth is less than the growth of an aggregate that uses the higher relative price weights of an earlier period for the randily growing outputs. Since this phenomenon applies both to aggregates of output and of inputs, the aggregation bias affects productivity ratios less than it affects the separate variables.
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From page 46... ...
It is generally believed that market price weights are appropriate for welfare comparisons but that unit factor cost weights are more appropriate for production and productivity comparisons since they indicate the relative importance of products in terms of resource inputs and costs (Hicks 1940~. As a practical matter, however, it is a laborious and uncertain process to adjust market prices of all output so as to remove the erects of indirect business taxes minus subsidies.
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From page 47... ...
In operational terms, the services may be viewed as time rates of use of the real stocks, with the labor-hours and real capital hours weighted by their base-period prices (average hourly compensation) , which presumably reflect their relative marginal productivities in the base period.
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From page 48... ...
The first concerns the detail in which the inputs are defined and measured. If inputs are measured and weighted by detailed industry groupings and if the average base compensation for equivalent inputs differs by industry, then changes in input proportions affect the measured changes in aggregate input but do not affect the measured changes in productivity.
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From page 49... ...
8. If one replaces the translog production function by a homogeneous quadratic function, the appropriate indexes are Fisher's ideal index numbers.
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