Measurement and Interpretation of Productivity (1979) / Chapter Skim
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5 The Measurement of Output
5 The Measurement of Output
Pages 88-121
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From page 88... ...
THE OUTPUT MEASURE DEFINING THE ACTIVITIES TO BE INCLUDED A productivity ratio, whether labor productivity, capital productivity, or multi-factor productivity, is intended to identify shifts in a production function linking output to one or more inputs.) The measurement of output for use in productivity ratios should be based on criteria that minimize spurious changes in productivity not caused by shifts in the production function.
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From page 89... ...
Whatever the merits of such welfare-oriented approaches to the measurement of total economic well-being, it would be inadvisable to incorporate most of the proposed changes in aggregate productivity measures because of the difficulty of meeting the required standard of consistency in the matching of output and input.2 The point of departure for the measurement of aggregate productivity is a labor input concept that includes total hours sold on the market or worked to produce market goods and excludes time spent at home or time spent in voluntary leisure and charitable activities. By hours sold on the market, we mean the hours of wage and salary workers.
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From page 90... ...
Since the use of labor input as an output measure usually reflects practical or philosophical difficulties of measuring output, rather than a "true" absence of productivity change, these activities are best excluded from aggregate productivity measures. Otherwise, the rate of change of aggregate productivity will be biased toward zero, and the level of aggregate productivity will be biased toward constancy.
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From page 91... ...
Although expenditures on single-family houses and public roads are deflated by relatively good price indexes, some of the remaining portions of the construction industry are still deflated by input-cost price indexes, which are a weighted average of wage rates and materials costs that make no allowance for productivity change in construction activity.4 As indicated in the first and second rows of Table 5-2, aggregate productivity growth appears to have slowed down substantially less between 1947-1967 and 1967-1972 for the private business sector, excluding the construction industry than for the total private business sector. The major contribution of construction to the apparent slowdown in the growth of productivity is shown directly in the bottom half of Table 5-2.
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From page 92... ...
1,700.1 TOTAL: Gross national producta Total included in productivity measure Included in the Bureau of Labor Statistics' productivity measure for the private business sector, output not measured by labor input Included in productivity measure, output measured by labor inputb Personal consumption expenditures Producers' durable equipment Structures Total excluded from productivity measure Private business sector, excluded from productivity measure C (owner-occupied housing) Other sectors excluded from productivity measured Government Rest of the world Households and institutions Statistical discrepancy ,336.1 ,274.2 61.9 43.6 2.1 16.2 364.0 96.4 267.6 92.5 14.4 56.5 4.2 aTable 1 .7 in Survey of Curren t Business July 1 9 7 8.
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From page 93... ...
It is easier to state the platitude that the government agencies should improve their measures of real output for activities in which labor input currently serves as a proxy than to suggest specific ways to improve the treatment of individual industries. For instance, it can be argued that the output of proprietary schools should be measured by student-hours or number of graduates rather than by the input of teacher-hours and secretary-hours.
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From page 94... ...
Nevertheless, current criteria for the exclusion of sectors from aggregate productivity measures are generally sound. Imputed rent on owner-occupied housing is properly excluded from the GNP before productivity ratios are calculated, because there is no associated marketoriented labor input (see Table 5-1~.
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From page 95... ...
It is the television sets, not the metal or machine tools used up in production, that is the objective of the production process.; Proponents of the gross-of-depreciation approach, on the other hand, do not believe that productivity measures should be based solely on a welfare criterion. A portion of the labor input included in the denominator of the productivity ratio is engaged in the manufacture of capital goods to replace those goods that are wearing out or becoming obsolete.
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From page 96... ...
It would probably be more desirable to exclude research employees from private labor input than to attempt to add research output to aggregate private real output. Education is another prime candidate for capitalization as an investment good.
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From page 97... ...
We do not want the shift of a worker from an assembly line building automobile transmissions to an assembly line building catalytic converters to cause a sudden drop in measured productivity, as it would if all labor input in the automobile and automobile parts industries was included in the input denominator of the productivity ratio but production of converters was excluded from the output.9 Business expenditures for antipollution and other required devices are at present treated in exactly the same way because the price deflators used are developed by the same methods. However, in the case of business, the shift of one dollar of gross investment from normal "productive" types of investment to "unproductive" government-mandated investment will cause future measured output to be lower than otherwise.
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From page 98... ...
If changes in the value of products that are actually price changes are treated instead as quantity or quality changes, the growth of productivity and aggregate output are overstated. On the other hand, if value changes that actually represent quantity or quality changes are treated as price changes, the growth in productivity and aggregate output are understated.
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From page 99... ...
Many quality changes do not involve the inclusion of former options as standard equipment, but are entirely new features. In some cases, producers are asked to estimate the added cost of a product change.
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From page 100... ...
A reduction in the price of gasoline that makes automobiles less expensive to operate is not a type 3 quality change, but the redesign of an engine to improve fuel efficiency iS.~4 Although BES has steadily improved the thoroughness with which it adjusts its price indexes for type 1 quality change, it has devoted little attention to types 2 and 3. If quality changes of types 2 and 3 occur frequently but are not measured by the BES, the aggregate rate of price increase in the private economy is overstated and the corresponding growth rates of output and productivity are understated.
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From page 101... ...
Although the discussions often read as though theoretical or philosophical points were at issue, in fact most of the opposition to suggestions that quality changes of types 2 and 3 be measured appears to boil down to a question of feasibility, not philosophy.~5 The current position of BES begins by distinguishing between input and output price indexes. BES would like to measure prices using the input criterion but is forced by measurement problems to use the output criterion.
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From page 102... ...
The terminology of the distinction between input and output price indexes is unfortunate, because there appears to be an implication that the output criterion should be used for the measure of real gross output (real GNP)
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From page 103... ...
First, the computer manufacturer has invested its own funds in research and development, using a substantial number of employees; the productivity of these research employees would be measured by the increase in real output of computers if the declining price of computer services were adequately measured. To treat the price of computers as unchanged implies that the research effort is wasted, because there is no extra real GNP to show for all the labor hours invested in product improvement in the period during which the computers are produced.
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From page 104... ...
A similar belief in the infeasibility of measuring the value of quality changes when value and cost diverge appears to lie behind Denison's opposition to the correction of price indexes for type 2 quality changes. Denison (1957, p.
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From page 105... ...
The sits reliance on estimates of the change in manufacturing cost associated with quality changes and Denison's opposition to attempts to measure quality changes of types 2 and 3 thus come down to a question of feasibility. When closely examined, however, the differences between the proponents and opponents of more comprehensive adjustments for quality change involve matters of degree.
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From page 106... ...
For consumer home appliances, there have been extensive unmeasured type 3 quality changes in the form of improvements in energy efficiency (refrigerators, room air-conditioners) and reduced maintenance and repair requirements (color television sets, automobiles)
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From page 107... ...
PROBLEMS IN MEASURING TYPE 1 QUALITY CHANGES Lateness in Introducing New Products A general phenomenon that affects the accuracy of all price measurement programs, both current and prospective, is the product-price cycle. In the early stages of product development, the price of many products declines gradually, as a result of the improved efficiency of workers through learning-by-doing and of the spreading of fixed cost (both research and administrative)
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From page 108... ...
The problem of the late introduction of products might seem to be absent in the deflators used by BEA to convert nominal expenditures into the real output numerator of productivity ratios because BEA'S procedures allow the weight of a major category, e.g., food in the consumer expenditures or engines and turbines in the producers' equipment, to shift in response to changes in current expenditures. However, the deflators for these major categories are made up of individual product-price indexes combined using fixed Laspeyres weights.
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From page 109... ...
This second interpretation of bias in the BES indexes has an important implication for productivity measurement; the apparent finding that the bias was greater in the early postwar years than in the more recent period indicates that the actual growth of output and productivity may have decelerated between the 1947-1957 and 1957-1970 periods as compared with the growth rates recorded in the official series. This implication is valid only if the apparent finding of greater bias in the earlier years, based on research for a relatively small segment of economic activity, can also be assumed to be valid for the economy as a whole.
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From page 110... ...
By far the most important component of GNP that is not covered by the BES price index program is the output of structures. The BEA deflators for structures rely on indexes from a variety of government agencies and private contractors; of these the most important is the Census Bureau's index of the prices of single-family homes based on a hedonic regression analysis of actual sales price data.
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From page 111... ...
This leaves the omission of quality change of types 2 and 3 as the main potential source of error in the current price indexes.23 PROBLEMS IN MEASURING TYPE 2 QUALITY CHANGES The extension of quality adjustments to changes of types 2 and 3 does not involve any revolution in existing techniques of measurement but rather different criteria for the application of existing techniques. The basic method of specification pricing used to adjust for resource-using quality changes can be extended to "costless" quality changes.
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From page 112... ...
If 1979 models are higher priced than 1978 models, holding constant their other characteristics, then the estimated coefficient on the year of production will indicate the average increase in quality-adjusted price between 1978 and 1979.24 If the independent variables in the regression equation are the performance attributes of value to the user, then the hedonic technique corrects for quality changes of types 1 and 2 simultaneously. For instance, an improvement in the acceleration of an automobile might be achieved by a resource-using increase in the size of the engine, or by a "costless" replacement of a conventional ignition system by an electronic ignition system made possible by technical innovation.
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From page 113... ...
lIlCreaSe ill GNP. PROBLEMS IN MEASURING TYPE 3 QUALITY CHANGES The contribution of durable goods to output should depend on their value to users, which in turn depends on the net stream of benefits they provide: that is, the gross flow of services adjusted for operating costs.
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From page 114... ...
Design changes that alter maintenance requirements should also be taken into account. The reduced frequency of maintenance and downtime for motor vehicles, electricity generating equipment, color television sets, and other products has been documented, although the information required to adjust for such savings is inherently more difficult to obtain and interpret than engineering data on fuel consumption.
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From page 115... ...
The old index for rotary electrics was linked to the new index for electronic calculators, so that the PA reflected no price change rather than the 80-percent price decrease that actually occurred. Using the criterion that the old and new varieties should have been treated as the same product because they provided the same services to the user, the 80-percent price reduction could be retrospectively incorporated into an alternative historical price index.
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From page 116... ...
They leave unmeasured, however, quality changes in goods or services that have yielded time savings to users. Such changes include the faster speed of jet aircraft, the electronic calculator, the reduction of scheduled maintenance requirements of motor vehicles, and the provision of free check-cashing services by supermarkets.
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From page 117... ...
Many categories of nondurable goods are generally agreed to be relatively free of unmeasured quality change, including most types of food, beverages, shoes, toilet articles, publications, flowers, and petroleum products. Quality changes in the form of new and more durable fabrics have been common in the clothing and semidurable household furnishing categories (with a 1976 value of $74.7 billion)
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From page 118... ...
Because they are produced by market-oriented labor input, the production of national defense and public safety, along with commuting and other regrettables, should not be excluded from the output universe. The requirement that output be produced by market-oriented labor input is a necessary but not sufficient condition for inclusion in the numerator of the productivity ratio.
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From page 119... ...
seek to improve their existing price indexes and to develop auxiliary measures of price change. These new auxiliary measures should take into account more adequately the types of quality change that are not now measured.
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From page 120... ...
9. While the current treatment of government-mandated devices makes sense for productivity measurement, it has the unfortunate consequence of excluding from the price indexes important changes in specifications for which consumers are not generally willing to pay and which they perceive as increasing price rather than quality.
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From page 121... ...
25. For example, the decision to treat safety and antipollution devices on automobiles as a change in quality rather than price and the decision to ignore all quality changes involved in the "downsizing" of automobiles in the period since 1976 are arguable.
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