Measuring Output Measuring Output and Productivity in and Productivity in Service-Producing Service-Producing

IndustriesIndustriesBarry BosworthBarry Bosworth

Services are Services are underrepresented in underrepresented in

national statistical systemsnational statistical systems Focus on goods production and Focus on goods production and

exportablesexportables Socialist systems emphasized Gross Socialist systems emphasized Gross

Material ProductMaterial Product U.S statistical system created during U.S statistical system created during

wartime to monitor production of wartime to monitor production of defense goodsdefense goods

Services are often difficult to measure Services are often difficult to measure – hard to define unit of output.– hard to define unit of output.

Reasons for Current Reasons for Current InterestInterest

Major source of employment growthMajor source of employment growth Important part of infrastructure to support Important part of infrastructure to support

manufacturing.manufacturing. Primary user of ITC capital.Primary user of ITC capital. Important area of recent acceleration in Important area of recent acceleration in

productivity (ITC related) in some countries.productivity (ITC related) in some countries. General Agreement on Trade in Services General Agreement on Trade in Services

(GATS) increased interest in performance of (GATS) increased interest in performance of services.services.

Significant influence on competitiveness for Significant influence on competitiveness for emerging business centers in global production emerging business centers in global production system.system.

I. Measurement I. Measurement FrameworkFramework

gross output (sales), gross output (sales), value added (labor and capital)value added (labor and capital)

Capital stockCapital stock employment employment

purchased inputspurchased inputs Price deflators for gross output and Price deflators for gross output and

inputsinputs

General shift away from General shift away from emphasis on value addedemphasis on value added

Gross output aligns better with production Gross output aligns better with production function framework.function framework.

Consistent with double-deflation of value Consistent with double-deflation of value added for price change.added for price change.

Easy to link to input output-tablesEasy to link to input output-tables Identify changing patterns of outsourcing.Identify changing patterns of outsourcing.

Common for goodsCommon for goods Increasingly important for services (a la India).Increasingly important for services (a la India).

Need output, rather than value added, to Need output, rather than value added, to make international comparisons of make international comparisons of productivity.productivity.

Industry-level price Industry-level price indexes indexes

Services previously excluded from industrial Services previously excluded from industrial price indexes of many countries .price indexes of many countries .

Voorburg group (UN)Voorburg group (UN) Effort to share methodology and lessons among Effort to share methodology and lessons among

national statistical officesnational statistical offices Rapid improvements in methodologyRapid improvements in methodology

Still, many industries where the price Still, many industries where the price deflators are based on input prices – deflators are based on input prices – effectively ruling out the possibility of effectively ruling out the possibility of measuring productivity changes.measuring productivity changes.

Alternative use of broad price index captures Alternative use of broad price index captures general price inflation, but misses relative general price inflation, but misses relative price changes price changes

Industry EmploymentIndustry Employment

Detailed industry data normally Detailed industry data normally requires an establishment measure requires an establishment measure of employment.of employment.

Household surveys do not provide Household surveys do not provide accurate estimates of employment at accurate estimates of employment at the level of detailed industries.the level of detailed industries.

Thailand has only a limited set of Thailand has only a limited set of periodic industry surveys, and no periodic industry surveys, and no employment survey.employment survey.

Industry Capital StockIndustry Capital Stock Most countries lack information on Most countries lack information on

investment expenditures at industry investment expenditures at industry level.level.

Capital stock computed in aggregate Capital stock computed in aggregate based on information from producers.based on information from producers.

Allocate stock in proportion to historical Allocate stock in proportion to historical cost information from establishment cost information from establishment balance sheetsbalance sheets Historical costs can be quite different than Historical costs can be quite different than

current replacement costcurrent replacement cost Limited information on type of capitalLimited information on type of capital

The United States Industry The United States Industry Data SetData Set

Output, value added, and purchased Output, value added, and purchased inputsinputs nominal and constant valuenominal and constant value Covers about 80 industriesCovers about 80 industries

Consistent with the national accounts.Consistent with the national accounts. Benchmarked to I-O tables at 5-year intervals.Benchmarked to I-O tables at 5-year intervals.

Supported by 5-year economic censusesSupported by 5-year economic censuses Annual surveys for major industriesAnnual surveys for major industries

Surveys expanded to cover most service Surveys expanded to cover most service industries. industries.

Value of Industry Data Value of Industry Data SetSet

Identify the industry sources of Identify the industry sources of aggregate productivity growth.aggregate productivity growth. Recent U.S. growth concentrated in Recent U.S. growth concentrated in

services— those that make major use of ITC services— those that make major use of ITC capitalcapital

Retail and wholesale trade, commercial and Retail and wholesale trade, commercial and investment banking, information processing investment banking, information processing and publishing, and telecommunications.and publishing, and telecommunications.

Capture effects of outsourcing and Capture effects of outsourcing and offshoring.offshoring.

Thailand: Industry dataThailand: Industry data

Thailand has measures of gross output, Thailand has measures of gross output, value added, & purchased inputs for many value added, & purchased inputs for many industries.industries. Used to construct double-deflation estimates of Used to construct double-deflation estimates of

value added.value added. Industry detail exists for some service industries.Industry detail exists for some service industries.

Air transport, communications, and parts of finance.Air transport, communications, and parts of finance. Output information for some industries is limited to Output information for some industries is limited to

value added.value added.

Information on employment and capital Information on employment and capital stock limited to broad industry groupsstock limited to broad industry groups

II. Productivity II. Productivity MeasurementMeasurement

Traditional emphasis on inter-Traditional emphasis on inter-temporal growth rates,temporal growth rates,

Shift of focus to multifactor analysis Shift of focus to multifactor analysis using gross output, instead of two-using gross output, instead of two-factor value-added framework. factor value-added framework.

Recent interest in cross-country Recent interest in cross-country comparisons of productivity levels.comparisons of productivity levels.

Basic Growth IdentityBasic Growth Identity

Growth in value added as a function of Growth in value added as a function of growth in factor inputs and TFPgrowth in factor inputs and TFP

ssi i is factor income share is factor income share Assumes competitive markets where price is Assumes competitive markets where price is

equal to marginal productequal to marginal product K = index of capital servicesK = index of capital services L*= quality adjusted index of labor inputL*= quality adjusted index of labor input

TFPLdsKdsQd lk ln)ln()ln(ln *

Labor Quality: two Labor Quality: two measuresmeasures

Option 1: Shifts in labor compositionOption 1: Shifts in labor compositionEducation, gender, experienceEducation, gender, experience

vvii = income share = income share Option 2: Index of educational attainmentOption 2: Index of educational attainment

a = return (7%), s = years of schoolinga = return (7%), s = years of schooling

i

ii LdvLd lnln *

LeL as*

Expanded Growth Expanded Growth AccountsAccounts

Growth in output as a function of growth Growth in output as a function of growth in three inputs and MFPin three inputs and MFP

Q = gross outputQ = gross outputK = capital servicesK = capital servicesLL* * = labor= laborM = purchased inputsM = purchased inputs

ssii = share of capital or labor income in value added = share of capital or labor income in value added

vvii = share of purchased inputs in gross output = share of purchased inputs in gross outputShares are averaged over two periods to construct Shares are averaged over two periods to construct

chained indexeschained indexes

MFPdMvdKdsLdsvQd kl lnlnlnln1ln *

Two Versus Three-factor Two Versus Three-factor ModelsModels

Expanded approach of value for detailed Expanded approach of value for detailed industriesindustries Insights into outsourcingInsights into outsourcing More closely related to production processMore closely related to production process But, it involves significant amount of double But, it involves significant amount of double

counting of purchased inputs in process of counting of purchased inputs in process of aggregationaggregation

Two-factor value-added framework more Two-factor value-added framework more useful for total economy and major sectorsuseful for total economy and major sectors Goods-producing industriesGoods-producing industries Service-producing industries.Service-producing industries.

III. Cross-national III. Cross-national Comparisons of Comparisons of

Productivity LevelsProductivity Levels Important complement to more Important complement to more

standard focus on productivity growth.standard focus on productivity growth. Most meaningful interpretation of term Most meaningful interpretation of term

“competitiveness.”“competitiveness.” Useful to study patterns of Useful to study patterns of

convergence or divergence.convergence or divergence. Valuable benchmark of performance of Valuable benchmark of performance of

critical industries relative to trade critical industries relative to trade partners.partners.

Basic Measurement Basic Measurement IssuesIssues Cross-border comparisons of productivity add an Cross-border comparisons of productivity add an

extra dimension of complexity because of need to extra dimension of complexity because of need to convert to a common currencyconvert to a common currency

How to define relative price term?How to define relative price term? Commercial exchange rate for traded goods, Commercial exchange rate for traded goods,

but even then prices will vary because of but even then prices will vary because of Strength of competitionStrength of competition Lags in responding to exchange rate Lags in responding to exchange rate

changeschanges

ij

iu

iu

iu

ij

ij

iju PP

LY

LY

RLP

Basic Measurement Basic Measurement Issues (2)Issues (2)

In non-traded industries no reason to believe that In non-traded industries no reason to believe that relative prices will be even close to exchange rate.relative prices will be even close to exchange rate.

National PPPs are averages of all prices at final National PPPs are averages of all prices at final demanddemand Appropriate for comparing total GDPsAppropriate for comparing total GDPs For industry comparisons, need producer prices at For industry comparisons, need producer prices at

individual industry levelindividual industry level Industry PPPsIndustry PPPs

International Comparison Program includes very few International Comparison Program includes very few service-producing industries (Thailand is a member).service-producing industries (Thailand is a member).

Range of industry PPPs is very broad for emerging Range of industry PPPs is very broad for emerging markets.markets.

Basic Measurement Basic Measurement Issues (3)Issues (3)

Physical quantity measures of outputPhysical quantity measures of output Avoids problem of price conversion, butAvoids problem of price conversion, but Limited to homogeneous product groupsLimited to homogeneous product groups Used in transportation and communicationsUsed in transportation and communications

Physical quantities could be used to Physical quantities could be used to construct industry PPPs.construct industry PPPs.

Could we assume that PPPs are the same Could we assume that PPPs are the same for related industries?for related industries?

Value Added versus Gross Output Value Added versus Gross Output comparisonscomparisons Need a conversion factor for purchased inputs.Need a conversion factor for purchased inputs. Energy in transportationEnergy in transportation

BankingBanking

Two suggested approachesTwo suggested approaches Transactions measures of physical output (U.S.)Transactions measures of physical output (U.S.)

ATM transactionsATM transactions Teller customersTeller customers Credit card transactionsCredit card transactions Loan transactionsLoan transactions

Output proportionate to loan and deposit stocksOutput proportionate to loan and deposit stocks Used in AustraliaUsed in Australia Appear to underestimate output growth in the United Appear to underestimate output growth in the United

States.States. ICT innovations should have sharply reduced price ICT innovations should have sharply reduced price

of transactions, raising output.of transactions, raising output.