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1 [1] (November 12, 2019)

handle is hein.crs/crsitrpd0001 and id is 1 raw text is: Ir CongressiEnal Reseacyh Service Infrmirng th Iegislive debate since 1914 Introduction to U.S. Economy: Productivity What Is Productivity? Productivity is broadly defined as the ratio of outputs to inputs. With respect to the economy, productivity measures how efficiently goods and services can be produced by comparing the amount of economic output with the amount of inputs (labor, capital, etc.) used to produce those goods. Productivity Measures There are two prominent measures of economic productivity: labor productivity (also known as output per hour) and multifactor productivity (also known as total factor productivity), both of which are produced by the Bureau of Labor Statistics (BLS) in the United States. Labor productivity is defined as the ratio of the real (inflation-adjusted) value of output from the business sector to the total number of hours worked, or real output per labor hour, as shown below. Business sector output is defined as gross domestic product excluding outputs from general government, nonprofit institutions, paid employees of private households, and rental value of owner-occupied dwellings. Estimates of labor productivity are released quarterly by BLS. BLS also produces a nonfarm business labor productivity measure that further excludes output from the farm sector. Growth in labor productivity can be estimated by calculating the difference between growth in real output and growth in hours worked. Business sector real output Labor Productivity n Total num'b1er of hours worked Multifactor productivity (MFP) is an alternative measure of productivity that compares real private business sector output to the level of combined inputs (labor and capital) used to produce goods and services. More specifically, MFP actually measures the portion of output that is unexplained by the value of inputs, providing a sense of how efficiently firms are using and combining inputs in the production process. Estimates of MFP are released annually by the BLS. BLS also produces a private nonfarm business measure of MFP that further excludes output from the farm sector. MFP, unlike labor productivity, differentiates among workers with respect to educational attainment and work experience. Therefore, changes in labor force composition that increase the workers' efficiency (e.g., increased work experience) would not be registered as an increase in MFP, but would be registered as an increase in labor productivity. Measurement Complications When attempting to measure productivity, a number of complications arise with the measurement of both outputs and inputs. Adjusting nominal output figures for inflation to Updated November 12, 2019 produce estimates of real output can be complicated. This is especially true during periods of rapid technological progress where the introduction of new products and services and improvements in their quality complicate measuring inflation. Depending on the construction of the price index, estimates of real output may understate or overstate actual real output. Gaps in the data available to BLS also complicate the measurement of labor inputs. The primary source of labor data only includes figures for total number of employees and average weekly hours of production and nonsupervisory workers. BLS then has to estimate the number of hours worked by nonproduction and supervisory workers. Additionally, labor hour data for the self- employed and unpaid family workers must be forecasted from IRS data that lags by about three years. BLS faces additional challenges when determining the value of capital inputs for MFP. To calculate MFP, BLS uses the total value of the services provided by productive capital in the economy, rather than the amount of physical capital. BLS uses a number of assumptions to first determine the level of productive capital in the economy by applying depreciation schedules to physical capital based on its age. Then BLS must determine the value of the services provided by that level of capital. Estimates of MFP are likely less precise than estimates of labor productivity due to the additional assumptions incorporated into estimating MFP. Importance of Productivity Growth Policymakers are interested in productivity because productivity growth is generally the most consequential determinant of long-term economic growth and substantive improvements in individual living standards. As productivity increases, society can produce more goods and services with the same level of resources, which increases incomes and access to goods and services, including additional leisure time. Policymakers are also interested because government policies, institutions, and the regulatory environment can impact productivity growth. For example, strong and enforceable patent laws likely encourage companies to invest more in research and development because the laws enable companies to profit from their new technologies and products. Sources of Productivity Growth Growth in output per hour of labor can be achieved through three different sources: improvements in the quality of workers (i.e., human capital), increases in the level of physical capital, and technological progress. https:!crsreports cong --sg

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