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1 1 (January 3, 2023)

handle is hein.crs/govejzv0001 and id is 1 raw text is: Congressional Research Service Informing 1h IegIsative debate since1914 Introduction to U.S. Economy: Productivity What Is Productivity? Productivity is broadly defined as the ratio of output 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. 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. 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). Labor productivity is defined as the ratio of real (inflation- adjusted) output per labor hour. The most commonly cited measure of labor productivity is for the nonfarm business sector. Nonfarm business sector output is defined as gross domestic product excluding outputs from farms, general government, nonprofit institutions, paid employees of private households, and rental value of owner-occupied dwellings. Estimates of labor productivity, across several sectors and industries, are released quarterly by BLS. Growth in labor productivity depends upon how real output and hours worked change in relation to each other and is an important factor in the overall economy. 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. BLS releases estimates of MFP annually. 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. Likewise, increases in the capital stock would boost labor productivity but not MFP. Measurement Complications Measuring outputs and inputs, and thus productivity, involve challenges. Adjusting nominal output figures for inflation can be complicated, especially during periods of rapid technological progress when 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. Updated January 3, 2023 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 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 Productivity growth is a primary driver of long-term economic growth and improvements in living standards. As productivity increases, society can produce more goods and services with the same level of resources, which, all else equal, 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, which contributes to productivity growth, 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. Human Capital Improvements in the abilities and efficiency of individual workers, often referred to as increases in human capital, allow each individual worker to produce more goods and services per hour, and therefore increase labor productivity. Increases in human capital generally result from increased education, work experience, on-the-job training, and so on.

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