Multifactor productivity is designed to measure the joint influences of technological change, efficiency improvements, returns to scale, reallocation of resources, and other factors on economic growth while allowing for the effects of capital and labor. Multifactor productivity, therefore, differs from the labor productivity (output per hour worked) measures that are published quarterly by BLS since it includes information on capital services and other data that are not available on a quarterly basis. Additionally, multifactor productivity measures for the private business and private nonfarm business sectors account for shifts in the composition of labor. Estimates of labor composition are not included in the quarterly labor productivity measures.
In private business and private nonfarm business, the change in multifactor productivity reflects the difference between the change in real gross domestic product for the sector and the change in labor and capital inputs engaged in the production of this output. The output measures for private business and private nonfarm business are similar to the indexes of output for business and nonfarm business used in the quarterly labor productivity measures, differing only in that the output of government enterprises is excluded.
A change in multifactor productivity reflects the change in output that cannot be accounted for by the change in combined inputs of labor and capital. In contrast, a change in labor productivity reflects the change in output that cannot be accounted for by the change in hours of all persons engaged in production.
Private business sector
Over the last 20 years, capital services have grown more rapidly than hours in private business, and the skills of workers - as measured by their age and education, which implicitly measure their work experience - also have risen over this period. These shifts toward more capital intensive production and toward workers with more human capital have supplemented labor productivity growth, usually allowing output per hour to grow at a faster rate than multifactor productivity.
Multifactor productivity rose 0.4 percent in 2007. The multifactor productivity gain in 2007 reflected a 2.1-percent increase in output and a 1.7-percent increase in the combined inputs of capital and labor.
Continuing the relatively slow growth of the last six years, capital services grew by 2.7 percent. Labor input rose 1.1 percent, less than half of the growth of the previous year, 2.4 percent. Hours rose 0.5 percent, a sharp drop from 2.1 percent of the previous year. The capital-labor ratio (capital services per hour of all persons) increased by 2.3 percent, the highest rate of growth since 2003.
Equipment capital services grew 4.6 percent in 2007, much more rapidly than other broad categories of capital assets. Within equipment, services of computers and related equipment grew 17.3 percent, software 6.1 percent, communication equipment 5.6 percent, other information processing equipment and software (IPES) 4.4 percent, and all other equipment 2.4 percent. The rates of increase in information processing and software continue to be markedly lower than the huge increases observed in the 1995-2000 period. The lone exception is other information processing equipment and software, which includes office and accounting machinery, medical equipment, and photocopying, electromedical and nonmedical instruments.
Services of structures grew 1.3 percent in 2007, the highest growth rate since they grew 1.4 percent in 2002. Inventories grew at an annual rate of 0.8 percent in 2007, down from 2.7 percent in 2006.
Private nonfarm business sector
Multifactor productivity in the private nonfarm business sector rose 0.2 percent in 2007, the slowest rate of growth since 1995. Output increased 2.0 percent and the combined inputs of capital and labor increased 1.8 percent.
Labor input in 2007 grew less than half of the previous year, 1.2 percent, compared to 2.6 percent recorded in 2006. Capital services grew 2.9 percent, the same as in 2006. Within capital services, equipment was the fastest growing component.The increase in equipment in 2007 was largely due to capital services of information processing equipment and software, which rose by 7.4 percent. As in previous years, the fastest growth in equipment was in computers and related equipment, which grew 17.3 percent.
Labor productivity grew at a 1.4-percent annual rate and capital productivity fell at a 0.9- percent annual rate. Capital services per hour increased at the rate of 2.4 percent.
Historical trends in the private business and private nonfarm business sectors
Labor productivity (output per hour worked) differs from multifactor productivity (output per unit of combined capital and labor inputs) in the treatment of both capital and hours. Labor productivity measures do not explicitly account for the effects of capital nor do they account for changes in the composition of labor on output growth. As a result, changes in capital intensity (the capital-hours ratio) and labor composition can influence labor productivity growth. In addition, the labor input measure used to calculate multifactor productivity reflects the combined effects of changes in hours at work and of shifts in the composition of the workforce. Therefore, multifactor productivity accounts for changes in labor composition as well. Historical trends in labor productivity growth can be viewed as the sum of three components: multifactor productivity growth, the contribution of increased capital intensity, and the contribution of shifts in labor composition.
The contribution of capital intensity equals the change in the capital-hours ratio multiplied by capital's share of total payments to inputs. The contribution of labor composition equals the difference between the growth rate of labor input and the growth rate of hours multiplied by labor's share of total payments. Historically, capital's share has been slightly less than a third of total payments.
The description that follows focuses exclusively on the private business sector. Trends in the private nonfarm business sector were similar to those in the private business sector in each period.
Of the 2.2 percent growth rate in labor productivity, 1.0 percent can be attributed to increases in multifactor productivity, 0.8 percent to the contribution of capital intensity, and 0.3 percent to changes in labor composition. Output per hour worked accelerated from a 1.5 percent annual growth rate in the 1990-95 period to 2.7 percent in the 1995-2000 period. For the 2000-07 period, output per hour grew at nearly the same rate as the previous period, 2.6 percent.
Over the 1987-90 and 1990-95 periods, all productivity measures showed similar rates of growth. Multifactor productivity increased at an average annual rate of 0.6 percent in the 1987-90 period while rising 0.5 percent in the 1990-95 period. Labor productivity grew at an average annual rate of 1.6 percent during the 1987-90 period while rising 1.5 percent in the 1990-1995 period. In both periods, increasing capital intensity contributed 0.6 percent to output per hour worked. Information processing equipment contributed 0.5 percent in the 1987-90 period and 0.4 percent in the 1990-95 period. The contribution of labor composition rose at an average annual rate of 0.4 percent in the 1987-90 period and 0.5 percent in the 1990-95 period.
In the latter half of the 1990s, productivity growth accelerated. Multifactor productivity growth increased 1.3 percent and output per hour growth increased 2.7 percent, a sharp increase from the previous period. The contribution of capital intensity doubled from the 1990-95 period, rising an average of 1.2 percent per year from 1995 to 2000. The contribution of information processing equipment rose to 0.9 percent, while the contribution of other capital services grew 0.2 percent. The contribution of labor composition dropped 0.3 percentage points from the previous period to 0.2 percent.
In the 2000-07 period, multifactor productivity growth increased to 1.5 percent, an additional 0.2 percentage points from the 1995-2000 period. Labor productivity rose an average of 2.6 percent per year. The contribution of capital intensity dropped 0.3 percentage points from the previous period to 0.9 percent. The contribution of information processing equipment dropped to 0.5 percent from 0.9 percent in the 1995-2000 period. At the same time, the contribution of other capital services rose to 0.3 percent. The contribution of labor composition growth increased at the same rate as the previous period, 0.2 percent.
