The estimates of multifactor productivity in the private business and in the private nonfarm business sectors for 2006 both show the slowest annual rates of growth since 2001.
The 0.5 percent change in multifactor productivity growth for the private business sector is less than half of the preliminary 1.1 percent change reported on May 24, 2007 based on preliminary information. This was largely due to a sharp downward revision to output.
Multifactor productivity is designed to measure the joint influences of economic growth on technological change, efficiency improvements, returns to scale, reallocation of resources, and other factors, 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 omitted.
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 19 years, capital services have grown more rapidly than hours in private business, and the skills of workers - as measured by their education and 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 0.5 percent in 2006. The multifactor productivity gain in 2006 reflected a 3.2 percent increase in output and a 2.6 percent increase in the combined inputs of capital and labor.
Continuing the relatively slow growth of the last five years, growth in capital services rose 2.7 percent. However, labor input rose 2.6 percent, the largest annual increase since 1999. Hours rose 2.1 percent. The capital-labor ratio (capital services per hour of all persons) increased by 0.6 percent, the lowest rate of growth since 1994.
Equipment capital services grew 4.7 percent in 2006, much more rapidly than other broad categories of capital assets. Within equipment, services of computers and related equipment grew 16.8 percent, software 5.7 percent, communication equipment 5.1 percent, other information processing equipment 4.9 percent, and all other equipment 2.7 percent. The rates of increase continue to be markedly lower than the huge increases in information processing equipment and software observed in the 1995-2000 period. The lone exception is other information processing equipment.
Services of structures grew 0.9 percent in 2006, continuing their relatively low rate of growth for the last four years. Inventories grew at an annual rate of 2.3 percent in 2006, down from 3.1 percent in 2005.
Labor input reflects the change in hours at work adjusted for the effects of changing labor composition. As mentioned previously, labor input rose 2.6 percent. This increase in labor input was due to an increase in hours at work of 2.1 percent and a contribution from labor composition of 0.5 percent. Changes in labor composition, as measured by shifts in the educational attainment and work experience of the work force, showed the largest rate of growth since 2002.
Labor productivity (output per hour worked) increased 1.1 percent, the fourth consecutive year in which the growth rate of labor productivity decelerated. Capital productivity (output per unit of capital services) grew 0.5 percent, the fourth consecutive annual increase.
Private nonfarm business sector
Multifactor productivity in the private nonfarm business sector rose 0.4 percent in 2006, the slowest rate of growth since 2001. Output increased 3.2 percent, and the combined inputs of capital and labor increased 2.8 percent.
Labor input grew faster in 2006 than the previous year, 2.7 percent, compared to 1.8 percent in 2005. Capital services grew 2.8 percent, compared to 2.6 percent in 2005. Within capital services, equipment was the fastest growing component. The increase in equipment in 2006 was largely due to capital services of information processing equipment and software rising by 7.1 percent. As in previous years, the fastest growth in equipment was in computers and related equipment, which grew 16.8 percent.
Labor productivity grew 1.0 percent and capital productivity rose 0.4 percent. Capital services per hour increased at the rate of 0.6 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 educational attainment and experience of the work force. 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 thosein the private business sector in each period.
Over the 1987-2006 period, output per hour worked grew at an annual rate of 2.3 percent in private business. Of the 2.3 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 0.4 percent to changes in labor composition. Output per hour worked accelerated from a 1.5 percent growth rate in the 1990-95 period to 2.7 percent in the 1995-2000 period. For the 2000-06 period, output per hour grew around the same rate as the previous period, 2.8 percent.
Over the 1987-1990 and 1990-1995 periods, all productivity measures showed similar rates of growth. Multifactor productivity increased at an average annual rate of 0.6 percent in the 1987-1990 period while rising 0.5 percent in the 1990-1995 period. Labor productivity grew at an average annual rate of 1.6 percent during the 1987-1990 period while rising 1.5 percent in the 1990-1995 period. In both periods, increasing capital intensity contributed 0.6 percent of which 0.5 percent came from information processing equipment. The contribution of labor composition was the same in the two time periods, 0.4 percent.
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 almost doubled from the 1990-95 period, rising an average of 1.1 percent. The growth in each of the two components of the contribution of capital intensity, information processing equipment and other capital services, doubled from the previous period. In both time periods, the contribution of information processing equipment was a little over 80 percent of the total contribution of capital services. 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 0.1 percentage point from the previous period, to 0.3 percent.
In the 2000-2006 period, multifactor productivity growth increased an additional 0.2 percentage points from the 1995-2000 period, to 1.5 percent. Labor productivity rose an average of 2.8 percent per year. The contribution of capital intensity dropped 0.2 percentage points from the previous period to 0.9 percent. The contribution of information processing equipment dropped to 0.6 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 to 0.4 percent.
Contribution of research and development to multifactor productivity in the private nonfarm business sector
While multifactor productivity reflects many influences, technological change is one of the primary contributors. For the private nonfarm
business sector, BLS also reports estimates of the impact on multifactor productivity growth of firms' spending for research and development (R&D) on all firms within the same industries. Because many people associate research and development spending and the resulting technological improvements with productivity, multifactor productivity has not been adjusted to exclude the effects of research and development. The contribution of research and development averaged 0.2 percent per year for the entire 1987-2006 period, or about 20 percent of total multifactor productivity growth. The contribution of research and development did not vary measurably over time, contributing 0.2 percent per year during each time period.
