L 2 J

The Meaning and

Measurement

of Productivity

Bulletin 1714

U. S. DEPARTM ENT OF LABOR

Bureau of Labor Statistics

DaVt pubttc Libras

Co.

DEC 6

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The Meaning and

Measurement

of Productivity

Bulletin 1714

Prepared for the

National Commission

on Productivity by

the Bureau of

Labor Statistics

U. S. Department of Labor

September 1971

U. S. DEPARTMENT OF LABOR

J. D. Hodgson, Secretary

BUREAU OF LABOR STATISTICS

Geoffrey H. Moore, Commissioner

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Preface

The National Commission on Productivity was established by President Richard 

Nixon in June 1970 to develop recommendations for programs and policies to improve 

the productivity of the U.S. economy. The Commission is composed of top-level representatives of business, labor, government, and the public. In order to aid the members in 

their consideration of various topics, staff papers will be prepared by government or 

private industry experts in different subject matter fields. These papers serve as background material for the members but do not necessarily represent their views.

The two papers included here were prepared by Herbert Stein, member of the 

President’s Council of Economic Advisers, and Jerome A. Mark, Assistant Commissioner 

for Productivity and Technology, Bureau of Labor Statistics, U.S. Department of Labor.

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Contents

Page

The meaning of productivity by Herbert Stein ......................................................................................................... 1

The meaning and measurement of productivity.................................................................................................... 1

Why productivity is important n o w ........................................................................................................................ 3

Concepts and measures of productivity b y Jerome A. M a rk ..................................................................................... 7

Concepts of productivity.......................................................................................................................................... 7

Output .................................................................................................................................................................... 8

Labor in p u t............................................................................................................................................................ 8

Capital i n p u t .......................................................................................................................................................... 9

Problems of measurement of productivity.............................................................................................................. 9

O u tp u t...................................................................................................................................................................... 10

Economy and sector level...................................................................................................................................10

Industry lev el.......................................................................................................................................................11

Labor in p u t.............................................................................................................................................................. 11

Q u ality ................................................................................................................................................................. 11

Gaps in coverage..................................................................................................................................................11

Hours paid versus hours w o rk e d ......................................................................................................................12

Total factor measures......................................................•...................................................................................... 12

Available measures of productivity............................................................................................................................. 12

Labor productivity ..................................................................................................................................................12

National measures............................................................................................................................................... 12

Industry measures............................................................................................................................................... 13

Capital productivity..................................................................................................................................................13

Combined factory input productivity................................................................................................................... 14

Recommendations......................................................................................................................................................... 14

Additional price information.................................................................................................................................. 14

Better man-hour and capital d ata...........................................................................................................................15

Charts:

1. Output per man-hour and real compensation per man-hour, total private

economy, 1950-70 ........................................................................................................................ , ................ 2

2. Productivity trends, total private economy and selected sectors,

1950-70 and 1965-80 ..................................................................................................................................... 3

3. Relative importance of employment for major sectors, 1950, 1970

and projected 1980 ........................................................................................................................................ 4

4. Annual rates of change in wages, productivity, and unit labor costs,

total private econom y..................................................................................................................................... 5

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The Meaning of Productivity

by Herbert Stein*

The rate at which productivity grows is central to 

two of the major issues facing the country. One is the 

issue of inflation. The other is the speed at which the 

society’s demands on the economy are rising— not only 

for the traditional purpose of private consumption and 

investment but also for improving the environment, 

health, domestic security, and general quality of life.

Recognizing the key role of productivity increase in 

meeting the Nation’s goals, and the potential contribution of all sectors of the community, the President on 

June 17, 1970, announced his intention to establish a 

National Commission on Productivity. The Commission 

when established included six members each from business, labor, and the public at large, and five members 

from the Federal Government.

Subgroups of the Commission have been established to 

deal with specific problems. While its work still lies 

largely ahead of it, some points raised in early discussions by the Commission, with participation by the 

President, deserve public attention at this time.

THE MEANING AND MEASUREMENT

OF PRO DUCTIVITY

The most commonly used definition of productivity 

is real output per hour of work. Productivity in this 

sense is a rough measure of the effectiveness with which 

we use our most important productive resource— labor. 

It has important social implications because it takes 

account not only of the chief source from which individual and social desires are met— that is, the total output 

of the economy— but also of a major source of getting 

that output, namely work. We would surely think that 

an increase in output achieved by raising the output per 

hour of work does us more good than an increase in output achieved by working more hours. The definition of 

productivity as real output per hour of work has economic significance also. If all terms are consistently 

defined, if labor compensation per hour rises at the 

same percentage rate as productivity, then unit labor 

costs will be stable; and if the shares of compensation 

in the national income remain unchanged, then prices 

on the average will be stable. In fact, the price level 

generally moves very closely with the ratio of compensation per hour to productivity per hour except for cyclical or other shortterm interruptions. Finally, estimates 

of productivity defined in this simple way are available 

to permit interesting and analytical comparisons of 

different times and countries, whereas more sophisticated measures are not.

The most commonly used measure of productivity 

relates the total output of goods and services in the 

private economy, that is, private Gross National Product 

(GNP) to the man-hours of all persons engaged in the 

production of those goods and services. This measure is 

expressed in the usual GNP constant dollar terms. Other 

measures, at the firm or industry level, may be constructed in a similar conceptual framework but more often 

are derived by using some physical concept of output 

unique to that firm or industry such as tons of steel 

or kilowatt-hours of electricity.

The most common definition and measure of productivity is sometimes called inadequate or even irrelevant on the ground that it reflects only the “quantity” 

and not the “quality” of economic performance. It is 

true that like all measurements, the measurement of 

productivity relates to a quantity, but it is untrue that 

the quantity measured is unrelated to the qualities that 

human beings value. The value of gross national product 

is a product of the quantities which people buy and the 

prices which people are willing to pay for them. The 

quantities people buy, and the amounts they are willing 

to pay for them, reflect the qualitative values that 

people find in the different products. Thus, GNP and 

its components reflect a value or “quality” choice 

among consumers, subject to limits imposed by income 

levels and the available supply of goods and services.

There are, of course, consequences of economic activity that are not reflected in existing measures of output 

per hour and the country has become increasingly conscious of some of these in recent years. On the output 

side these are generally consequences of activity that 

does not pass through a market. The outstanding case 

is the deterioration or improvement of the environment. 

The deterioration of the environment is not counted as

* Member, Council of Economic Advisers.

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Chart 1. Output Per Man-Hour and Real Compensation Per Man-Hour, Total Private Economy, 1950-70

Index 1950-100

(ratio scale)

a cost or a deduction from the product, and an improvement of the environment is not counted as an addition 

to the product. Thus, as far as this factor alone is concerned, our ordinary figures may have overstated the 

growth of productivity in the past and may in the future 

understate the growth if more and more resources are 

used to improve the environment. However, this is only 

one among many omissions in the measurement of output and productivity. Going further, it is obvious that 

productivity statistics do not measure justice, security, 

happiness, beauty, or the lack of them, and we cannot 

be sure in what direction our available measurements 

may be biased. But this obvious fact does not belie the 

importance of the statistic as an indication of the ability 

of society as a whole to achieve its goals.

There are other limitations of the statistical measures 

of productivity which are a consequence of our inability, 

thus far at least, to perfect our methods of national accounting. In construction, for example, we do not yet 

know how to measure properly the output of complex 

and diverse structures such as homes, hotels or hospitals.

Nor do we yet know how to assign a correct market 

value to products which are not sold such as those of 

education and many government activities.

For many analytical and policy purposes the simple 

figure of output per hour is inadequate. We would like 

to know why total output and output per hour are 

larger in one country, industry or time than another and 

for this purpose we need additional measures. We need 

to measure output per unit of all resources, including at 

least capital as well as labor. And we need to recognize 

that different kinds of labor, distinguished by skill, in 

a sense, are different amounts of labor per hour and 

have different productivities. When we measure output 

per unit of capital and labor combined and adjusted for 

quality werhave another measure of the efficiency of 

resource use. When we break down this measure into its 

various components we then have a family of measures 

which permits better estimation of the contribution of 

different factors to the growth of output and provide 

insights into the effects of different policies in the 

future.

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Measurements of productivity have been improved 

substantially in sophistication, variety, and accuracy in 

the past 20 years. They are still inadequate to answer 

all the questions that might be asked of them. Further 

improvement and dissemination of the statistics will contribute to better understanding of our economic problems and to better policy. The Commission hopes to 

contribute to this.

WHY PRO DU CTIVITY IS IMPORTANT NOW

By any available measurement the level of productivity in America has risen persistently over the decades, 

except for brief cyclical interruptions, and for many 

years has been the highest in the world. One might think 

in these circumstances that productivity growth would 

be a matter of no great concern. Nevertheless, the discussions of the Commission have confirmed the premise 

which underlay its establishment— namely the great 

importance of the productivity question today.

The claims upon the economy, expressed through the 

political process or in the market, are very large, even 

relative to the great capacity of the American economy. 

The size of these claims results at least in part from past

rapid economic growth, which has led to rapidly rising 

expectations among workers and consumers. We shall 

come closer to meeting these claims if we can increase 

the rate of growth of productivity.

jk During the past 4 years the rates of growth in productivity and GNP slowed down. At the same time the 

real income gains which workers has come to expect 

with rising wages also deteriorated. A return to a more 

normal productivity growth rate can help to restore the 

rate of gain in average real income. (See chart 1.)

'^This striving for higher productivity must not be 

viewed as a whip-cracking exhortation to “work harder” 

in order to raise some arbitrary abstract measure of 

economic performance. Increasing productivity is a way 

of increasing the ability of people to do what they want 

to do. It can provide the wherewithal for achieving a 

higher standard of living for families now living at the 

low end of the income scale. It can provide for a choice 

of leisure— not idleness— in the form of more holidays 

and vacations and entrance to an earlier retirement from 

the world of work, and it can provide the resources for 

improving the physical quality of the environment.

Chart 2. Productivity Trends, Total Private Economy and Selected Sectors, 1950-70 and 1965-80

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6.0

5.0

4.0

3.0

2.0

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TOTAL FARM COMMUNICATIONS MINING M A N U ­ TRANS­ WHOLESALE

AND FACTURING PORTATION AND

PUBLIC UTILITIES RETAIL TRADE

U.S. D E P A R TM E N T OF LABOR

Bureau of Labor Statistics

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We may be entering a period in which sustaining the 

rate of growth of productivity will be more difficult. For 

several decades the shift of workers out of agriculture, 

where productivity was below the average, contributed 

substantially to the increase of productivity. The number 

of workers left in agriculture is so small that this can no 

longer be significant. On the other hand, there will now 

be an increase in the proportion of the labor force employed in those industries, loosely called “service industries,” where productivity and its rate of growth 

have been low relative to the national average. (See 

charts 2 and 3.)

Productivity, in recent years, has been increasing 

more rapidly in Japan and in several Western European 

countries than in the United States. The reduction of the 

gap between our productivity and their’s is not a matter 

of concern; it is to our advantage that their productivity 

should be high. Neither does it necessarily indicate any 

superior effectiveness of their economic policies. The

fact that they are behind us in productivity by itself 

helps them to grow more rapidly because it means that 

they have opportunities to exploit— such as advanced 

production techniques— which we are already using. 

In some cases where they have embarked on new product ventures they have built plants embracing the most 

modern technology. But technology and methods may 

not be the whole story, and the experience of others 

requires us to consider carefully whether there are steps 

that could be taken here to speed up the increase of 

productivity.

The higher rates of productivity growth in other 

countries were accompanied by increases in hourly compensation which, in the past 5 years, tended to exceed 

those in the United States. The relationship of trends 

between output per man-hour and compensation per 

man-hour, however, was closer in those countries than 

in the United States so their unit labor costs did not go 

up as much in those years.

Chart 3. Relative Importance of Employment for Major Sectors, 1950, 1970 and Projected 1980

FARM

COMMUNICATIONS AND

PUBLIC UTILITIES

MINING

MANUFACTURING

TRANSPORTATION

FINANCE INSURANCE

AND REAL ESTATE

WHOLESALE AND

RETAIL TRADE

CONSTRUCTION

SERVICES

(Projected)

U.S. D E P A R TM E N T OF LABOR

Bureau of Labor Statistics

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/(In comparing the trends of productivity and earnings 

among countries, we must draw a distinction between 

real income and unit costs. Certainly we must applaud 

the rising productivity and standard of living of workers 

in the rest of the world. But the gap between changes 

in money earnings and changes in productivity which 

determines unit labor cost trends, is an important 

element in the difference between a stable or improving 

or deteriorating position in international trade.

Within the United States, no less than among countries, to recognize the distinction between costs and income is useful. The last 3 years were witness to the 

highest 3-year increase in average compensation per manhour (of all persons working in the private economy) 

since the early 1950’s. And yet, when these figures are 

adjusted for the rise in consumer prices, the resultant 

real compensation per man-hour showed the smallest

3-year rise over the same period. There was a deterioration in the rate at which higher real income was being 

achieved.

The important point here is not so much that compensation rose rapidly but rather that there was a large 

gap between productivity and compensation gains with 

a resultant large increase in unit labor costs. (See chart 

4.) It is a part of the syndrome of inflation in which 

prices and wage rates each rise— and each, at different 

points of time, tries to catch up with the other. One way 

to break into the syndrome is to increase the rate at 

which productivity grows so that wages can rise without 

increasing unit costs and the pressure on prices is abated.

Increasing productivity may. thus be regarded as the 

keystone to an improved standard of life and environment for all of society. It is with this broad view in mind 

that the National Commission on Productivity has set 

its task of finding ways to continue or accelerate the 

historical rates of productivity gains in the United States.

Chart 4. Annual Rates of Change in Wages, Productivity, and Unit Labor Costs, Total Private Economy

Percent Change

Compensation includes wages and salaries and supplemental payments for employees and an

estimate of the salaries and supplements for the self-employed.

U.S. D E P A R T M E N T OF LABOR

Bureau of Labor Statistics

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Concepts and Measures of Productivity

by Jerome A. Mark*

Despite the wide attention paid to productivity over 

the years, confusion prevails as to its meaning and measurement. This is understandable because the concept 

does lend itself to ambiguity and a wide range of productivity measures can and have been developed in response 

to different analytical uses.

Productivity is loosely interpreted to be the efficiency 

with which output is produced by the resources utilized. 

A measure of productivity is generally defined as a ratio 

relating output (goods and services) to one or more of the 

inputs (labor, capital, energy, etc.) which were associated 

with that output. More specifically, it is an expression of 

the physical or real volume of goods and services related 

to the physical or real quantities of inputs.

A variety of plausible productivity measures can be 

developed, the particular form depending on the purpose 

} to be served. For example, output per labor input, the 

jj£ most familiar measure, is useful in understanding changes 

y in employment or labor costs. This measure might be 

based on man-hours paid or man-hours worked, with 

different results. A more comprehensive measure of input might be more useful in studying how the economy 

is using labor and capital combined. Also, there are 

various ways of adding up diverse products into a measure of output. No one measure is the right or best

measure.

Since the interpretation of these statistics depends 

on the definitions and data used, an understanding of the 

productivity concepts used in relation to the purpose to 

be served is always essential.

CONCEPTS OF P R O D U C T IV IT Y

( There are two broad classes into which productivity 

concepts and in turn measures can be grouped. One includes those measures which relate output of a producing enterprise, industry, or economy to one type of input such as labor, capital, energy, etc.; the other includes those which relate output to a combination of 

inputs extending to a weighted aggregate of all associate 

V inputs.1

Although the former measures relate output to one 

input, they do not measure the specific contribution of

that factor to production. Rather, they express the joint 

effect of a number of interrelated influences on the use 

of the factor in the production process— such as changes 

in technology, substitution of one factor for another, 

utilization of capacity, layout and flow of material, the 

skill levels and the efforts of the work force, and managerial and organizational skills.

Whether for an individual establishment, an industry, 

or the entire economy, the most frequently developed 

and perhaps most useful productivity measure is an output per unit of labor input measure of what is frequently 

termed a labor productivity measure. There are several 

reasons for this. Perhaps the most important is that labor 

is almost universally required for carrying through all 

types of production. There is a labor element of costs in 

almost all endeavors; the degree varies but it is always 

present. In addition, as a practical matter, it is perhaps 

the most measurable input. Other factors, such as capital, are much more difficult to quantify.

There are, however, various labor productivity measures, depending on the definition of labor input. A 

measure may refer to output per person or it may take 

account of changes in hours of work and be based on 

total hours. It may cover the hours of the entire labor 

force including proprietors, unpaid family workers, and 

employers; or it may be limited to selected groups 

of workers.

Another set of productivity measures relating output 

to a single input is output per unit of capital. These 

measures are particularly useful in understanding movements in unit nonlabor costs by relating the measures to 

corresponding measures of returns to capital. As in the 

case of other single factor productivity measures they 

indicate the changes in the use of capital per unit of output not the contribution of capital alone. The measures

* Assistant Commissioner for Productivity and Technology,

Bureau of Labor Statistics, U.S. Department of Labor.

1 Even at the level of an individual craftsman where the

output-input relationships are limited, these two concepts are

present. Productivity can refer to the volume of work the individual is able to accomplish within a given time span— i.e.,

output per man-hour. It can also refer to the volume of work

completed per unit of his time, his tools, and his materials—

i.e.. an output per total factor input.

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have been limited to reproduction of what has been 

termed “tangible” capital.

Other single factor measures such as output per 

energy input or output per material input are relevant 

for plant and industry study where these inputs are of 

considerable importance in the production process or 

represent relatively scarce resources. For example, in the 

aluminum industry where electrical power is an important element in processing bauxite, output per KWH-is 

very useful as an indication of the efficiency with which 

electricity is being utilized.

As mentioned earlier, all single factor productivity 

measures reflect the joint effect of a variety of factors 

including the substitution of one factor for another. For 

some purposes, to develop a measure which eliminates 

the effect of that substitution is useful. This type of 

measure relates output to a combination of inputs. Thus, 

a productivity index of output per labor and capital 

combined elininates the effects of changes in amounts 

of capital per workers These measures have been termed 

multifactor or “total factor” or simply “total” productivity measures. For both conceptual and statistical 

reasons they have generally been limited to labor and 

“tangible” capital inputs and have not included as inputs activities such as research and education which can 

be viewed as intangible capital.2

Output

For all productivity measures, output is measured in 

physical or real terms. The concept is one of work done 

or the amount of product added in the various enterprises, industries, sectors, or economy. It refers not to 

activity as such but to the results of activity.

In this sense, at the plant level, production and hence 

productivity measurement differs from work measurement. Work measurement generally refers to the analysis 

of the stages of activity and the requirements at each of 

these stages. Productivity refers to the finished product 

(the result of activity) and its relationship to input.

In the case of a producing unit making one homogeneous commodity, production in physical terms would 

merely be a count of units produced. For a commodity 

to be regarded as homogeneous, certain conditions 

should be fulfilled. The product should be of a specified 

quality (e.g., carbon steel) and it must conform to precise standards of size, volume, unit, etc. Even though 

the measure of production in this case is a single count, 

the way of defining the unit of product can have different 

implications for productivity measurement. For example, 

carpeting can be measured in pounds or square yards. 

A change in the density of the carpeting would affect 

the weight per yard and, therefore, have a different

impact on man-hour requirements depending on whether 

output is measured by the yard or by the pound.

For the more usual case of a plant or an industry 

producing many heterogeneous products, the different 

units must be expressed on some common basis. They 

can also be combined in terms of their man-hour requirements. The advantage of the latter method for 

measures of output per man-hour is that the change in 

the productivity of the entire plant or industry is then 

a simple arithmetic average of the changes in the productivity of the individual components.

When the components are combined with value or 

price weights, that is, on the basis of their dollar value, 

then the output per man-hour measure for the total 

reflects not only changes in the productivity of the 

components but shifts in the importance of the components.

Physical quantity data are often not readily available, 

so deflation of dollar value is used. That is, total value of 

production is adjusted for change in price by use of a 

price index. This type of index is usually referred to as 

constant dollar output or deflated value of output. Such 

indexes are conceptually equivalent to indexes which 

use physical quantities combined with price weights.

The contribution of a producing unit lies in the value 

added, by its own labor and capital, to the materials and 

services purchased from other producing units— i.e., its 

net addition. Net output, therefore, is the constant 

dollar value of production minus the constant dollar 

value of purchased goods and services. In measuring 

productivity, the net measure would then be related to 

the particular input or all associated inputs except the 

material inputs. Relating a net output measure to a 

single input, when the various commodities produced 

and purchased are combined with value or price weights, 

will result in a single factor productivity measure that 

reflects not only the changes in productivity of the 

components and shifts in the importance of these 

components but also savings in material consumption.

Labor input

For all productivity measures where labor is relevant, labor input is measured in physical terms. The 

measure can refer either to the total number of individuals engaged in production or to only part of the work 

force, or it can refer to the man-hours of workers.

It is usually preferable to include the entire employed 

work force in the labor input measure— blue-collar and

Denison in his work on the sources of economic growth

has made estimates of the contributions of intangible factor

input such as research, education, organization, etc., to total

output. See Edward Denison, The Sources o f Economic Growth

in the United States and the Alternatives Before Us (New York,

1962) and Why Growth Rates Differ (Washington, D.C., The

Brookings Institution, 1967).

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white-collar workers, corporate officers, and the selfemployed. The assessment of manpower needs must take 

all labor input requirements into account. But of course, 

there are times when analysis of labor requirements and 

the analysis of cost components suggests the use of measures which include only a component of the work force.

To analyze the productive capacity of labor and the 

effects of changes in working hours, or in use for projections of manpower needs, an output per man-hour 

measure is most relevant. The most suitable unit of 

measure is man-hours worked. There are some ambiguities or differences of opinion on what to include, for 

example, standby time, coffee breaks, etc. In general, 

“hours worked” refers to the time spent at the place of 

employment, and therefore excludes hours paid for but 

used on leave for vacation, holiday, illness, accident, etc. 

In some cases, total hours paid are utilized in the productivity measures because data on hours worked are 

not available.

In developing a labor input measure, in many cases 

man-hours are treated as homogeneous and additive. 

These measures are particularly relevant to problems 

of estimating total man-hour requirements. But merely 

adding up the number of hours ignores the qualitative 

aspect of an hour worked by different individuals. 

Therefore, a productivity measure which is based on 

the sum of undifferentiated man-hours will reflect 

changes in the composition of the work force with different qualitative characteristics.

For some purposes, it may be desirable to develop a 

productivity measure which takes into account the differences in the “quality” of an hour of labor. That is, 

an hour of high quality labor is counted as proportionately more than an hour of low quality labor. To 

do this some methods have to be introduced to differentiate these hours. One way which has been utilized 

is to combine the man-hours of various employees in 

terms of pay differentials. The man-hours of higher 

paid workers are given more weight than lower paid. 

This assumes that differences in earnings reflect differences in education, experience, skill, and their contribution to output.3 Another method is to adjust the 

data to take into account changes in vocational training, 

length of schooling, or type of education, etc., of the 

work force, assuming there is a close relationship between qualifications and quality. When adjustments are 

made for changes in the quality of labor input the resultant productivity measure will not reflect changes 

in the composition of the work force as a productivity 

change but rather as a change in factor input.

3 Except to the extent that regional or similar wage differentials affect average hourly earnings.

Capital input

Capital stock estimates include the constant dollar 

value of structures, plants, and equipment current available for production. These estimates may also take into 

account the value of land, inventories, and working 

capital.

Generally capital stock measures are derived by adjusting the value of existing plant and equipment for 

new investment and the retirement of old assets. There 

are different ways of measuring the stock of capital; for 

example, they may be gross or net. Net stock estimates are 

derived by depreciating assets (and there are various 

methods of depreciation). Gross stock estimates are 

derived by retaining assets at their full value until they 

are retired from use. Since these are physical measures, 

the value of capital stock must be adjusted for price 

changes.

For productivity analysis, however, the flow of 

capital services rather than the stock is the preferred 

measure. A capital stock measure does not account for 

differences in the intensity of use over time. Equipment, 

for example, may be used for several shifts during a 

business expansion or may be idle during a contraction. 

Then, too, a large part of existing capital capacity may 

be standby and employed only during periods when the 

economy is operating at very high rates. There is also 

a loss of efficiency of assets as they grow older. A 

flow measure reflects differences in usage and efficiency 

and how they affect varying levels of output, which is 

the basis of productivity estimation. Ideally flow measures should indicate the amount of capital employed to 

produce current output.

To derive this capital flow measure, an aggregate of 

the capital hours used weighted by the rental value of 

each type of structure and piece of equipment is needed. 

The data for this measure are often not available in the 

detail necessary for a capital flow measure.

A commonly used flow of capital service measure is 

depreciation. However, this is based on accounting principles which often reflect current income tax regulations 

rather than the actual amount of capital used for current production. Because of the difficulty of estimating 

a capital flow measure, however, most analyses of capital 

and production use capital stock estimates.

PROBLEMS OF MEASUREMENT

OF PRO DUCTIVITY

The measurement of productivity trends involves two 

fundamental problems which are applicable to both output and input data. First, because of difficulties in obtaining direct quantity measures of output and input, 

substitute measures or approximations must be used in 

many cases. Second, since most data are collected for

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purposes other than productivity measurement, definitions already established and procedures for reporting 

information on production and factor inputs must be 

used; these may or may not be consistent with concepts 

appropriate for productivity measurement.

Output

Econom y and sector level. The problems of using the 

gross national product data for productivity measurement involve primarily the inadequacies of the measures 

of real output for some components and the lack of 

comparability of coverage between output and labor 

input measures.

Limitations in measuring output affect the reliability 

of productivity statistics in some sectors more than 

others. Since the implications for productivity movements can be offsetting among the sectors, the effect on 

measures for the overall economy is not as large as it is in 

each of the sectors.

The three areas where the real product measures as 

derived from the national accounts are particularly weak 

for productivity measurement are government, construction, and services (including business and personal services, and finance, insurance, and real estate).

In the absence of market valuation of the services of 

general government agencies, the practice in national income accounting is to value government output in terms 

of the wages and salaries of government employees. The 

deflated, or constant dollar, measure is derived from 

changes in employment. Such an output measure, when 

related to a labor input measure, results in no statistical 

change in productivity. This measure of government output may be increasingly difficult to continue in view of 

the reported increases in output per man-hour in certain 

government operations which are subject to measurement. 4 Based on these data the trend of output per 

man-hour for the national economy would be biased 

downward. As a consequence, the available measures of 

productivity are limited to the private economy.

Measuring output in the service activities is difficult 

because of the absence of a directly quantifiable entity 

which describes a unit of service. Consequently, various 

substitute indicators are utilized in the national accounts. 

These usually involve the use of some “price” index for 

deflating the value of the service activities or the use of 

an employment index to develop trends in producers of 

services.

As in the case of government, the use of the employment movements as an indicator of the change in real 

output implies a constant labor productivity. This approach is utilized for such activities as security and 

commodity brokers, 5 insurance agents, and miscellaneous business and repair services.

For the bulk of service activities, however, the deflation approach is used and its validity for the resultant 

output measure rests on the adequacy of the price indexes. Most of the price indexes used are components of 

the Consumer Price Index, which in turn have different 

degrees of reliability. The indexes for medical services, 

for example, do not adequately take into account 

changes in the quality of medical services performed.

As mentioned earlier, the real product measure is 

conceptually a net output measure but in many of the 

service activities data are not available on the real value 

of the material inputs. In such cases estimates of real 

product are made on the basis of changes in the total 

volume of output. This does not present a serious problem, however, since in most service industries intermediate purchases constitute a relatively small proportion of total value.

The other major activity in the national accounts 

where the output measure has severe limitations for productivity measurement is the construction industry. The 

constant dollar output measure is obtained by deflation, 

but the price index used is really a cost index. For the 

most part, these are measures of the change in costs of 

materials and labor weighted in terms of their base 

period importance. These indexes do not take into account any savings in the utilization of materials or labor, 

and, as a result, there is an overstatement of price increases. Consequently, there is an understatement of 

gains in real output and hence productivity.

Productivity indexes based on real product for construction show an average annual decline of 0.2 percent. 

This is somewhat inconsistent with studies which the 

Bureau of Labor Statistics has conducted of labor requirements for various specific types of construction 

during this period. These studies indicate for schools 

there was approximately a 2 3A percent per year gain 

over much -of this period, for highways a 3-percent increase per year, and for hospitals not mcuh change.

With regard to lack of comparability of coverage between output and labor, perhaps the largest evidence of 

this occurs in the real estate activity. For national income accounting purposes, an inputed rent for home 

ownership is added to the output of the real estate 

industry. There is, however, no corresponding labor in4

Nestor E. Terleckyj “ Recent Trends in Output and Input

of the Federal Government,” in Proceedings of the Business and

Economics Section, American Statistical Association, 1964,

pp. 76-94.

5 In view of the rapid spread in recent years of electronic

data processing in this industry this measure must be very much

understated since the productivity gains undoubtedly were

large, John Kendrick has suggested that data on shares of stocks

and bonds sold appropriately weighted would be a better

measure. See “Production and Productivity in the Service

Industries,” Victor Fuchs, Educational Studies in Income and

Wealth No. 39, National Bureau of Economic Research, 1969.

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put associated with that output. Rough estimates indicate that the removal of this activity from the output 

account would reduce the productivity trend for the 

private economy about two-tenths of a percent per year 

over the last two decades.

Industry level The effects of certain measurement 

problems are greater at the individual industry level than 

at the national level where there is a tendency for errors 

and biases to offset each other. On the other hand, at 

the industry level, more flexibility is possible because 

the output measures are not part of an overall framework (such as the national income and product accounts) 

which requires certain definitions and measures not necessarily consistent with the desired productivity measures.

Three major problems are encountered in developing 

measures of output from available data for industry 

productivity indexes. First, for many industries, the 

appropriate detailed product data are not available. 

Second, there is the well known quality change problem 

which results from the development of new products 

and the changing specifications of existing products. 

Third, appropriate weights are often not available for 

deriving the desired industry measure.

Some of the presently available industry indexes are 

based on unit man-hour weights; others are based on unit 

value or price. The use of unit value or price weights 

is not a serious problem among commodities where labor 

consts or inputs are a high proportion of price.

Labor input

With regard to labor input measures there are several 

data gaps in presently available measures. They relate 

to changes in the composition of labor (the quality), 

groups of the work force for which data are lacking or 

incomplete, the relationship of output to the time of 

research development and other workers whose activities 

are not directed to current production, and finally, the 

absence of adequate hours worked data on a comprehensive basis.

1. Quality. As mentioned earlier, changes in the composition of labor input are adjusted in some measures by 

weighting industry man-hours with the average hourly 

earnings of workers in the industry. Insofar as earnings 

differentials reflect productivity differences among workers, this measure captures changes in the quality of 

workers of different industries. However, this approach 

has severe limitations. Pay differentials between industries reflect many factors unrelated to productivity differences, such as the degree of unionization or regional 

and geographical differentials. Moreover, the industry 

hourly earnings differential does not take into account 

occupational changes which occur within an industry.

Estimates of the effects of shifts among major 

sectors— farming, manufacturing, mining, etc., show 

that shifts contributed about 0.3 percent per year of the 

output per man-hour growth over the last two decades. 

The shift in composition of the work force within manufacturing between production and nonproduction workers contributed 0.1 percent per year to the rate of increase in private output per man-hour over the last two 

decades. In recent years this has been reduced considerably to less than 0.05 percentage points.

In view of the limited information on occupational 

detail, another approach (followed by Denison) to ascertain the impact of shifts and changes in the work 

force has been to utilize information on changes in age, 

sex, and education. He estimates, for example, that the 

increase in education of the work force contributed 0.7 

percentage points to the trend rate in output per manhour from 1950-62. For a longer period, 1929-57, he 

estimates the effect to be 0.9 percentage points per 

year. Another estimate of the contribution of education 

to the growth rate by Schwartzman 6 provides a much 

lower figure— three-tenths of a percent per year for a 

roughly comparable period, 1929-63. The magnitude of 

these differences in this critical area suggests that there 

is need for further exploration of the interrelationship 

between education skills, training, earnings, and productivity.

2. Gaps in coverage. Payroll data on employment and 

average weekly hours, which are the primary source of 

man-hours estimates, do not include the entire economy, 

but are limited to nonfarm wage and salary workers. 

These data do not cover farm workers, proprietors, unpaid family workers, and domestics. Estimates for these 

sectors, for the most part, are taken from the labor force 

series (based on household surveys) which is not strictly 

comparable to the payroll series. Employment is a count 

of persons rather than jobs as in the payroll data, so 

that appropriate adjustments must be made.

Average hours for supervisory workers in nonmanufacturing industries are not available. The assumption is 

made that the average workweek for these workers is the 

same as for the nonsupervisory workers in each industry. 

Since 85 percent of all employees in nonmanufacturing 

industries are nonsupervisory workers, however, the 

effect of this imputation may be minimal.

Sampling procedures also affect the man-hours estimates. One week of each month is used to represent the 

entire month. If anything unusual, such as an unpaid 

holiday, strike, or bad weather, occurs during this period, 

the estimates will reflect these aberrations for the entire

6 David Schwartzman, “Education and the Quality of Labor,

1929-63,” Am erican E conom ic R eview , June 1968.

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month. On the other hand, fluctuations in employment 

between survey periods may not be reflected in the 

sample estimates. For example, short-term layoffs and 

plant shutdowns of 1 to 2 weeks between survey periods 

would not be reflected in the man-hour estimates for 

the month— leading to an overestimate of man-hours 

and an underestimate of productivity.

3. Hours paid versus hours worked. Because of lack 

of data, productivity measures for the most part refer 

to hours paid rather than the more desirable measure of 

hours worked.

Surveys now are being conducted biannually for the 

nonfarm economy where information on leave hours 

and hours worked will soon provide a body of data 

which will fill some gaps in this area. Estimates of the 

effects of the difference between hours paid for but not 

worked on output per man-hour measures developed by 

the Bureau of Labor Statistics indicate that the effect 

over the last 15 years has been about 0.1 percent per 

year for the nonfarm economy.

The effects of course can vary substantially by sector 

and at the industry level. Within manufacturing, the 

annual surveys and censuses of manufactures do provide 

measures of what could be termed plant man-hours, 

and these are used in many industry productivity 

measures.

Total factor measures

Total factor productivity measures relate output to 

the weighted sum of labor and capital and are therefore 

subject to the limitations of each of these data series. 

The problems of measuring output and labor input have 

been discussed. Capital measures, however, are probably 

the most difficult and complex measures to derive. They 

contain highly differentiated elements, and to express 

this differentiated stock in physical terms requires adjusting dollar values of assets for price change.

For the most part, available data for prices of structures are based primarily on cost information. As mentioned earlier, they do not take into account savings 

in utilization of materials and other inputs. Furthermore, 

the problems of obtaining representative prices for 

equipment which is highly differentiated severely affects 

the adequacy of the price measures used in capital 

measurement.

In addition, technical advances are often built into 

capital so that a piece of equipment produced in an 

earlier period may not be as efficient as one currently 

produced. In constructing price indexes, some of these 

technical improvements may be incorporated as quality 

changes, but adjusting for quality is often difficult. There 

is some question as to whether improvements in the

quality of new capital should be incorporated in the 

capital stock measures or treated as a productivity increase. Both interpretations have been used in productivity analysis.

Total factor measures as currently presented are not 

consistent with their treatment of capital and labor. 

In general, labor refers to actual man-hours whereas 

capital refers to available stock not taking into account 

varying levels of utilization.

A VA ILA BLE MEASURES OF PRO DUCTIVITY

Labor productivity

National measures. Each quarter, the BLS prepares 

and publishes indexes of output per man-hour for the 

private economy and for the farm, nonfarm, and manufacturing sectors. 7 For these measures, output per 

man-hour refers to the constant dollar value of goods 

and services produced in relation to the man-hours of 

all persons employed (including proprietors and unpaid 

family workers). Corresponding and comparable indexes 

of hourly compensation and unit labor costs are also 

developed.

The output measure for these productivity indexes 

is real gross national product originating in the private 

economy or the individual sectors. It comprises the purchase of goods and services by consumers, gross private 

domestic investment (including the change in business 

inventors), net foreign investment, and government all 

deflated separately for changes in prices.

Final goods and services are differentiated from intermediate products in that they are usually not purchased 

for further fabrication or resale. In addition to purchases 

in the market, final goods and services also include some 

items provided but not actually purchased such as food 

furnished to employees, food produced and consumed 

on farms, and the rental value of owner occupied homes.

Measures for the farm, nonfarm and manufacturing 

sectors are derived by subtracting the value of goods and 

services purchased by the sector from the constant 

dollar value of products and services leaving the sector.8

The labor input measures for these series are based 

largely on a monthly survey of establishment payroll 

records. Since this survey does not cover total employment in the private economy and because there are gaps 

in the hours information, it is necessary to use some supplementary data to derive man-hours estimates for all 

persons engaged in producing the output of the private

7

Productivity, Wages and Prices, quarterly release issued by

the Bureau of Labor Statistics, U.S. Department of Labor.

The actual measures are developed according to a variety

of approaches because of data limitations. However, all are

attempts to approximate this concept.

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economy. Various sources are utilized and data from 

them are adjusted for consistency with the establishment 

man-hours.

The establishment man-hours are based on an hours 

paid rather than an hours worked concept. That is, 

the estimates include paid holidays, vacations, sick 

leave and other time off paid for by the employer 

in addition to actual hours worked.

Another set of labor productivity indexes is developed 

based on man-hours obtained from a monthly survey 

of the noninstitutional civilian population. This survey 

of households provides information on the labor force, 

employment, unemployment as well as man-hours. The 

man-hours estimates for the labor force series are based 

on an hours worked concept, i.e., hours spent at the 

establishment, thus excluding vacation and sick leave 

but including such things as rest periods and standby 

time.

Since compensation data are derived primarily from 

establishment payroll records, when relating labor productivity measures to hourly compensation, the appropriate series is the one based on establishment man-hours. 

On the other hand, when examining the relationship 

between productivity changes and displacement of workers, since the employment and unemployment measures 

are based on the household survey, the more consistent 

output per man-hour measure is the one based on labor 

force data.

In addition to the current indexes of output per manhour published by .the BLS, John Kendrick of the 

National Bureau of Economic Research has published 

indexes of output per man-hour for the private economy 

and major sectors (as well as total factor productivity) 

which include a series that makes adjustments for 

changes in the composition of man-hours.9 Using average 

hourly earnings for weighting man-hours at the industry 

level he derives an index of output per weighted 

man-hour. The basic man-hour data for this series are 

generally the same as those for the establishment series 

and the weights are also derived from BLS average 

hourly earnings data. These indexes presently cover 

the period 1887 to 1966.

Edward Denison of the Brookings Institution has 

published measures of output per labor input in the 

form of growth rates for selected periods, the most recent 

being 1950-62.10 These measures also take into account 

changes in the quality of labor; however, the procedure 

differs from Kendrick’s. Adjustment based on age, sex, 

education, and other changes in the labor force are 

applied to basic employment and man-hours measures 

to derive labor input reflecting changes in quality. 

These measures are available only at the national level.

Industry measures. In addition to the indexes for the 

private economy and major sectors, the BLS publishes 

annually indexes of output per man-hour for selected 

industries.11 At the present time, measures for about 40 

manufacturing and nonmanufacturing industries such 

as steel, motor vehicles, railroad transportation, coal, 

etc., are prepared.

The output measures for these indexes are developed 

by combining the data on quantities of commodities 

or services within the industry with fixed period weights. 

As mentioned earlier, man-hour weights would be preferred for developing these measures and insofar as possible these are used. However, where such information 

is not available, other weights such as unit labor costs, 

or unit value (price) are used. These substitutions are 

introduced on the assumption that unit values are good 

commodities in an industry.

In addition, for some industries where it is not possible to obtain any quantity information, indexes of 

deflated value of output are developed. For these 

industry measures current dollar value estimates are 

divided by indexes of price change for the industry to 

derive a real output measuer. The adequacy of these 

measures is dependent on the quality of the price 

measure.

The labor input data for these measures are establishment man-hours. As in the aggregate measures, they 

are derived from payroll records and for the most part 

are based on an hours paid concept. For manufacturing 

industries, however, additional man-hours information 

is available in terms of hours at the plant. These data 

which theoretically exclude vacation, holdiays, and such 

leave hours are closer in concept to an hours worked 

measure. Unfortunately, the information on plant manhours is usually not as current as that from other 

sources on establishment man-hours.

Capital productivity

Measures of output per unit of capital are not available on a current basis. Historical measures have been 

developed by a number of researchers.

Separate estimates of capital stock and hence measures of capital productivity are available for the private 

economy from sources such as the National Industrial 

Conference Board, National Bureau of Economic Research, and many economists doing research in production analysis. In addition, the Office of Business 

Economics prepares 12 different capital series depending 

on alternative options for service lives, depreciation, and

9 John W. Kendrick, Productivity Trends in the United

States, Princeton University Press, 1961.

10 Edward F. Denison, op. cit.

11 Indexes o f Output per Man-Hour, Selected Industries,

1939 and 194 7-70 (BLS Bulletin 1692).

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adjustment for price change. These estimates are constructed within the framework of the national accounts 

and are consistent with output measures used for labor 

productivity in the private economy. However, the variation among these series gives different results for the 

growth of capital productivity.

The OBE estimates are prepared annually for the 

private economy, farm, manufacturing, nonfarm, and 

nonmanufacturing. They include equipment and nonresidential structures, but exclude such items as housing, 

motels, and hotels.

These capital stock series are developed using the 

perpetual inventory method. That is, each new piece of 

equipment or structure is added into the stock estimates 

and remains there until retired from use. Retirements of 

assets are based on mean useful service lives published 

in the Internal Revenue Services Bulletin of Service Lives 

of Assets. Because the latter are believed to overstate asset lives, OBE prepares estimates of capital 

series either based on Bulletin F or 85 percent of 

Bulletin F service lives.

Net capital measures are derived using either straight 

line or double declining balance depreciation.

Most other capital series are developed in a manner 

similar to the OBE measures with other variations on 

mean service lives and methods of depreciating assets.

Combined factor input productivity

The second group of productivity measures— those 

which relate output to several factors— involve the 

weighting together of the quantities of the separate 

factors. For the most part, these measures have been 

limited to output per unit of capital and labor combined.

Just as the separate components of an output index 

must be combined with appropriate weights, the separate 

components of the input measure also must be appropriately weighted together. Capital and labor can be 

aggregated using their unit costs (e.g., wages, rate of returns of capital) in a base year as weights. These weights 

can also be viewed as the proportion of current dollar 

output earned by each input (factor share) in a base 

period.

Two sources of combined factor input or total factor 

productivity measures exist— the work done by John 

Kendrick for the National Bureau of Economic Research 

and that by Edward Denison in his work on sources of 

growth.

Kendrick provided annual measures for the period 

1889 to 1957, and more recent measures, 1957-69, will 

be available early in 1972. Estimates cover the private 

economy and are based on GNP output measures. Separate measures were made for farm, manufacturing, 

trade, finance, transportation, public utilities, and services and for selected industries within these major 

groups.

Labor input is measured in man-hours and adjusted 

for quality change using industrial hourly earnings. 

Capital includes the net stock of structure, plant equipment, inventories, working capital and land. The capital 

measures do not include quality inprovements which 

can occur because of technical advance. The capital and 

labor input are added together with factor prices as 

weights. The base period for the weights was changed 

periodically to reflect economic conditions of the various subperiods under analysis.

The combined factor measure developed by Edward 

Denison relates net domestic product (excluding depreciation) to weighted sum of capital and labor. The 

weights are the base period share of dollar output of 

each of these inputs. He also periodically shifted the base 

period for the factor shares to reflect current economic 

conditions. Denison’s analysis covers the total economy 

for the 1919-62 period, and he is currently updating 

his work.

His labor input is employment adjusted for quality 

change using relative earnings for selected age-sexeducation groups. He also adjusts the labor input for 

intensity of effort as reflected in varying lengths of the 

workweek. His assumption is that as the workweek declines productivity improves because the worker is less 

fatigued and can work more diligently.

RECOMMENDATIONS

Within the general constraints imposed on all users of 

economic data, productivity measures for the total private and private nonfarm economics and for selected 

major sectors (manufacturing, mining, trade, transportation, communication, and public utilities) are reliable 

and useful for economic analysis. Conversely, productivity measures for construction and service-type industries are not reliable measures for identifying either the 

magnitude or direction of change in productivity for the 

reasons outlined above. To improve these measures, additional information must be developed in two areas— 

the data base from which output, input, and price 

statistics are compiled, and the conceptual base upon 

which the output and price data are developed.

Additional price information

More and better price information in the service and 

construction industries is of prime urgency. In construction, work is currently underway by the Census Bureau 

to develop price measures in order to improve the measures of the real volume of residential construction put in 

place. Additional research is also necessary for nonresidential construction. In the service sector, more adequate

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and extensive price information on personal services is 

needed as well as the expansion of wholesale prices to 

include business services. The BLS at the present time is 

trying to develop an index of the general price level. The 

development of this index will materially assist productivity measurement because it will require the collection 

of a wider range o f service prices.

More work is also needed in collecting data on durable 

equipment (such as heavy machinery and aircraft) which 

is highly differentiated and often custom-made.

Another recommendation is to have timely (quarterly 

and annually) estimates on the imputed rental value of 

owner occupied housing so that it may be excluded from 

the output estimate and not bias productivity measurement.

Better man-hour and capital data

Input data also need to be improved. Most important 

to productivity measurement would be better estimates 

for certain components of labor input. This would entail 

estimating supervisory hours in nonmanufacturing and 

expanding employment sampling coverage so that resultant data refer to the entire month rather than 

1 week. Adjustment for changes in labor quality calls 

for more detailed information on occupational wages

and man-hours. Some research is being carried out using 

occupational and wage data to account for some changes 

in labor quality, but it is necessary to develop a more 

integrated system for collection than in currently in 

effect.

Capital information is also needed to make a more complete analysis of factors affecting productivity growth. 

Of paramount importance are better data on changes in 

the quality of capital equipment and the length of 

service lives.

The concepts used to define output need to be changed 

to conform to a productivity framework. This is particularly true of government and households and institutions 

where actual output definitions are needed rather than 

merely relying on an employment measure.

Financial intermediaries also present definitional problems. For example,banking output is currently measured 

as liquidity. If the output reflected changes in the number of transactions weighted by some value measures, it 

would be more compatible with the inputs and provide 

a means for making a better productivity measure.

These recommendations will not solve all of the problems of productivity measurement. However, they will 

certainly improve the output and related input measures 

and thereby make productivity a more viable tool for 

economic analysis.

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