Measuring Output and Productivity in Service-Producing Industries

1. Measuring Output and Productivity in Service-Producing Industries Barry Bosworth

2. Services are underrepresented in national statistical systems • Focus on goods production and exportables • Socialist systems emphasized Gross Material Product • U.S statistical system created during wartime to monitor production of defense goods • Services are often difficult to measure – hard to define unit of output.

3. Reasons for Current Interest • Major source of employment growth • Important part of infrastructure to support manufacturing. • Primary user of ITC capital. • Important area of recent acceleration in productivity (ITC related) in some countries. • General Agreement on Trade in Services (GATS) increased interest in performance of services. • Significant influence on competitiveness for emerging business centers in global production system.

4. I. Measurement Framework • gross output (sales), • value added (labor and capital) • Capital stock • employment • purchased inputs • Price deflators for gross output and inputs

5. General shift away from emphasis on value added • Gross output aligns better with production function framework. • Consistent with double-deflation of value added for price change. • Easy to link to input output-tables • Identify changing patterns of outsourcing. • Common for goods • Increasingly important for services (a la India). • Need output, rather than value added, to make international comparisons of productivity.

6. Industry-level price indexes • Services previously excluded from industrial price indexes of many countries . • Voorburg group (UN) • Effort to share methodology and lessons among national statistical offices • Rapid improvements in methodology • Still, many industries where the price deflators are based on input prices – effectively ruling out the possibility of measuring productivity changes. • Alternative use of broad price index captures general price inflation, but misses relative price changes

7. Industry Employment • Detailed industry data normally requires an establishment measure of employment. • Household surveys do not provide accurate estimates of employment at the level of detailed industries. • Thailand has only a limited set of periodic industry surveys, and no employment survey.

8. Industry Capital Stock • Most countries lack information on investment expenditures at industry level. • Capital stock computed in aggregate based on information from producers. • Allocate stock in proportion to historical cost information from establishment balance sheets • Historical costs can be quite different than current replacement cost • Limited information on type of capital

9. The United States Industry Data Set • Output, value added, and purchased inputs • nominal and constant value • Covers about 80 industries • Consistent with the national accounts. • Benchmarked to I-O tables at 5-year intervals. • Supported by 5-year economic censuses • Annual surveys for major industries • Surveys expanded to cover most service industries.

10. Value of Industry Data Set • Identify the industry sources of aggregate productivity growth. • Recent U.S. growth concentrated in services— those that make major use of ITC capital • Retail and wholesale trade, commercial and investment banking, information processing and publishing, and telecommunications. • Capture effects of outsourcing and offshoring.

11. Thailand: Industry data • Thailand has measures of gross output, value added, & purchased inputs for many industries. • Used to construct double-deflation estimates of value added. • Industry detail exists for some service industries. • Air transport, communications, and parts of finance. • Output information for some industries is limited to value added. • Information on employment and capital stock limited to broad industry groups

12. II. Productivity Measurement • Traditional emphasis on inter-temporal growth rates, • Shift of focus to multifactor analysis using gross output, instead of two-factor value-added framework. • Recent interest in cross-country comparisons of productivity levels.

13. Basic Growth Identity • Growth in value added as a function of growth in factor inputs and TFP si is factor income share • Assumes competitive markets where price is equal to marginal product • K = index of capital services • L*= quality adjusted index of labor input

14. Labor Quality: two measures • Option 1: Shifts in labor composition Education, gender, experience vi = income share • Option 2: Index of educational attainment a = return (7%), s = years of schooling

15. Expanded Growth Accounts • Growth in output as a function of growth in three inputs and MFP Q = gross output K = capital services L* = labor M = purchased inputs si = share of capital or labor income in value added vi = share of purchased inputs in gross output Shares are averaged over two periods to construct chained indexes

16. Two Versus Three-factor Models • Expanded approach of value for detailed industries • Insights into outsourcing • More closely related to production process • But, it involves significant amount of double counting of purchased inputs in process of aggregation • Two-factor value-added framework more useful for total economy and major sectors • Goods-producing industries • Service-producing industries.

17. III. Cross-national Comparisons of Productivity Levels • Important complement to more standard focus on productivity growth. • Most meaningful interpretation of term “competitiveness.” • Useful to study patterns of convergence or divergence. • Valuable benchmark of performance of critical industries relative to trade partners.

18. Basic Measurement Issues • Cross-border comparisons of productivity add an extra dimension of complexity because of need to convert to a common currency • How to define relative price term? • Commercial exchange rate for traded goods, but even then prices will vary because of • Strength of competition • Lags in responding to exchange rate changes

19. Basic Measurement Issues (2) • In non-traded industries no reason to believe that relative prices will be even close to exchange rate. • National PPPs are averages of all prices at final demand • Appropriate for comparing total GDPs • For industry comparisons, need producer prices at individual industry level • Industry PPPs • International Comparison Program includes very few service-producing industries (Thailand is a member). • Range of industry PPPs is very broad for emerging markets.

20. Basic Measurement Issues (3) • Physical quantity measures of output • Avoids problem of price conversion, but • Limited to homogeneous product groups • Used in transportation and communications • Physical quantities could be used to construct industry PPPs. • Could we assume that PPPs are the same for related industries? • Value Added versus Gross Output comparisons • Need a conversion factor for purchased inputs. • Energy in transportation

21. Banking • Two suggested approaches • Transactions measures of physical output (U.S.) • ATM transactions • Teller customers • Credit card transactions • Loan transactions • Output proportionate to loan and deposit stocks • Used in Australia • Appear to underestimate output growth in the United States. • ICT innovations should have sharply reduced price of transactions, raising output.