1. BLS Research on Capital Service Lives Michael D. Giandrea, Brian D. Chansky, Corby A. Garner, Randy M. Kinoshita, Peter B. Meyer, Susan G. Powers, and Steven Rosenthal Office of Productivity & Technology U.S. Bureau of Labor Statistics July 24, 2015

2. Outline Role of capital service lives Sources of capital service lives Comparisons Future

3. What are capital service lives? 3 Expected productive lifetime of a productive asset  Equipment and structures In practice: the average expected lifetime of a class of heterogeneous assets  Level of aggregation determines the degree of similarity of the assets within a class

4. How are capital service lives used? Capital stock is measured using the Perpetual Inventory Method (PIM) This requires 1)Historical data on investment 2)Age-efficiency function 3)Asset service lives Important input to calculation of multifactor productivity Also used for calculation of wealth stock

5. Sources of BLS capital service lives 5 Bureau of Economic Analysis produces service life and depreciation values for asset classes Data sources include  U.S. Treasury Bulletin F (1942)  Hulten and Wykoff (1979, 1981a, 1981b)  Office of Industrial Economics  Office of Tax Analysis (Treasury)

6. Sources of BLS capital service lives (2) BEA Rates of Depreciation and Service Lives Type of Asset Rate of Depreciation Service Life Hulten-Wykoff Category Software Prepackaged0.55003C Custom0.33005C Nonmedical instruments0.135012C Photocopy & related equipment0.18009C Office & accounting equipment0.31197B Metalworking machinery Nonmanufacturing industries0.122516A Durable manufacturing: Wood products0.163312A Fabricated metal products0.081724A Motor vehicles, bodies & trailers, and parts0.140014A

7. Sources of BLS capital service lives (3) Hyperbolic asset depreciation is assumed Depreciation rate – service life pairs are calculated based on this assumption BEA’s depreciation rate for an asset is compared to these pairs Closest depreciation rate is selected and associated service life is assigned

8. Models of efficiency decline 8 For structures: For equipment: Effectiveness assumed to decline by 30% per year (e is effectiveness or efficiency, a is age of the asset):

9. Source of BLS capital service lives (4) Household Furniture and Fixtures BEA depreciation rate is 0.1375 BLS compares this to hyperbolic depreciation rate and service life pairs Closest BLS depreciation rate is 0.1356 This rate is associated with 15 years compared to 12 years at BEA

10. BLS – BEA service life comparison

11. Accuracy of service lives Source data for service lives is, in many cases, very dated Lives of many assets are not based on asset data  No specific data were available for Special industry machinery, for example Part of general review of capital service measures, BLS has begun study of whether and how to update service life data

12. Effect of service lives on capital stock YearService Life = 6Service Life = 5Service Life = 4 11000 2187518471803 3260125102370 4316929842714 5358332882886 6386334602951 7403435412967 8412735712968 9417135792968 10418735792968 11419135792968 12419135792968 13419135792968 14419135792968 15419135792968

13. Small service life change has small effect on stock

14. Other sources of asset service lives Expect service lives to be similar across countries Data from other countries  National statistical agencies of Netherlands, Italy, Canada But comparisons can be difficult, primarily due to differing classification systems and levels of aggregation  Asset classes, industries

15. Statistics Netherlands Disinvestment Survey  Direct observation of capital discards  Establishment level survey  1991 - 2003  55 industries and 16 asset types

16. BLS – Stats Netherlands comparison BLS  light trucks (post 1992) = 10 years  autos = 9 years Statistics Netherlands  passenger cars and other road transport equipment = 5 to 9 years depending on industry

17. BLS – Stats Netherlands comparison (2) BLS  Metal working machinery in Fabricated metal industry = 25 years Stats Netherlands  Machinery and equipment in Manufacture of fabricated metal products industry = 33 years

18. Italian National Institute of Statistics Survey of assets classified under Other Machinery and Equipment 359 using firms 78 producing firms Recently conducted: 2011

19. Istat Using firms asked  Useful service life of their capital goods  Expected service life of newly purchased capital goods Producing firms asked  Expected service life of capital goods produced in last 5 years

20. BLS – Istat comparison BLS  Communications equipment = 19 years (13 years in Broadcasting & communications) Italy  Communications equipment = 7 years (9 years in manufacturing)

21. BLS – Istat comparison (2) BLS  Personal computers = 5 years  Household furniture and fixtures = 15 years  Other furniture = 17 years Italy  Computers and peripheral equip. = 6 years  Furniture = 13 years

22. Statistics Canada Capital Repair and Expenditure Survey  25 years of observations  155 asset types  Asks about used asset sales and discards  Calculates service lives and depreciation rates from large sample

23. BLS – Canada comparison BLS  Software, pre-packaged = 3 years  Household furniture & fixtures = 15 years Canada  Software, standard and on the shelf = 3 years  Other furniture, furnishings, and fixtures = 7.9 years

24. BLS – Canada comparison (2) BLS  Mining and oil field machinery = 13 years Canada  Oil and gas exploration drilling = 31 years  Mining sites exploration = 14.2 years

25. Service life survey Establishment level Focus on equipment Limit the questions to promote ease of response

26. Service life survey (2) Acquisitions  Equipment code?  New or used?  Year of manufacture?  Expected years in service?

27. Service life survey (3) Discards  Equipment code?  Year of acquisition?  Year of manufacture?  Was equipment sold, destroyed, or some other action?

28. Usefulness New data could confirm or complement existing service life values If new data are of high enough quality they would replace existing service life values This may be largely dependent on sample size

29. Conclusion Already have used excellent international service life efforts to assess current BLS service life values For many assets, improved service life data will have small impact on estimated capital stocks and growth rates Some larger changes could have substantial effects

30. Depreciation – Service Life Pairs EquipmentStructures Service LifeDepreciation RateService LifeDepreciation Rate 10.871810.8356 20.643920.6066 30.506330.4732 40.415840.3866 50.352050.3262 60.304960.2817 70.268670.2476 80.239880.2207 90.216590.1989 100.1972100.1809 110.1809110.1658 120.1671120.1529 130.1551130.1418 140.1447140.1322 150.1356150.1237 160.1275160.1162 170.1203170.1095 180.1138180.1036 190.1079190.0982 200.1026200.0933