Measuring Output and Productivity in Service- Producing Industries Barry Bosworth

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

Reasons for Current Interest Major source of employment growth Major source of employment growth Important part of infrastructure to support manufacturing. Important part of infrastructure to support manufacturing. Primary user of ITC capital. Primary user of ITC capital. Important area of recent acceleration in productivity (ITC related) in some countries. 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. 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. Significant influence on competitiveness for emerging business centers in global production system.

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

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

Industry-level price indexes Services previously excluded from industrial price indexes of many countries. Services previously excluded from industrial price indexes of many countries. Voorburg group (UN) Voorburg group (UN) Effort to share methodology and lessons among national statistical offices Effort to share methodology and lessons among national statistical offices Rapid improvements in methodology 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. 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 Alternative use of broad price index captures general price inflation, but misses relative price changes

Industry Employment Detailed industry data normally requires an establishment measure of 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. 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. Thailand has only a limited set of periodic industry surveys, and no employment survey.

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

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

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

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

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

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

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

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

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

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

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

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

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

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