«Productivity growth in services and problems measuring services price indices » EUKLEMS Consortium meeting Brussels, March 2007 Anita Wölfl, CEPII, EHESS * This contribution resulted in the framework of the EUKLEMS project, funded by the European Commission, DG Research as part of FP6, Priority 8, "Policy Support and Anticipating Scientific and Technological Needs".

Why analysing the measurement of price indices in services? What we observe: –relatively weak productivity growth in services as compared to manufacturing industries... –... although some services show characteristics that would typically spur productivity growth. Maybe due to problems measuring the underlying price index ? Steps –Reasons and channels of measurement problems in services? –How to analyse the extent of such measurement problems? –Producer price changes and their variation - some results for two selected business services.

Some major problems measuring producer price indices and volumes series in services Source: Eurostat Handbook on Price and Volume Measures in National Accounts, 2001 Heterogeneity of services products –Specific services for individual customers (one-off ), –Different types and levels of prices for different markets/consumers, –Bundling of services products. Date of delivery different to date of payment Quality of service provided is important, but difficult to measure –Rapid change of technologies used, –Service that is provided ~ knowledge provided. Availability and comparability of data –Definition of service output, –Lack of necessary detail, –Lack of comparability across countries.

Channels of measurement problems II - An overview The elementary price series Following prices over time Aggregation issues finding a « typical » services product defining the detailed product specification measuring the price for each specification estimating missing values adjusting for changes in product specifications adjusting for quality changes accounting for new products choice of the firm sample classification of services products weighting schemes choice of the index formula accounting for new firms

The approach taken I The basic idea An alternative residual : –idea: estimate a price function on the basis of variables determining prices and their changes -> –in the ideal case, the estimated price changes should be equal to the measured price changes, –the difference between the two would then reflect measurement problems, i.e.: Measured price changes Factors determining price changes Measurement problems Error due to model specification Error due to problems measuring prices

The approach II Factors determining price changes Broadly three strands in the literature: Microeconomic theory, e.g., Varian (1995) summarised in conjectural variation: with v 12 : reaction of firm 2 on action of firm 1 Marketing: e.g. Wöhe(2005) –cost-based pricing –demand-based pricing –market-structure-based pricing Macroeconomic theory of the reasons for price stickiness: –time-dependency –state-dependency.

The data Individual data on price changes per product for France: –industrial cleaning –computer services (hardware and software consulting, TA) Additional information: –product code, firm code, product group code –different variables on adjustments done by INSEE –product and price descriptions. Data sets after cleaning: Source: INSEE PPI in business services, 2005/2006

Distibution of quarterly price changes - industrial cleaning - Source: INSEE PPI in business services, 2005/2006

Distibution of quarterly price changes - computer services - Source: INSEE PPI in business services, 2005/2006

Variation in producer price changes across products - Industrial cleaning - Source: INSEE PPI in business services, 2005/2006

Variation in producer price changes across products - Computer services - Source: INSEE PPI in business services, 2005/2006

Individual factors - Industrial cleaning - Source: INSEE PPI in business services, 2005/2006

Individual factors - Computer services - Source: INSEE PPI in business services, 2005/2006

Multifactorial VA - Industrial cleaning - Source: INSEE PPI in business services, 2005/2006

Multifactorial VA - Computer services - Source: INSEE PPI in business services, 2005/2006

Accounting for adjustments - Industrial cleaning - Source: INSEE PPI in business services, 2005/2006, preliminary results!!

Accounting for adjustments - Computer services - Source: INSEE PPI in business services, 2005/2006, preliminary results!!

The frequency of price changes - industrial cleaning - Source: INSEE PPI in business services, 2005/2006

The frequency of price changes - Computer services - Source: INSEE PPI in business services, 2005/2006

First results from a hazard model - I Source: INSEE PPI in business services, 2005/2006, preliminary results !

First results from a hazard model - II hazard ratios, time impact Source: INSEE PPI in business services, 2005/2006, preliminary results !

Conclusion Summarising: –Mean quarterly price change between 2 et 5% in absolute terms. –Large heterogeneity across services activities, firms, product groups, and over time, both in terms of levels and timing of price changes. –Time and firm-specific factors are most important determinants of price changes in services, both in terms of variation and timing,... –… but less so product groups. Does measurement matter ? –Conclusion on this basis would be premature: –Weak explanatory power of the estimated models -> better specification, better measurement of variables necessary –Unexpectedly weak impact of product groups - careful interpretation –Impact of adjustments undertaken to construct the price index - linked to other variable and their measures?

Channels of measurement problems I - The steps in the construction of a PPI Source: PPI Manual ILO, OECD, IMF, 2004 Determining the objectives, scope, conceptual basis of the index, deciding on the index coverage and classifications structure, deriving the weighting pattern, designing the sample, collecting and editing the prices, adjusting for changes in quality, calculating the index, disseminating the indices, maintaining samples of businesses and product specifications, reviewing and reweighting the index.

Variation in producer price changes by firm - Industrial cleaning - Source: INSEE PPI in business services, 2005/2006

Variation in producer price changes by firm - Computer services - Source: INSEE PPI in business services, 2005/2006

Variation in producer price changes by product group - Industrial cleaning - Source: INSEE PPI in business services, 2005/2006

Variation in producer price changes by product group - Computer services - Source: INSEE PPI in business services, 2005/2006