Technology People and Productivity - Complex Factors Of Productivity

More output per hour of labor indirectly reflects the impact of machines. But why not measure the impact of machines, materials, and other factors directly? The Bureau of Labor Statistics does just that. It produces an index of Multifactor Productivity (MFP). This measure combines the inputs of labor, capital¹, energy, materials, and purchased services into a single index. How the MFP index is produced is described below. First, consider the following:

Multifactor productivity has been growing, albeit at a slower rate then the conventional productivity measure, output per hour. In the 1949 to 1999 period, MFP grew 1.2% (compounded, annual rate); labor productivity grew at 2.7%. But multifactor productivity is a more inclusive measure; it thus provides a more complete picture.²

Multifactor productivity accounts for the inputs of labor, capital, energy, materials, and purchased services. It reflects factors much more difficult to measure effectively: scale effects (bigger is often better), technological change, reallocation of resources, efficiency improvements, changes in materials and better materials, structural changes, and other factors.

The index is a ratio of outputs to combined inputs. First, data for each input are normalized to constant dollars and expressed as an index for each (labor, capital, etc.). Next, the input indexes are combined to reflect the relative importance of each. If labor is 30% and capital 15%, for instance, 30% of the labor index and 15% of the capital index appear in the combined index of inputs. Next, the output index is developed in the same manner.

The final multifactor productivity value is the Output divided by the Input. If the Output is 119.57 and the Input is 118.32, the result is 1.0105. This number, multiplied by 100, is the MFP index. Note that only the value greater than 100 reflects the difficult-to-measure, "synergistic" effects of scale, technology, and so on. If the index is 100, it means that all inputs are fully reflected in the output. If the index falls below 100, it means that deterioration has taken place.

Multifactor productivity measures broader aggregates — Business and Non-farm Business (not shown here) — reflect various structural changes in the economy, including "efficiencies" not always appreciated by the consumer. They impose unpaid labor. Examples are the self-service gas stations in many states; labor savings in drive-through car washes; ATM machines that turn us into bank tellers; assemble-your own toys, furniture, and appliances; and that scourge of our age: voice mail.

Source: Bureau of Labor Statistics, U.S. Department of Labor, http://www.bls.gov/mprhome.htm.