The Challenge of Measuring Labor Productivity Gains

Five out of six private sector workers are employed in service-producing (rather than goods-producing) industries.  Much of our domestic production is also in services.  There is no doubt that computers, information technology and the internet have increased the productivity of service workers, especially those in business and scientific fields, over the past two decades.  However these productivity gains are extremely difficult to measure.  The Bureau of Labor Statistics makes a valiant effort to measure labor productivity gains in service industries.  A more careful examination of the detailed productivity data released by the BLS at the end of May casts doubt on our ability to measure productivity in the service sector.

Measuring labor productivity gains in the goods producing sector is relatively straight-forward.  An increase in labor productivity occurs when more physical units of output (of a given quality) are produced per hour worked.  The biggest challenge in measuring productivity in goods-producing jobs is adjusting for changes in the quality of the good being produced.

In service-producing industries it is extremely difficult to disentangle increases in the cost of an hour of a service-producer’s time and the quantity of the services provided.  Consider a situation where the cost of an hour of a lawyer’s time increased by 20% over a five-year period.  Is that a price increase, holding the quantity and quality of services rendered?  Or are more legal services being provided per hour because of productivity gains due to the internet and improvements in computer databases.  The same question can be asked for engineers, architects, consultants or accountants.

The following chart illustrates BLS measures of productivity gains (in output per hour) in three service-producing industries between 1987 and 2010.

Productivity fell in bars (technically drinking places serving alcoholic beverages) over the past twenty-three years.  It is unclear what makes a bartender less productive.  Apparently Americans are sipping their alcoholic beverages more slowly than we were in 1987.  It is even more surprising that janitorial service providers saw a bigger increase in productivity than engineering service providers over the past two decades.  Again it is unclear whether the BLS can measure how much more productive janitors have become.  Perhaps it takes 55.7% less time to clean floors than it did in 1987.  Or maybe are floors aren’t quite as clean as they used to be.

It is imperative that we accurately measure productivity gains in the service economy when we try to measure real GDP growth and price inflation.  If productivity measures for many detailed service-producing industries are inaccurate can more aggregated measures of real output and prices be reliable?  It is a challenge to accurately measure the quality and quantity of output in many industries in our information and service-based economy.  It isn’t exciting to devote more of our resources to developing better measures of prices and quantities in these industries, but it may be warranted.

A Penny Earned – Every Two Seconds

Canada recently announced that they are ceasing production of the penny.  The U.S. should follow Canada, Australia, New Zealand and other trading partners and stop production of the penny.  There are many arguments in favor of eliminating the penny.  First, it costs more than a penny to mint a penny.  Moreover, a one cent difference in prices and wages is so negligible that calculating values to the nearest penny is not worth the cost (of handling and producing pennies) for almost any conceivable transaction.

In 1955 the median full-time employee worked about 20 seconds to earn a penny but today earns a penny every 1.9 seconds.  In 1955 a penny was about one half of one percent of a typical worker’s hourly wage but today is only about one twentieth of one percent of the median wage.

Workers and consumers, regardless of their income, should support legislation to eliminate the penny despite what some have written.  It is counterproductive to produce coins that cost more than they are worth.  Consumers should not be concerned that rounding prices to the nearest nickel will result in higher prices, on average.  Prices are set by competitive forces.  Moreover, retailers effectively round prices by not continuously adjusting prices as cost and demand conditions change from one day to the next.  A recent paper by Martin Eichenbaum and co-authors analyzes over twenty years of price changes of individual items and finds that small price changes are relatively rare; the vast majority of price changes are at least 1% in absolute value.  Requiring companies to round prices to the nearest nickel is sensible because the penny’s purchasing power has been devalued so much by inflation.

Textbook Inflation

Last week Apple Computers announced that it is entering the textbook market with an interactive textbook application for the iPad and software to help authors create digital textbooks on a Mac.  Although electronic textbooks have been available for years, Apple’s marketing chief Phil Schiller stated that “education is in the dark ages.”  Apple, Amazon, and other producers of tablets and e-readers may re-invent the textbook by encouraging the development of more interactive and effective methods of presenting information on more portable platforms.

The digital textbook market may evolve more slowly than other markets for digital content because instructors and school boards, rather than students and parents, decide which textbooks are adopted.  Whether students can choose the most effective and convenient textbooks is influenced by the selections and decisions of instructors.

Professors choose which textbooks are used even though students purchase them.  This separation of the selection and purchase decisions may contribute to higher textbook prices.  If professors are more concerned about textbook content than prices they may require more expensive textbooks even if they are only marginally better for students.  Textbook publishers will respond by competing less on price and more on features valued by instructors.

Price competition keeps prices lower, whether the product is a textbook, a prescription drug, or a barrel of oil.  The Bureau of Labor Statistics, which calculates the Consumer Price Index, collects price information for a variety of products and services purchased by college students including textbooks, tuition, and dormitory housing.  The following chart shows that textbook prices have risen faster than the prices of other goods and services purchased by students, including tuition. College textbooks cost about 39% more than they did five years ago.

The fact that textbook prices are increasing faster than other costs of attending college does not prove that professors ignore their students’ interests when selecting textbooks, but it suggests that features such as test banks and lecture materials may be more important for a textbook’s success than price or convenience to the student.  Apple and Amazon will help digital textbooks become more interactive and portable over the next few years.  This innovation will be even more effective if professors internalize the preferences of their students when deciding which textbooks to adopt.

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