Technical Note Total Factor Productivity: Total factor productivity measures are derived by dividing an index of real industry output by an index of the combined inputs of labor, capital, and intermediate purchases. The total factor productivity indexes do not measure the specific contributions of capital, labor, and intermediate inputs. Rather, they reflect the joint influences on economic growth of a number of factors that are not specifically accounted for on the input side, including technological change, returns to scale, improved skills of the workforce, better management techniques, or other efficiency improvements. Output: Manufacturing industry output is measured as annual sectoral output, the total value, in real terms, of goods and services produced for sale outside the industry. Industry value of production is derived by adjusting industry shipments for changes in inventories and subtracting intra-industry transfers and resales. For most manufacturing industries, real output is measured by deflating nominal value of production, but for some industries physical quantities of output are measured. For air transportation and line-haul railroads, output is measured by aggregating passenger-miles and freight ton-miles with weights based on revenues or operating expenses. Output measures for manufacturing industries are constructed using data primarily from the economic censuses and annual surveys of the Bureau of the Census, U.S. Department of Commerce, together with information on price changes chiefly from the Bureau of Labor Statistics (BLS). Output measures for air transportation and line-haul railroads are constructed using data primarily from the Bureau of Transportation Statistics (BTS) and the Surface Transportation Board (STB), both in the U.S. Department of Transportation (DOT), together with information from the Association of American Railroads (AAR), AMTRAK, and several other sources. Combined Inputs: The index of combined inputs is a Törnqvist index of separate quantity indexes of capital, labor, and intermediate purchases (including fuels, electricity, materials, and purchased services). The annual growth rates of the various inputs are aggregated using their relative cost shares as weights. The labor weight is based on labor compensation, including fringe benefits. The weight for intermediate purchases is based on the total cost of materials, fuels, electricity, and purchased services. The capital weight is based on total capital cost, which is calculated as the value of sectoral production minus the costs of labor compensation and intermediate purchases. Capital Input: Capital input reflects the flow of services derived from the stock of physical assets. Capital services are estimated by calculating productive capital stocks and are assumed to be proportional to changes in these capital stocks for each asset. The capital index is a Törnqvist index of separate quantity indexes of equipment, structures, inventories, and land. For manufacturing industries, physical capital is comprised of 24 categories of equipment, 10 categories of structures, 3 categories of inventories, and land. Measures of total capital services for each industry are estimated by aggregating the capital stocks of individual asset types. Estimates of investment by asset type for each industry are derived using annual capital expenditures for detailed industries from the economic censuses and annual surveys of the Bureau of the Census. Additional annual investment data comes from the fixed asset accounts from the Bureau of Economic Analysis (BEA). Annual investment data is supplemented with the 1997 benchmark capital flow table from the BEA as well as the 2008 and 2012 Annual Capital Expenditures Survey from the Bureau of the Census. Price changes are removed from the annual investment data before calculating stocks. Price deflators for each asset category are constructed by combining detailed price indexes (mostly BLS Producer Price Indexes) with weights that reflect each industry’s use of individual asset commodities. The capital stocks for the different assets are combined using weights based on estimated annual rental prices for each asset type, averaged between two time periods. Each rental price reflects the nominal rate of return to all assets within the industry and the rates of economic depreciation and revaluation of the specific asset. Rental prices are adjusted for the effects of taxes. For air transportation, a weighted index combining 23 categories of airframes and 21 categories of engines is derived from annual carrier operating inventories reported to BTS. For assets other than airframes and engines, capital stocks are calculated similarly to manufacturing industries. For these assets, a more detailed breakdown of annual expenditures on equipment and structures from the BEA is used. Inventories of parts and supplies are also included; the current dollar series is deflated with a weighted cost index based on data from Airlines for America (A4A) and BTS. Indexes for aircraft and engines, non-aircraft assets, and parts and supplies inventories are aggregated using cost share weights to derive an overall measure of capital input. For line-haul railroads, current dollar investment for 10 categories of equipment and 13 categories of structures, obtained from STB and AMTRAK, are deflated with BLS PPIs and deflators based on BEA data. The capital stocks for each of the items are calculated similarly to manufacturing industries. Inventories of materials and supplies are also included. Estimates of investments in land from STB and AMTRAK were deflated with price indexes from BEA. Labor Input: For manufacturing industries, labor hours are measured as annual hours worked by all employed persons in an industry. Data on industry employment and hours come primarily from the BLS Current Employment Statistics (CES) survey and the Current Population Survey (CPS). CES data on the number of total and production worker jobs held by wage and salary workers in nonfarm establishments are supplemented with CPS data on self-employed and unpaid family workers to estimate industry employment. Hours worked estimates are derived using CES and CPS employment, CES data on the average weekly hours paid of production workers, CPS data on hours of nonproduction, self-employed, and unpaid family workers, and ratios of hours worked to hours paid based on data from the National Compensation Survey (NCS). For some industries, employment and hours data are supplemented or further disaggregated using data from the BLS Quarterly Census of Employment and Wages (QCEW), the Census Bureau, or other sources. Hours worked are estimated separately for different types of workers and then are directly aggregated; no adjustments for labor composition are made. For air transportation, annual labor input estimates are based on monthly employment data from BTS supplemented by employment and hours from the CES program and hours from the CPS. For line-haul railroads, labor input measures are derived primarily from STB data and supplemented with data from AAR. For the railroad industry, the labor input measure includes an adjustment to remove capitalized labor hours in order to avoid double-counting because some capitalized labor costs are embedded in the railroad investment data. Intermediate Purchases Input: The index of intermediate purchases is a Törnqvist index of separate quantities of materials, purchased services, fuels, and electricity consumed by each industry. Except for electricity consumed by manufacturing industries, for which direct quantity data are available, quantities are derived by deflating current dollar values with appropriate price deflators. For manufacturing industries, nominal values of materials, fuels and electricity, along with quantities of electricity consumed by each industry are obtained from economic censuses and annual surveys of the Bureau of the Census. To avoid double counting, an adjustment is made to the materials estimates to exclude the value of intra-industry commodity transfers. Purchased business services are estimated using annual industry data and benchmark input-output tables from BEA. Constant dollar materials consumed are derived by dividing annual current dollar industry purchases by a weighted price deflator for each industry. Aggregate materials deflators are constructed for each industry by combining producer price indexes and import price indexes from BLS for detailed commodities. The deflators are combined using weights based on detailed commodity data from the BEA benchmark input- output tables. Aggregate price indexes to deflate purchased business services are constructed in a similar manner using consumer price indexes (CPIs), PPIs, and deflators developed by BEA. The value of fuels consumed by each industry is deflated with a weighted price deflator based on PPIs for individual fuel categories; the weights reflect fuel expenditures by industry from the Energy Information Administration (EIA), U.S. Department of Energy. For air transportation, detailed cost of materials, services, fuels, and electricity from the BTS are deflated using cost indexes from A4A. For line-haul railroads, intermediate purchases data from STB are supplemented with data from other sources including AAR and AMTRAK. The nominal values are deflated with producer price indexes from BLS and implicit price deflators calculated from BEA investment data. Labor Productivity: Labor productivity describes the relationship between real output and the labor hours involved in its production. These measures show the changes from period to period in the amount of goods and services produced per hour worked. Although the labor productivity measures relate output in an industry to hours worked of all persons in that industry, they do not measure the specific contribution of labor to growth in output. Rather, they reflect the joint effects of many influences, including: changes in technology; capital investment; utilization of capacity, energy, and materials; the use of purchased services inputs, including contract employment services; the organization of production; the characteristics and effort of the workforce; and managerial skill. Contributions to Labor Productivity: Contribution of Capital Intensity: Capital intensity is the ratio of capital services to hours worked in the production process. Multiplying the change in capital intensity times capital’s share of combined inputs yields the contribution of capital intensity. Contribution of Intermediate Purchases Intensity: Intermediate purchases intensity is the ratio of intermediate purchases to hours worked in the production process. Multiplying the change in intermediate purchases intensity times intermediate purchases’ share of combined inputs yields the contribution of intermediate purchases intensity. When positive, both the contribution of capital intensity and the contribution of intermediate purchases intensity represent sources of labor productivity growth. These statistics represent factor substitution in the production process. In other words, positive change in the contribution of capital intensity indicates that labor productivity growth is being achieved in part through the substitution of capital for labor. Likewise, positive change in the contribution of intermediate purchases intensity indicates that labor productivity growth is being achieved in part through the substitution of intermediate purchases for labor. Over a given time period, the average logarithmic growth rate of labor productivity will equal the sum of the average logarithmic growth rates of the contribution of capital intensity, the contribution of intermediate purchases intensity, and total factor productivity. However, because both output and input data are expressed annually, average annual (as opposed to logarithmic) rates of change are calculated. Therefore, the sum of growth rates of multifactor productivity, the contribution of capital intensity, and the contribution of intermediate purchases intensity may not precisely equal the rate of change of labor productivity.