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Technical Notes Capital Services Capital services are the services derived from the stock of physical assets and intellectual property assets. There are 90 asset types for fixed business equipment, structures, inventories, land, and intellectual property products. Data on investment for fixed assets are obtained from the Bureau of Economic Analysis (BEA). Data on inventories are estimated using information from BEA and the Internal Revenue Service (IRS) Corporation Income Returns. Data for land in the farm sector are obtained from the U.S. Department of Agriculture (USDA). Nonfarm industry detail for land is based on IRS book value data. Current-dollar value-added data, obtained from BEA, are used in estimating capital rental prices. Additional detail on information processing equipment and intellectual property products are available in table C. Information processing equipment is composed of three broad classes of assets: computers and related equipment, communications equipment, and other information processing equipment. Computers and related equipment includes mainframe computers, personal computers, printers, terminals, tape drives, storage devices, and integrated systems. Communications equipment is not further differentiated. Other information processing equipment includes medical equipment and related instruments, electromedical instruments, nonmedical instruments, photocopying and related equipment, and office and accounting machinery. Intellectual property products are composed of three broad classes of assets: software, research and development, and artistic originals. Software is comprised of pre-packaged and custom. Research and development is creative work undertaken to increase the stock of knowledge for the purpose of discovering or developing new products or improving existing ones. Research and Development also includes own-account R&D for software which had previously been classified in software. Artistic originals include theatrical movies, long-lived television programs, books, music, and other forms of entertainment. Structures include nonresidential structures and residential capital that are rented out by profit-making firms or persons. Financial assets are excluded from capital services measures, as are owner-occupied residential structures. The aggregate capital services measures are obtained by Tornqvist aggregation of the capital stocks for each asset type within each of 61 NAICS industry groupings using estimated rental prices for each asset type. Each rental price reflects the nominal rate of return to all assets within the industry and rates of economic depreciation and revaluation for the specific asset; rental prices are adjusted for the effects of taxes. Current-dollar capital costs can be defined as each asset’s rental price multiplied by its constant-dollar stock, adjusting for capital composition effects. Capital services measures constructed for the most recent year are preliminary and are based on less detail than the rest of the series. These measures consist of 6 asset types as opposed to the 90 asset types for fixed business equipment, structures, inventories, land, and intellectual property products included in estimates for all previous years. The assets included in the most recent year are structures, fixed business equipment, intellectual property products, inventories, rental residences, and land. Investments, depreciation, and capital income are estimated for each of these six aggregates. Capital services are calculated by a chained superlative Tornqvist index combining stocks of the six asset categories, weighted by capital income shares. See the June 2005 Monthly Labor Review article, “Preliminary estimates of multifactor productivity growth” located at www.bls.gov/opub/mlr/2005/06/art3full.pdf. Labor Input Labor input in private business and private nonfarm business is obtained by a chained superlative Tornqvist aggregation of the hours worked, classified by age, education, and gender with weights determined by each group’s share of the total wage bill. Hours paid of employees are largely obtained from the Current Employment Statistics (CES) program. Weekly paid hours are adjusted to hours worked using data from the National Compensation Survey (NCS) for 1996 forward and data from the BLS Hours at Work survey, conducted for this purpose, prior to 1990. Between 1990 and 1995, weekly paid hours are adjusted to hours at work using a combination of NCS and Hours at Work survey data. Hours worked for nonproduction and supervisory workers are derived using data from the Current Population Survey (CPS), CES, and NCS. The hours worked of proprietors, unpaid family workers, and farm employees are derived from the CPS. Hours worked data reflect estimates in the March 4, 2021 “Productivity and Costs” news release (www.bls.gov/news.release/archives/ prod2_03042021.htm). The estimates of 2020 hours worked for the private nonfarm business and private business sectors are extrapolated from the hours worked reported in the nonfarm business and business sectors, respectively, in the March 4, 2021 “Productivity and Costs” news release (www.bls.gov/news.release/archives/prod2_03042021.htm). The growth rate of labor composition is defined as the difference between the growth rate of weighted labor input and the growth rate of the hours of all persons. The index of hours worked of all persons including employees, proprietors, and unpaid family workers, classified by age, education, and gender are weighted together using median wages to compute the labor composition estimates reflecting the different skillset of the work force. These cell estimates are smoothed using a three year moving average to address missing observations and reduce volatility. Additional information concerning data sources and methods of measuring labor composition can be found in “Changes in the Composition of Labor for BLS Multifactor Productivity Measures, 2014” (www.bls.gov/mfp/mprlabor.pdf). Combined Inputs Labor input and capital services are combined using chained superlative Tornqvist aggregation, applying weights that represent each component's average share of total costs. The chained superlative Tornqvist index uses changing weights; the share in each year is averaged with the preceding year's share. Total costs are defined as the value of output less a portion of taxes on production and imports. Most taxes on production and imports, such as excise taxes, are excluded from costs; however, property and motor vehicle taxes remain in total costs. Capital Intensity Capital intensity is the ratio of capital services to hours worked in the production process. The higher the capital to hours ratio, the more capital intensive the production process becomes. In a production process, profit-maximizing/cost-minimizing firms adjust the factor proportions of capital and labor when the price of one factor is less than the other factor; there is a tendency for the firms to substitute the less expensive factor for the more expensive one. In the short run, changes in hours worked are more variable than changes in capital services. Changes in hours worked in business cycles can result in volatility of the capital intensity ratio over short periods of time. In the long run an increase in wages relative to the price of capital will induce the firm to substitute capital for labor, resulting in an increase in capital intensity. Rising labor costs are, in fact, an incentive for firms to introduce automated production processes. Industry estimates of capital to hours ratios can be obtained at www.bls.gov/mfp/mprdload.htm. Value-Added Output Private business sector output is a chain-type, current-weighted index constructed after excluding from gross domestic product (GDP) the following outputs: general government, nonprofit institutions, private households (including owner-occupied housing), and government enterprises. This release presents data for the private business and private nonfarm business sectors. Additionally, the private nonfarm business sector excludes farms from the private business sector, but includes agricultural services. Total factor productivity measures exclude government enterprises, while the BLS quarterly Productivity and Costs series include them. The output measures are based on the National Income and Product Accounts (NIPA) data released by BEA on February 26, 2021. The estimates of 2020 output for the private nonfarm business and private business sectors are extrapolated from the output reported in the nonfarm business and business sectors, respectively, in the March 4, 2021 “Productivity and Costs” news release (www.bls.gov/news.release/archives/prod2_ 03042021.htm). Total factor Productivity Total factor productivity measures describe the relationship between output in real terms and the inputs involved in its production. They do not measure the specific contributions of labor or capital, or any other factor of production. Rather, Total factor productivity is designed to measure the joint influences of technological change, efficiency improvements, returns to scale, reallocation of resources, and other factors on economic growth, allowing for the effects of capital and labor. The total factor productivity indexes for private business and private nonfarm business are derived by dividing an output index by an index of combined inputs of capital services and labor input. The output indexes are computed as chained superlative indexes (Fisher Ideal indexes) of components of real output. Research and Development The stock of research and development in private nonfarm business is derived by aggregating different vintages of constant dollar measures of research and development expenditures and allowing for depreciation. Current dollar expenditures for privately financed research and development are obtained from annual issues of Research and Development in Industry published by the National Science Foundation. BLS develops price deflators and estimates of the rate of depreciation. The research and development data in the private nonfarm business sector presented here show the effect of spillovers from economic units that conduct research and development. BEA publishes measures of research and development investments in each industry that include estimates of the direct returns to firms conducting such research and development activities. By combining the direct returns to firms conducting research and development with the spillover effect of other firms, a picture of the total overall effects of research and development can be drawn. Further description of these data and methods can be found in BLS Bulletin 2331 (September 1989), "The Impact of Research and Development on Productivity Growth" at www.bls.gov/mfp/mfparchive.htm. BLS measures of year-to-year contributions of research and development to the private nonfarm business sector and measures of the stock of research and development are available at www.bls.gov/mfp/rdtable.pdf. Other Information Comprehensive tables containing additional data beyond the scope of this press release are available upon request at (202) 691-5606 or at www.bls.gov/mfp/mprdload.htm. More detailed information on methods, limitations, and data sources of capital and labor are provided in BLS Bulletin 2178 (September 1983), “Trends in Multifactor Productivity, 1948-81” (www.bls.gov/mfp/mfparchive.htm) and on the BLS Multifactor Productivity website under the title “Technical Information About the BLS Multifactor Productivity Measures for Major Sectors and 18 NAICS 3-digit Manufacturing Industries” (www.bls.gov/mfp/mprtech.pdf). General information is available on the BLS website at www.bls.gov/mfp/mprover.htm. Additional data not contained in the release can be obtained at www.bls.gov/mfp. Comprehensive tables for the private business and private nonfarm business sector can be downloaded at www.bls.gov/mfp/mprdload.htm, including data that links 1948-87 SIC data to NAICS data from 1987 forward.