Measuring Output and Productivity Growth in Services

1. Measuring Output and Productivity Growth in Services Joint product of NESDB and World Bank Work being down by by a team from the National Accounts Office

2. Reasons for Current Interest • Services are a major source of employment growth • Important part of economic infrastructure. • Major area of innovation (primary user of ITC capital). • General Agreement on Trade in Services (GATS) increased interest in performance of services. • Significant influence in competition for emerging business centers in global production system.

3. Objectives • Review methodology for computing output and productivity in services. • Develop a methodology for cross-national comparisons of productivity performance in specific industries. • Airlines, Communications, Banking, and Trucking. • Valuable benchmark of performance of critical industries relative to trade partners.

4. Problems • Statistical system collects very little information on services • Very true in Thailand • Reporting system (surveys) dominated by manufacturing and goods production • Focus on tradable goods and exports • Hard to measure real output of services • Hard to define unit of output • Lack of price indexes to adjust for inflation

5. Construction of Growth Accounts • (1) • (2) • Where: • Q: real GDP • A: TFP – efficiency of factor usage • K: physical capital inputs -stock measure • L*: labor inputs - adjusted for yrs school • sk: factor income shares

6. Growth Accounts (2) • Computation of factor shares • Division of value added between capital and labor compensation • Income share can be used to measure contribution in competitive situations • Mixed income (self-employment) is a combination of labor and capital income. • Assume labor component equal to wage of employees • Adjust compensation by ratio of total employment to employees. • Increases importance of labor in growth accounts

7. Stages of Presentation • Macroeconomic Overview • Total Economy and major sectors • Agriculture, Industry, and Services • Structure of Services Sector • Industry groupings • General data issues • Detailed Industries • Productivity measures • International comparisons

8. Macro Overview

9. I.Macroeconomic Overview • Thailand has had a very limited recovery from 1997-98 financial crisis. • Permanent loss of output in levels context • Much slower trend growth after crisis (annual LP growth– 2.6% vs 6.8%) • Sharply lower rates of capital accumulation • Faster growth of Total Factor Productivity

12. Sector Performance • Agriculture • Small contribution to growth • Mechanization (capital) is major source • Industry • Historically, most rapid growth • Large post-crisis decline in capital contribution • Some TFP offset • Services • Decline in capital contribution • No TFP offset

16. Reallocation Gains • Low labor productivity and TFP growth in all three sectors • Contribution of within-sector labor productivity has declined. • Large productivity slowdown in industry and services. • Large portion of aggregate productivity growth coming from reallocation of workers from low-productivity agriculture to high-productivity industry and services.

18. Resource Reallocations

19. Resource Reallocations (2) • Definitions • LPv = labor productivity (value added) • L = employment • wi = value added share of industry i. • ei = employment share of industry i.

20. II. Major Service Industries • Unlike the situation in agriculture and industry, Thailand collects very little information about the performance of services. • No comprehensive economic census. • Employment estimates are available only from the household labor force survey • Survey works well for major sectors • But, respondents do not know detailed industry classification of their employers.

21. Labor Productivity in Service Industries • Real output measures from national accounts • Employment estimates from LFS • Trade, restaurants and transportation are largest providers of value added and employment. • Growth is mot rapid in communications, and public services. • Many industries appear to have negative productivity growth. • Implausible, and suggestive of measurement problems.

22. Output and Labor Productivity Growth, 1993-2005

23. Total factor productivity • Conversion of capital stock measures to new industrial classification is still incomplete • Severe problems with factor income shares • Labor share recorded as very low in industries such as wholesale and retail trade and restaurants. • TFP growth is negative in many industries

24. Total Factor Productivity, 1993-2005

25. Overview of Service Industries Problems • Suggestion that output and productivity growth are significantly understated in several service industries • Unresolved conflicts with other data, such as Business Trade and Service Survey of NSO • Difficult to make significant progress without expanded source data.

26. Problems (2) • Need for a decennial census and annual surveys of service industries. • Comparable to existing data for manufacturing. • Questionnaire can be considerably shorter • Revenue, value added, and investment outlays are the critical elements. • Would provide an estimate of employment and compensation on a basis that matches that of the production data.

27. III. Four Detailed Industries • Airlines, communications, banking, and trucking • Important components of logistics infrastructure for manufacturing and exports • Indicative of Thailand’s development as an international business center • Attempt benchmark comparisons of performance relative to trading partners.

28. Methodology • Measure productivity as before, but need to measure output and inputs in common international units • Reluctant to use either commercial exchange rates or PPPs as they may not be representative of specific industry • Try to develop a common physical unit for output (e.g. airlines and communications) • In banking, we plan to use commercial exchange rate. • OK for labor, and much of capital is purchased in a common global market.

29. I. Airlines • Case study of international comparison • Can define a unit of output as a ton kilometer (aggregate passenger and freight) • Avoids need to convert from one national currency to another • Data are available from individual airlines • Can basically match the data in Thailand’s national accounts.

31. Alternative Measures of Capital Input • Net capital stock of NESDB • Cumulative of investment with assumed rate of depreciation • Issues of leasing and retirement of planes • Available capacity tons of passengers and freight • Available ton-kilometers • Number of planes aggregated by relative price.

34. International Comparisons

35. International Comparisons • Output is a weighted average of passengers (58%) and passenger ton-kilometers (42%) • Weights are from a regression of airline revenues as a function of passengers and passenger ton kilometers • Capital is based on available ton-kilometers

41. Overview • Thai Air’s labor productivity is below that of the United States an Singapore • Currently offset by lower labor cost • Gap is slowly widening for both Thai Air and Malaysia Air • Capital productivity is comparable to that of Singapore Airlines • Overall TFP gains very similar for Thai and Malaysia

42. Overview (2) • Most serious problem is a lack of any adjustment for quality. • U.S. productivity gains in recent years may have been at expense of service quality • How measure quality? • Overall performance measures may camouflage some more specific problems. • Thai Air has a high load factor on regional flights, but very low for long distances • Harder to compete outside of region.

43. Overview (3) • Thailand has a significant labor cost advantage • Thai Air has a relatively high rate structure • Revenue per passenger kilometer

44. 2. Communications • Industry of very rapid innovation • Mobile phones • Broadband and the internet • Increased competition • Data within Thailand are very incomplete • Grouped with postal service in national accounts • Currently relying largely on data from International Telecommunications Union

45. Output Measurement • Three broad activities of fixed line service, mobile phones and broadband • Current information on broadband service is incomplete for many countries • Emphasize fixed line and mobile • Weigh physical indicators of output (subscribers) by share of revenue. • Extraordinarily rapid growth for Thailand.

46. Telecommunications Output

47. Labor Productivity • Mobile systems are much cheaper to construct than fixed line and less labor intensive. • Questions about employment data in recent years • Reported numbers are volatile and may not consistently include all of the major companies • Emergence of mobile led to very rapid rise in labor productivity • Less dramatic for the United States, which had a large investment in fixed lines.

48. Labor Productivity

49. Capital • National Accounts Office does not produce a measure of capital stock at level of telecommunications. • Not sure of source for report to ITU and the coverage of that data • Expect large gains in capital productivity in those countries where mobile substitutes for building a fixed line system. • In Thailand, mobile phone subscribers far outnumber fixed line subscribers (33 million versus 7 million).

50. Capital Productivity