Total factor productivity (TFP) increased in 15 out of 21 major industries in 2021, the U.S. Bureau of Labor Statistics (BLS) reported today. The TFP increases in 2021 were primarily due to widespread output growth outpacing increases in the combined inputs of capital, labor, energy, materials, and services.
Output increased in 20 of 21 major industries in 2021. The 2021 output growth was the largest in the series for the following industries: arts, entertainment, and recreation (+36.5 percent), accommodation and food services (+32.0 percent), administrative and waste services (+15.8 percent), information (+13.4 percent), and transportation and warehousing (+11.9 percent). (See table 1.) Ten industries with output growth in 2021 have output declines over the 2019-2021 time period, illustrating that output for these industries is still below their pre-COVID-19 pandemic levels. (See table 3.)
Combined inputs increased in 18 of the 21 industries in 2021, driven by strong growth in labor input and intermediate inputs. (See table 1.) Labor input grew in 18 of 21 industries in 2021 but only 8 industries show growth for the 2019-2021 time period, demonstrating that these 8 industries have yet to
re-hire labor lost in 2020.
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| Methodology Change for Labor Composition |
| Data in this release reflect new methodology and sources for the estimation |
| of labor composition, which is a measure of the changing skill composition |
| of the work force. Labor composition is used to adjust the number of hours |
| worked by industry to estimate labor input. |
| See www.bls.gov/productivity/technical-notes/labor-composition-for-total- |
| factor-productivity-using-new-method-nov-2022.htm for more information. |
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Total factor productivity is defined as output per unit of combined inputs. TFP shows the relationship between changes in real sectoral output and changes in the combined inputs of capital input (K), labor input (L), and intermediate inputs (energy (E), materials (M), and services (S)) used in production of final goods and services. It reflects economic growth that is not due to growth in measured KLEMS inputs, including technological change, organizational changes in the production process, and other efficiency improvements.
Industry spotlight: Arts, entertainment, and recreation
Many industries experienced large growth in TFP and related measures in 2021 but this growth can be misleading without a comparison to 2020 when the COVID-19 pandemic struck the U.S. economy. The arts, entertainment, and recreation industry experienced record declines in 2020 in TFP and related measures and then experienced record growth for these measures in 2021. Growth rates from the 2019-2021 period can be used to gauge the effects the pandemic had on this industry over the last two years.
The reopening of museums, entertainment venues, sports arenas, and parks resulted in record output growth of 36.5 percent in 2021, due to historic TFP and combined inputs growth of 15.1 percent and 18.6 percent, respectively. However, this strong growth only partially offset the historic declines brought on by the COVID-19 pandemic, as output, TFP, and combined inputs all experienced declines over the 2019-2021 time period. (See table 3.)
Looking at the KLEMS components of combined inputs, the story is similar. The arts, entertainment, and recreation industry had double digit growth in labor, materials, and services, with capital and energy also increasing in 2021. Yet for the 2019-2021 time period, the change in all inputs except capital was negative. Thus, although 2021 was a productive year, the arts, entertainment, and recreation industry has not fully recovered to its pre-pandemic levels.
Total factor productivity and KLEMS as sources of labor productivity growth
As the economy started to rebuild after the COVID-19 pandemic, industries began to re-hire workers displaced in 2020 and increase inputs to production. As production throughout the economy improved, hours worked increased at a slightly slower rate than output which led to labor productivity increases among 16 of 21 major industries. (See table 5.)
Labor productivity can be expressed as the sum of six components: total factor productivity growth (TFP), contribution of capital intensity, contribution of labor composition, contribution of energy intensity, contribution of materials intensity, and the contribution of services intensity. The contribution of each KLEMS input is defined as the ratio of the services provided by that input to hours worked in the production process, weighted by its share of sectoral output. Examining input contributions and TFP changes reveals the substitution effect of increased use of an input relative to labor on an industry’s labor productivity. (See table 5.)
Of the 16 industries with labor productivity growth in 2021, TFP was the largest contributor to labor productivity growth in 10 industries, with services intensity being the largest contributor for five of the remaining industries. Capital intensity fell in 15 of the 21 industries measured, as hours growth outpaced capital input growth. Changes in labor composition were negative or zero for all industries in 2021, as workers with less experience were most negatively impacted by the pandemic, returned to work.
TFP and input contributions to output
The large productivity rebound among major industries in 2021 led to an overall increase in output at the private business sector. The nation's output can be viewed as the sum of three components: total factor productivity, contribution of capital input, and contribution of labor input. TFP contributed 4.2 percentage points of the rise in output, while labor input contributed 2.3 percentage points of the increase. This output growth is the largest since 2010, the first year following the Great Recession of 2008-09. As in 2010, TFP is the predominant contributor to private business output. However, the rebound from the COVID-19 recession is unique with labor input’s large contribution to growth.
The private business sector can be divided into four sectors:
goods producing; information and communication technology (ICT); finance, insurance, and real estate (FIRE); and service providing. Looking at these sectors provides further insights on how the U.S. recovered the year following the COVID-19 recession compared to the year after the Great Recession of 2008 and 2009. (See technical note for industry makeup of each sector.)
TFP’s contribution to output
The total factor productivity contribution of 4.2 percentage points to private business output in 2021 was widespread, with all four sectors experiencing positive contributions, led by the service providing sector which had a positive contribution of 2.5 percentage points. Within the service providing sector, accommodation and food services and professional, scientific, and technical services industries were the main upward drivers, with a 0.6-percentage point and 0.5-percentage point contribution, respectively. By contrast, in 2010 after the Great Recession, the goods producing sector made the largest contribution (1.1 percentage point) to TFP growth. (See tables 6 and 7.)
Labor’s contribution to output
In 2021, labor input saw positive contributions to private business output within all four aggregated sectors. The service providing sector had the largest positive contribution in 2021 (1.7 percentage points), led by transportation and warehousing (0.3 percentage point) and professional and technical services (0.3 percentage point). By contrast, the labor contribution to output in 2010 was negative in three of the four aggregated sectors but were offset by the positive contribution of the services providing sector (0.2 percentage points). Of note is the similar behavior of the service providing sector during 2021. This labor-intensive sector, which was the hardest hit by the pandemic, is an important part of the economic recovery. (See tables 6 and 7.)
Capital’s contribution to output
Capital input’s positive contribution in 2021 and after the Great Recession reflects the stability of capital stock after downturns. In 2021 all sectors demonstrated a positive contribution of capital, resulting in a 0.9-percentage point contribution of capital input to private business output, while these four sectors’ capital input contribution was only 0.3-percentage point in 2010 after the Great Recession. Given the financial crisis of 2009, capital in the FIRE sector had a negative impact on the recovery from the Great Recession, yet had a large positive boost to output in 2021. The 0.2-percentage point contribution of the FIRE sector was driven by the finance and insurance industry with a contribution of 0.2 percentage point. In the year after the Great Recession, this industry only had a negative contribution of 0.1 percentage point. (See table 6 and 7.) The goods producing sector increased its contribution of capital to output from 0.1 percentage point in 2010 to 0.2 percentage point in 2021.
Original source can be found here.
