Measurement of productivity

Without some knowledge of how productivity measures are formed,
a proper understanding of productivity trends is not possible.

The Australian Bureau of Statistics (ABS) publishes the official productivity estimates for Australia. The ABS methods are explained here. Because the ABS follows international conventions on productivity measurement, the approach also applies to other countries.

The ABS publishes annual estimates of productivity as part of the annual national accounts (Cat. No. 5204.0, Tables 13, 14). Detailed data that are used to form the productivity estimates are published on the ABS website in what is referred to as the 'Productivity Data Cube' (Cat.No. 5260.0.55.002).

The estimates published in Tables 13 and 14 of the national accounts are sometimes referred to as the 'headline' estimates. They are considered to be the 'go to' estimates, most representative of Australia's productivity performance. The ABS publishes a range of estimates (covered in the pdf attachment at the bottom of this page). But I will focus on the headline estimates on this page.

The published productivity measures
The measures the ABS publishes on Australia's productivity performance take the following forms:

where the f(K,L) signifies a relationship that combines the quantities of labour and capital services used.

Expressed as indexes
As set out on the 'What, why and how' page, productivity is the ratio of output produced to input(s) used. The ABS measures output and inputs in the form of indexes. The indexes are each set at a value of 100 in the second-last year of a series. The productivity ratios are also set to a value of 100 in the second-last year (see table below). As indexes, they do not have any units of measurement (such as tonnes or passenger-miles). 
Source: ABS Cat. No. 5204.0, Table 13

The use of indexes means that estimates of the level of productivity are not meaningful. To say that productivity was 100 in 2013-14 does not tell us anything useful. The interest is in productivity growth. The growth in labour productivity from 100 in 2013-14 to 101.3 in 2014-15 (an improvement of 1.3%) does have meaning.

Output and inputs measured as quantities
Output and inputs are measured in terms of quantities. Productivity in this context is the ratio of the quantity of output produced to the ratio of the quantities of inputs used. The ABS productivity measures are therefore quite distinct from financial measures, such as revenue per worker.

The output measure is value added
The quantity of output produced at an individual firm is straightforward to measure. At an automotive factory, for example, you could count the number of vehicles of a certain type produced.

But for the economy, outputs of many different goods and services have to be added. The only effective way to do that is to use the price of a good or service to measure a dollar value of the output. The values of goods and services can then be added together.

The effects of price inflation are removed from these values so that they represent quantities (or 'volumes' according to the ABS methodology).

'Value added' is the measure of output used. The quantity of output produced,multiplied by its price, is the gross value of production. Value added is the gross value of production, less all the costs of production, apart from labour and capital costs. It represents the value that is added to all the materials (such as components), and services (such as electricity and transportation) used in the course of production.

Labour is measured in 2 ways

Estimates cover the 'market sector' of the economy

Allowance for quality change