Annex F: Direct and Indirect Labour Input Measurement

The overriding methodological justification for the improvements to the labour measurement is to account for changes in the quality of labour, as these excerpts from the OECD Manual on Measuring Productivity and the Atkinson Review (2005) explain.

“Labour input reflects the time, effort and skills of the workforce. While data on hours worked capture the time dimension, they do not reflect the skill dimension. When total hours worked are the simple sum of all hours of all workers, no account is taken of the heterogeneity of labour.

For the estimation of productivity changes, the question is whether, over time, the composition of the labour force changes, i.e. whether there is an increase or decrease in the average quality of labour input.”

OECD Manual, paragraphs 85 and 86

“Principle F recommends that labour inputs be measured using both direct (number of hours worked, with different skill categories being weighted) and indirect (deflation of pay by a labour cost index) methods.”

Atkinson Review, paragraph 5.62

F.1 Indirect approach

The indirect approach simply deflates current price (CP) expenditure by a relevant price deflator:

Figure 16

where CP labour expenditure, classified by European Systems of Accounts 2010 code D1, is the total compensation of employees and includes remuneration in excess of gross pay.

F.2 Direct approach

The direct approach uses data on full-time equivalent employees (FTEs) and relative salaries for employment ranks:

Figure 17

The direct approach equation estimates the labour growth contribution of staff in employment at each rank or grade. To get a total direct labour estimate the following process is followed:

• Sum the growth contributions of all relevant rank or grade; i to n.
• Each rank is weighted within the calculation by their own implied expenditure relative to the total implied expenditure (for staff of all ranks).

This methodology aligns with that which is proposed, or already in place, for other areas within public service productivity.

While direct labour measurement is ideally based on the number of hours worked for all employees, the lack of data means that it is rarely possible, and the next best metric to use is the number of FTE staff.   To account for the skill-level of different groups of labour input, FTE data are typically weighted by the average salary data of these constituent groups.