«Productivity growth in services and problems measuring services price indices » EUKLEMS Consortium meeting Brussels, 16-17 March 2007 Anita Wölfl, CEPII,

«Productivity growth in services and problems measuring services price indices»

EUKLEMS Consortium meeting

Brussels, 16-17 March 2007

Anita Wölfl, CEPII, EHESS

* This contribution resulted in the framework of the EUKLEMS project, funded by the European Commission, DG Research as part of FP6, Priority 8, "Policy Support and

Anticipating Scientific and Technological Needs".

Why analysing the measurement of price indices in services?

• What we observe:

– relatively weak productivity growth in services as compared to

manufacturing industries ...

– ... although some services show characteristics that would typically

spur productivity growth.

• Maybe due to problems measuring the underlying price index ?

• Steps

– Reasons and channels of measurement problems in services?

– How to analyse the extent of such measurement problems?

– Producer price changes and their variation - some results for two selected business services.

Some major problems measuring producer price indices and volumes series in services

Source: Eurostat Handbook on Price and Volume Measures in National Accounts, 2001

• Heterogeneity of services products– Specific services for individual customers (‘one-off ’),

– Different types and levels of prices for different markets/consumers,

– ‘Bundling’ of services products.

• Date of delivery different to date of payment

• Quality of service provided is important, but difficult to measure– Rapid change of technologies used,

– Service that is provided ~ knowledge provided.

• Availability and comparability of data– Definition of service output,

– Lack of necessary detail,

– Lack of comparability across countries.

Channels of measurement problems II - An overview

The elementary price series

Following prices over time

Aggregation issues

• finding a « typical » services product

• defining the detailed product specification

• measuring the price for each specification

• estimating missing values

• adjusting for changes in product specifications

• adjusting for quality changes

• accounting for new products

• choice of the firm sample

• classification of services products

• weighting schemes

• choice of the index formula

• accounting for new firms

The approach taken IThe basic idea

• An alternative ‘ residual ’:

– idea: estimate a price function on the basis of variables determining prices and their changes ->

– in the ideal case, the estimated price changes should be equal to the ‘measured’ price changes,

– the difference between the two would then reflect measurement problems, i.e.:

Xdtpd ln

Measured price changes

Factors determining

price changes

Measurement problems

Error due to model specification

Error due to problems measuring prices

The approach IIFactors determining price changes

Broadly three strands in the literature:

• Microeconomic theory, e.g., Varian (1995)

summarised in conjectural variation:

with v12: reaction of firm 2 on action of firm 1

)(')1)((')( 11112 ycyYpYp

• Marketing: e.g. Wöhe(2005)

– cost-based pricing

– demand-based pricing

– market-structure-based pricing

• Macroeconomic theory of the reasons for price stickiness:

– time-dependency

– state-dependency.

The data

• Individual data on price changes per product for France:– industrial cleaning

– computer services (hardware and software consulting, TA)

• Additional information:– product code, firm code, product group code

– different variables on adjustments done by INSEE

– product and price descriptions.

• Data sets after ‘cleaning’:

Source: INSEE PPI in business services, 2005/2006

Services activities

Cleaning services 10393 2001/1-2005/3 5 19 547 19 82Computer services 11532 2002/3-2005/2 4 12 961 25 75

Total number

of obser-vations

Number of …

Years Quarters

Time information Product information

Observation period

(quarters)

Number of …

ProductsProduct groups

Firms

Distibution of quarterly price changes - industrial cleaning -


Distibution of quarterly price changes - computer services -


Variation in producer price changes across products - Industrial cleaning -

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.03

6

46

22

4

55

6

82

0

46

9

41

0

46

1

61

3

33

12

8

49

1

61

5

32

4

54

7

56

9

53

3

14

4

25

6

43

1

30

5

42

85

5

68

1

49

3

77

7

49

65

0

Products

Pric

e ch

ange

, in

%

Mean +/- standard deviation per productVariation across time

Mean price change per productMean across products and time


Variation in producer price changes across products - Computer services -

-20

-15

-10

-5

0

5

10

15

20

179 58 810

847

350

217

760

1009

1276 676

1492

1001 78 750

1239 763

1088 402

1240 476

728

120

165

1301 913

pri

ce c

ha

ng

e in

%

Mean price change per productmean across time

Mean +/- standard deviationvariation across time

Products


Individual factors- Industrial cleaning -


Dependent Variable: dlnp Number of observations:10393

Source

Model: products 546 0.319 0.001 1.01 0.4292 0.053Error 9846 5.703 0.001Corrected Total 10392 6.023

Model: firms 81 0.076 0.001 1.62 0.0004 0.013Error 10311 5.947 0.001Corrected Total 10392 6.023

Model: product groups 18 0.018 0.001 1.70 0.0327 0.003Error 10374 6.005 0.001Corrected Total 10392 6.023

Model: quarters 18 0.093 0.005 9.00 <.0001 0.015Error 10374 5.930 0.001Corrected Total 10392 6.023

Model: years 4 0.007 0.002 3.06 0.0157 0.001Error 10388 6.016 0.001Corrected Total 10392 6.023

Database: srnetva9920

Pr > F R-SquareDFSum of Squares

Mean Squares

F Value

Individual factors - Computer services -


Dependent Variable: dlnp Number of observations: 11531

Source

Model: products 960 1.342 0.001 0.61 1.0000 0.053Error 10571 24.157 0.002Corrected Total 11531 25.498

Model: firms 74 0.949 0.013 5.99 <.0001 0.037Error 11457 24.549 0.002Corrected Total 11531 25.498

Model: product groups 24 0.121 0.005 2.28 0.0003 0.005Error 11507 25.377 0.002Corrected Total 11531 25.498

Model: quarters 11 0.680 0.062 28.70 <.0001 0.027Error 11520 24.818 0.002Corrected Total 11531 25.498

Model: years 3 0.177 0.059 26.82 <.0001 0.007Error 11528 25.321 0.002Corrected Total 11531 25.498

Database: srinfva

Pr > F R-SquareDFSum of Squares

Mean Squares

F Value

Multifactorial VA - Industrial cleaning -


Dependent Variable: dlnp Number of observations: 10393Database: srnetva9920 R-Square 0.272

Source

Model 2085 1.636 0.001 1.49 <.0001Error 8307 4.387 0.001Corrected Total 10392 6.023

Source DF Type I Mean Sq F Value Pr > F

Firm 81 0.076 0.001 1.77 <.0001Product group 18 0.015 0.001 1.63 0.045Quarter 18 0.093 0.005 9.74 <.0001Firm*Product group 186 0.100 0.001 1.01 0.438Firm*Quarter 1458 1.159 0.001 1.51 <.0001Product group*Quarter 324 0.193 0.001 1.13 0.058

Source DF Type III Mean Sq F Value Pr > F

Firm 81 0.061 0.001 1.42 0.008Product group 18 0.012 0.001 1.22 0.233Quarter 18 0.024 0.001 2.57 0.000Firm*Product group 186 0.100 0.001 1.01 0.438Firm*Quarter 1458 1.117 0.001 1.45 <.0001Product group*Quarter 324 0.193 0.001 1.13 0.058

Pr > FDFSum of Squares

Mean Squares

F Value

Multifactorial VA - Computer services -


Dependent Variable: dlnp Number of observations: 11532Database: srinfva R-Square 0.529

Source







Mean Squares

F Value

Accounting for adjustments- Industrial cleaning -

Source: INSEE PPI in business services, 2005/2006, preliminary results!!

Dependent Variable: dlnp Number of observations: 10393R-Square 0.296

Source



Firm 81 0.047 0.001 1.09 0.268Product group 18 0.007 0.000 0.78 0.731Quarter 18 0.015 0.001 1.61 0.048Adjustment 3 0.001 0.000 0.91 0.437Firm*Product group 186 0.109 0.001 1.11 0.152Firm*Adjust 157 0.084 0.001 1.01 0.453Firm*Quarter 1443 1.127 0.001 1.48 <.0001Product group*Quarter 322 0.192 0.001 1.13 0.058Product group*Adjust 49 0.019 0.000 0.73 0.923Adjust*Quarter 54 0.029 0.001 1.02 0.443

Database: srnetva9920


Mean Squares

F Value

Accounting for adjustments- Computer services -

Source: INSEE PPI in business services, 2005/2006, preliminary results!!

Dependent Variable: dlnp Number of observations: 11532R-Square 0.529

Source



Firm 74 0.458 0.006 5.18 <.0001Product group 24 0.005 0.000 0.18 1.000Quarter 11 0.014 0.001 1.07 0.381Adjustment 2 0.006 0.003 2.50 0.082Firm*Product group 272 0.070 0.000 0.22 1.000Firm*Adjust 2 0.002 0.001 0.65 0.521Firm*Quarter 764 10.824 0.014 11.87 <.0001Product group*Quarter 264 0.188 0.001 0.60 1.000Adjust*Quarter 5 0.005 0.001 0.88 0.495

Database: srinfva


Mean Squares

F Value

The frequency of price changes - industrial cleaning -


The frequency of price changes - Computer services -


First results from a hazard model - I

Source: INSEE PPI in business services, 2005/2006, preliminary results !

Model Fit Without Covar: 171445 Without Covar: 194169

Crit. -2LogL With Covar: 167733 With Covar: 187683

Firm factors sign/non-sign >/<1, CV: 0.54 sign >>1, CV: 0.66Product group non-sign ~ 1 non-sign ~ 1Estimation <.0001 3.140 <.0001 1.523Forced value 0.114 0.898 <.0001 0.227Substitution <.0001 1.118 0.5938 0.88

Industrial cleaning Computer services

Variable p-value Hazard ratio p-value Hazard ratio

First results from a hazard model - IIhazard ratios, time impact

Source: INSEE PPI in business services, 2005/2006, preliminary results !

0.4

0.6

0.8

1.0

1.2

1.420

01_2

2001

_3

2001

_4

2002

_1

2002

_2

2002

_3

2002

_4

2003

_1

2003

_2

2003

_3

2003

_4

2004

_1

2004

_2

2004

_3

2004

_4

2005

_1

2005

_2

cleaning computer services

Haz

ard

ratio

in p

oint

s

Quarters

Conclusion

• Summarising:

– Mean quarterly price change between 2 et 5% in absolute terms.

– Large heterogeneity across services activities, firms, product groups, and over time, both in terms of levels and timing of price changes.

– Time and firm-specific factors are most important determinants of price changes in services, both in terms of variation and timing, ...

– … but less so product groups.

• Does measurement matter ?

– Conclusion on this basis would be premature:

– Weak explanatory power of the estimated models -> better specification, better measurement of variables necessary

– Unexpectedly weak impact of product groups - careful interpretation

– Impact of adjustments undertaken to construct the price index - linked to other variable and their measures?

Channels of measurement problems I - The steps in the construction of a PPI

Source: PPI Manual ILO, OECD, IMF, 2004

• Determining the objectives, scope, conceptual basis of the index,

• deciding on the index coverage and classifications structure,

• deriving the weighting pattern,

• designing the sample,

• collecting and editing the prices,

• adjusting for changes in quality,

• calculating the index,

• disseminating the indices,

• maintaining samples of businesses and product specifications,

• reviewing and reweighting the index.

Variation in producer price changes by firm - Industrial cleaning -

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.099

2081

9920

42

9920

48

9920

13

9920

44

9920

19

9920

39

9920

46

9920

70

9920

38

9920

06

9920

22

9920

45

9920

73

9920

58

9920

75

9920

72

9920

03

9920

66

9920

01

9920

16

Firms

Pric

e ch

ange

, in%

Mean +/- standard deviation per f irmVariation across time

Mean +/- standard deviation per f irmVariation across products & time

Mean price change per f irmMean across products and time


Variation in producer price changes by firm - Computer services -

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.07

20

67

72

03

1

72

03

2

72

00

5

72

01

0

72

00

1

72

06

3

72

04

6

72

02

9

72

07

1

72

06

4

72

00

3

72

04

8

72

05

6

72

05

8

72

06

5

72

03

7

72

01

7

72

04

9

Firms

Pri

ce c

ha

ng

e, i

n %

Mean price change per firmMean across products and time

Mean +/- standard deviation per firmVariation across time

Mean +/- standard deviation per firmVariation across products & time


Variation in producer price changes by product group - Industrial cleaning -

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.023

40

6202

2320

2202

6101

5001

6201

2201

1001

4102

1002

3002

4202

2310

4101

4201

5002

2100

6102

Product groups

Pric

e ch

ange

, in%

Mean +/- standard deviation per product groupVariation across time

Mean +/- standard deviation per product groupVariation across products & time

Mean price change per product groupMean across products & time


Variation in producer price changes by product group - Computer services -


-15.0

-10.0

-5.0

0.0

5.0

10.0

15.01

21

44

12

2

41

10

2

21

10

3

10

1

10

4

114

112

12

0

111

Product groups

Pri

ce c

ha

ng

e, i

n %

Mean price change per product groupMean across products and time

Mean +/- standard deviation per product groupVariation across time

Mean +/- standard deviation per product groupVariation across products & time

Documents

«Productivity growth in services and problems measuring services price indices » EUKLEMS Consortium meeting Brussels, 16-17 March 2007 Anita Wölfl, CEPII,