«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 -
Source: INSEE PPI in business services, 2005/2006
Distibution of quarterly price changes - computer services -
Source: INSEE PPI in business services, 2005/2006
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
Source: INSEE PPI in business services, 2005/2006
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
Source: INSEE PPI in business services, 2005/2006
Individual factors- Industrial cleaning -
Source: INSEE PPI in business services, 2005/2006
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 -
Source: INSEE PPI in business services, 2005/2006
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 -
Source: INSEE PPI in business services, 2005/2006
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 -
Source: INSEE PPI in business services, 2005/2006
Dependent Variable: dlnp Number of observations: 11532Database: srinfva R-Square 0.529
Source
Model 1459 13.476 0.009 7.74 <.0001Error 10072 12.022 0.001Corrected Total 11531 25.498
Source DF Type I Mean Sq F Value Pr > F
Firm 74 0.949 0.013 10.75 <.0001Product group 24 0.008 0.000 0.28 1.000Quarter 11 0.680 0.062 51.81 <.0001Firm*Product group 272 0.065 0.000 0.20 1.000Firm*Quarter 814 11.585 0.014 11.92 <.0001Product group*Quarter 264 0.189 0.001 0.60 1.000
Source DF Type III Mean Sq F Value Pr > F
Firm 74 0.790 0.011 8.95 <.0001Product group 24 0.004 0.000 0.15 1.000Quarter 11 0.151 0.014 11.47 <.0001Firm*Product group 272 0.065 0.000 0.20 1.000Firm*Quarter 814 11.088 0.014 11.41 <.0001Product group*Quarter 264 0.189 0.001 0.60 1.000
Pr > FDFSum of Squares
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
Model 2348 1.780 0.001 1.44 <.0001Error 8044 4.243 0.001Corrected Total 10392 6.023
Source DF Type I Mean Sq F Value Pr > F
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
Pr > FDFSum of Squares
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
Model 1468 13.490 0.009 7.70 <.0001Error 10063 12.008 0.001Corrected Total 11531 25.498
Source DF Type III Mean Sq F Value Pr > F
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
Pr > FDFSum of Squares
Mean Squares
F Value
The frequency of price changes - industrial cleaning -
Source: INSEE PPI in business services, 2005/2006
The frequency of price changes - Computer services -
Source: INSEE PPI in business services, 2005/2006
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
Source: INSEE PPI in business services, 2005/2006
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
Source: INSEE PPI in business services, 2005/2006
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
Source: INSEE PPI in business services, 2005/2006
Variation in producer price changes by product group - Computer services -
Source: INSEE PPI in business services, 2005/2006
-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
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