Productivity Measurement in the Public Sector: Theory and Practice

In many sectors of the economy, governments either provide various goods and services at no cost or at highly subsidized prices. It is usually possible to measure the quantities of these government sector outputs and inputs as well as input prices but the problem is how to estimate the corresponding output prices. Once meaningful output prices have been estimated, the measurement of productivity growth using index numbers can proceed in the usual manner. This chapter suggests three possible general methods for measuring public sector output prices and quantities. If little or no information on the quantity of nonmarket outputs produced is available, then the method recommended in the System of National Accounts 1993 must be used, where aggregate output growth is set equal to aggregate input growth. If information on nonmarket public sector outputs is available then the second general method sets the missing output prices equal to the unit costs of producing each output while the third general method uses purchaser’s valuations to determine the missing output prices. Specific measurement issues in the health and education sectors are discussed. Similar output and productivity measurement issues arise in the regulated sectors of an economy since regulated producers are forced to provide services at prices that are not equal to marginal or average unit costs. Finally, the problems associated with measuring capital services are discussed. The focus of the chapter is on the use of index number methods to measure the Total Factor Productivity of production units in the public and regulated sectors.