Technical note

Technical Note

Labor Productivity: Labor productivity describes the relationship between real output and the 
labor hours involved in its production. These measures show the changes from period to period in 
the amount of goods and services produced per hour worked. Although the labor productivity 
measures relate output in a state to hours worked of all persons in that state, they do not measure 
the specific contribution of labor to growth in output. Rather, they reflect the joint effects of many 
influences, including: changes in technology; capital investment; utilization of capacity, energy, 
and materials; the use of purchased services inputs, including contract employment services; the 
organization of production; the characteristics and effort of the workforce; and managerial skill. 

Output: Measures of real value-added output for the private nonfarm sector are created using 
GDP by state and industry data published by the Bureau of Economic Analysis (BEA). BEA does 
not produce a private nonfarm sector measure of real output by state. To create the necessary 
output series, several industry components are subtracted - the farm sector, private households, 
and owner-occupied housing - from GDP by state using a Fisher ideal index formula. 

Labor Hours: Hours are the number of hours worked by all employed persons, including wage 
and salary workers, self-employed persons, and unpaid family workers. Hours for wage and salary 
workers are primarily from BLS Current Employment Statistics (CES) and hours for self-
employed and unpaid family workers are from the BLS Current Population Survey (CPS). The 
hours are adjusted from an hours paid basis to an hours worked basis using data from the BLS 
National Compensation Survey (NCS).

Unit Labor Costs: Unit labor costs represent the cost of labor required to produce one unit of 
output. The unit labor cost indexes are computed by dividing an index of nominal industry labor 
compensation by an index of real industry output. Unit labor costs also describe the relationship 
between compensation per hour worked (hourly compensation) and real output per hour worked 
(labor productivity). When hourly compensation growth outpaces productivity, unit labor costs 
increase. Alternatively, when productivity growth exceeds hourly compensation, unit labor costs 
decrease.

Labor Compensation: Labor compensation, defined as payroll plus supplemental payments, is a 
measure of the cost to the employer of securing the services of labor. Labor compensation 
measures are constructed using BEA nonfarm compensation less private household 
compensation. Compensation for self-employed and unpaid family workers are imputed by 
assuming that hourly compensation for these workers is the same as the average wage and salary 
worker in each state. 

Contributions to Labor Productivity: Each state's contribution to national productivity growth 
is calculated by multiplying the state's productivity growth rate by its average share of total 
current dollar national output. Adding up these contributions will approximate, but may not 
exactly equal, growth rates of national productivity. Contributions measures used in this release 
capture the effects of within-state productivity changes but do not include the effects of shifting 
shares of output and labor among states.

Annual Percent Change: The annual percent change is the compound annual growth rate in an 
index series over a period of more than one year. The change of an index series varies from year 
to year. However, the annual percent change is the constant rate that can be applied to each year 
in a period, from the start to the end, that would give the same total result. It is calculated as 
(Ending Value/Starting Value)^(1/Number of Years)-1.