Productivity in the Fluid Milk Industry

A SPECIAL STUDY

P reparw for

Milk Industry Foundation

By

R. MAXI -liLIA N (iOEPP. LlI

M . Phil.

Th~ G~orge Washinglon University

Washin!!.lo.n . D. C.

With Ihe Advice and Consultation or DR.. JOHN W. KENDRICK

[conomlc Consultant

cw York. New York

J~lluary 1973

NOTE

The general concepts and methodology used in this report follow those developed by Dr. John W. Kendrick, formerly Professor of Economics at the George Washington University, and currently Vice President and Director of Economic Research at The Conference Board in New York City. Dr. Kendrick consulted with R. Maximilian Goepp, I I I concerning the plan of the study and reviewed and offered suggestions concerning the draft of the final report. Dr. Kendrick is the author of numerous works on productivity. Among them are: Measurin Com an Productivit: Handbook with Case Studies, New York: The Conference Board, 19 5 revised: and Productivity Trends in the United States, New York, National Bureau of Economic Research, 1961.

To prevent burdening the text of the report, a complete description of the sources of data and the methods of statistical analysis are contained in the Appendix.

Table of Contents

Introduction ........................... . ....................... .

Productivity - What is it? .................................... .

Productivity Measures Changes in "Real Terms"................... 2

Productivity as Related to Wage & Price Policy........ .. . ....... 3

Productivity and Costs.................... . ..................... 3

The Fluid Milk Industry...... .................. . ................ 4

Output: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Labor Inputs ............................. ~ . . . . . . . . . . . . . . . . . . . . . . 5

Capital Inputs .................... . ............................. 8

Intermediates-All Other Inputs (including Raw Materials) ........ 11

Summary Findings on Productivity in the Fluid Milk Industry ..... 13

Prod u c t i v i t Y Ba rg a i n i ng. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 8

Appendix 1 Sources of Data and Methods of Statistical Analysis .. 20

LIS T 0 F TAB L E S

OUTPUT - Table 1 .......................................... 4 Index of Total Output

LAB 0 R - Tab 1 e 2..... . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Labor I nput Indexes Table 3A .....................•............................ 5 Indexes of Employees and Production Man-Hours Table 4A ..............•......................•.•.......... 6 Index of Average Yearly Wage and Hourly Wage Rates Tab 1 e 5A .................................................. 7 Index of Total Wages Paid Tab Ie 6A .................................................. 8 Ratios of Production and Nonproduction Workers and Compensation

CAP I TAL - Tab 1 e 7 ......................................... 9 Capital Expenditures Tab 1 e 8 ...............................................•... 10 Index of Gross and Net Capital Table 9A ..........................•............•.......... 10 Percentage Contribution to Real Capital Input, by Kind Table 10A ...... , .......................................... 11 Index of Real Capital Inputs, by Kind

INTERMEDIATES - All Other Inputs (Including Raw Material) Tab 1 e 11 .................................................. 12 Index of Intermediate Inputs Table 12A ...........................•..................... 13 Percentage of Total Intermediates Represented by Raw Milk and Containers Tab 1 e 1 3A ..•.............................................. 13 Index of Each Category of Materials Consumed

SUMMARY FINDINGS OF PRODUCTIVITY IN THE FLUID MILK INDUSTRY Tab 1 e 14 .................................................. 14 Output and Input Indexes Table 15 .................................................. 14 1963 Input Shares Table 16 ......................•...••...................... 15 Weighted Combined Total of Inputs Compared to Ou~puts Table 17 .........................•................•....... 15 Total and Partial Productivity Ratios Table 18 .................................................. 16 Capital-Labor Substitution Ratio Table 19 ................................ ···.··············17 Indexes of Input Categories, Total Inputs and Outputs Tab Ie 20A .....................•...•................•...•.. 18 Rates of Total and Partial Productivity Gains

SUMMARY OF FINDINGS AND CONCLUSIONS

Productivity - The Ratio of Input to Output

Over the 1:' lear period, total inputs as well as output of the fluid milk industry have trended downward, but inputs have decl ined more than outputs. Therefore, there has been a gain in productivity.

Productivity in the fluid mi lk industry decl ined in 6 of the last 12 years. The trend in more recent years (the last 6) has been mixed with no change in 2 years, decreases in 2 years and increases in 2 years.

Total productivity has increased at the average rate of about 0.3% per year during the past twelve years. During the period of 1958-63, there was a 1% decl ine; followed by 1.3% gain during the 7 years from 1963-70. However, productivity has actually decreased during 2 of the past 4 years.

The average decline in total inputs (the sum of weighted individual inputs) is 1% per year. Total output has declined at the annual average rate of .6%. Labor inputs have decl ined at the annual rate of 3.3%. The inputs of capital have decl ined at the annual rate of 1.6%.

Partial Productivity Ratios

Whi Ie the total productivity ratio reflects the net change in efficiency for all inputs in combination, it is informative to know the changes in output per unit of individual inputs. Partial productivity rates indicate the change in "real costs" per unit of output of individual input categories. However, because of the frequent substitution of some categories of inputs for others, it should be noted that partial productivity measures reflect input substitutions as wei I as changes in productive efficiency.

Output per unit of labor has increased at the average rate of 2.6 percent per year during the past 12 years. The rate of increase has been somewhat more rapid in recent years than durin~ earlier periods. (3.3% for 1963-70 compared to 2.1% for 1958-63). The more recent trend compares quite closely with the 3.2% per year partial productivity ratio for labor currently used by the Price Com­mission.

Output per un it of capital has increased at the average rate of 1% per year over the 12 years studied. However, the rate of increase during the past 7 years has dou b led that of the preceding 5 years. (1.4% for 1963-70 compared to 0.6% for 1958-63).

1ncreased Capital Per Worker

Labor inputs have declined more rapidly than capital. There is now about 20% more capital associated with each unit of labor input than prevai led 12 years ago. The addition of capital per unit of labor input has contributed significantly to the gains in productivity.

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Wage Rates and Compensation

The growth in wage rates in the fluid mi lk industry is about equal to the national average. The national average increase was 4.4% per year compared to 4. 1% per year in the fluid milk industry.

Production workers wage rates have increased more than proportionately to nonproduction workers ' wage rates (nonproduction workers include distribution workers). However, nonproduction workers ' annual wages are about 80% greater than production workers.

During the past 7 years, the total amount of compensation paid nonproduction workers increased only. 1% as compared to an increase of .9% for production workers. Total wages paid employees in the fluid milk industry have increased about .4% per year. Thus, wage rates have been increased at a somewhat more rapid rate than the number of employees have declined.

Number of Workers

The number of production employees has declined at the steady rate of about 4.6% per year since 1958. The rate of decline for nonproduction workers increased. It averaged 2.0% during the period of 1958 to 1963 and 3.1% during the 1963-70 period. The smaller rate of reductions to the nonproduction labor force reflects the inabi lity to mechanize the distribution function to the same extent possi·ble in the plant.

Cap ita 1

Real capital (adjusted for inflation) invested in plant equipment decreased about 4% per year during the past seven years compared to a 1.6% decline in capital investment in new plants and additions to existing structures. The rate of investment in transportation equipment has shown little change.

While the total capital investment has been declining, it has not declined as rapidly as labor inputs. Thus, there has been an increase in the capital investment per worker. The rate of decline in capital investment when compared to total output reveals an increasing capital productivity, which indicates a reduced capital cost per unit of output.

Conclusions

Neither labor nor capital is productive by itself. It is through the combined application of labor, capital and other inputs upon raw materials that pro­ductions occur.

The increased capital investment per unit of labor has played a major role In increasing productivity of the fluid milk industry. Ceteris paribus, addi­tional capital, could increase labor productivity even more.

However, the declining capital investment and the rates of return on capital for other industries indicates returns on investments in the fluid milk industry are not great enough to attract significant amounts ·of capital from other alternative uses.

Therefore, it behooves both labor and management to carefully identify changes in the deployment of both the work force and the capital investment to further increase productivity.

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Labor representatives have a substantial interest in making the investment of additional capital more attractive so as to further enhance productivity of the industry. Therefore, further gains in productivity should be equitably divided so as to increase the return on capita l . The benefits which could flow from such an action could be substantial t o consumers, labor and investors.

This study clearly establi s hes the fact that increase in labor compensation in the fluid milk industry is comparable to the nation's average. However, the net outflow of capital indicates a need for improvement in the rate of return to capital. Labor leaders need to approach the bargaining table with a re­ceptive ear for both increasing productivity and for sharing the savings with capital. New capital brings new technology and innovations. This, in turn, brings greater output per unit of input which is what productivity is all about.

Introduction

With the advent of the Economic Stabil ization Program and the fight against inflation, there has been an increasing emphasis on improving productivity. However, most measurements of productivity relate the output of goods and services solely to the amount of labor used.

This study recognizes that the output of goods and services by fluid milk processors is a function not only to the ~mount of labor used but also capital and al I other materials used in the production, processing and distribution of fluid milk products. It is an economic fact that 8 single factor of production cannot be productive in and of itself. It only becomes productive when combined with other inputs. Man relies on natural resources and capital to produce goods. Labor's output is rncreased by the addition of capital or other inputs or their more efficient utilization. A milk truck driver can be more productive with modern vehicles than he could with a horse drawn wagon. Thus, the additional output is the combined function of the man's labor and the added capital.

The emphasis in this report is on a calculation of "total productivity" for the fluid mi lk industry, i.e., for the purpose of this study, the inputs have been categorized into labor, capital and all other inputs, which include raw material. The study relates these three categories of inputs to the industry's total output.

This report has particular significance for (I) bargaining for wage rates in the fluid milk industry; (2) productivity bargaining, i.e., bargaining for new and more effective work habits; (3) as a management tool wherebff productivity of inJividual companies may be compared to the industry average; and (4) for making representations to governmental agencies concerning productivity in the fluid mi lk industry.

Productivity - What is it?

Productivity analysis reveals the efficiency with which inputs are transformed into output. It measures the relationship between inputs of various resources and the resulting output in "real physical volume terms."

The comparison is most frequently put in the form of a ratio of the one to the other. Thus, if 100 units of input correspond with 110 units of output, the ratio of inputs to output is 1 to 1.1. (output t. ) . = ra 10

1 nput

Since the ratio at any given time has more significance when compared to other time periods, it is usually calculated for several time spans and then each ratio is expressed as a percent of a chosen base period, thus, producing a "productivity index ; " For examp l e, the productivity ratios are 1.1, 1.3 and 1.8 for a given three-year period, and the first one is to be chosen as the base, the index would be:

Year I Year 2 Year 3 Product ivi ty Index Productivitz:: Index ProductIvity Index

1.1 _ 100 1. 3 _ 1 18 1. 8 = 164 U- -1.-1 - "f:T

Productivity Index

Year 1 Year 2 Year 3

100 118 164

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Annual Increase

18% 39%

Thus, the productivity index relates the ratios of input to output expressed as the percent change from the base period. The annual percent increase can be determined by relating the index of one year to another.

The most common productivity relationship in use is "output per man-hour." This is the ratio between the physical volume of output and the numbers of man-hours worked to produce the output. This is also frequently referred to as "labor productivity." However, such a measure impl icitly attributes all of the change in output to the single input of labor. Since there are obviously numerous other inputs that also con­tribute to the total output of goods and services, the use of only one factor is commonly referred to as a "partial productivity ratio." When all inputs are considered, it is usually called "total productivity."

"Partial productivity ratios" may also be calculated for each item of input such as cap i tal, raw materials, etc. These partial measurements are useful when compared over time in reveal ing the savings in each of the inputs per unit of output. However, only "total productivity" reveals the true change in efficiency or the net savings of inputs per unit of output.

Output per man-hour or the so-called labor producti vity index may increase as a resul t of the use of more capital goods or a better yield from the raw material. Whi Ie the output per man-hour index reveals th e change in output and labor inputs, the causal effect of the increased output may be explained by an entirely different input. For example, output may be increased as whey is recovered and processed from cottage cheese production. However, the increase in output is more properly attributable to improved technology permitting its recovery and thus increasing the yield of the raw material, as well as the capital investment necessary to achieve the recovery, and process it for resale as weI I as the labor involved in the process.

S ince various inputs may be substituted for each other within limits, individual items of inputs change in response to the changes in the relative prices of the inputs as well as the available technology . Only if output rises faster than all real costs combined can one say there has been an increase in productive efficiency.

Product i vi ty Measures Changes in "Real Terms"

It is important to understand that productivity indexes measure the change in input­output ratios in "real terms." The most direct kind of productivity measurement would be to use physical units of inputs and outputs. However, since both input and output units are heterogeneous (i.e., inputs include - labor, capital, raw materials, etc. and output includes - half-gal Ions of mi lk, pints of yogurt, pounds of cottage cheese, each with differing services provided such as store del ivered vs. home del ivered, etc.) they are most frequently expressed in "constant price money values." This is a procedure whereby the dollar value of the input or output is deflated to el iminate the effect of inflation and expresses them on a common basis, i.e., "constant price money values . "

This is quite an important concept since it permits an output of goods to be considered jointly with an output of services. Thus, the total output of fluid mi lk products

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including any changes in services associated with the products may be considered as a part of the industry's total output. Stated another way, the additional services associated with home del ivery and full service wholesale del ivery are considered a part of the industry's total output. As the amount of services provided with the sale of fluid milk products changes, the output changes accordingly. This shift is not taken into account when only volumes of physical goods are used to measure the output. With the inputs converted to the same common denominator, i.e., Ilconstant price money values," one can easi ly compare any changes in output including a drop in added services to determine whether inputs have changed correspondingly.

If the rate of increase of all inputs (combined and weighted) is less than the rate of increase in total output, there has been a gain in productivity. If the rate of increase for a given single input is less than the rate of total output increase, it does not necessarily mean an increase in the productivity of that input. It is merely the ident i fication of a particular association between the units of input for that factor and changes in output. The cause for such a change may well be explained by a greater or lesser increase in another input.

Productivity as Related to Wage & Price Pol icy

Voluntary wage price guidelines were first prepared and initiated by President Kennedy"s Council of Economic Advisers in 1962. Whi Ie most people remember them only as a tool used to jawbone wage settlements, they also contained price guidel ines. A simi lar wage price guideline is the basic premise on which the current Economic Stabi lization Program is based.

The present rationale is probably best stated in the following excerpt from "The Economi c Report of the Pres i dent ,11 transmi tted to the Congress in January 1972:

II I f compensat ion per hour of work rises by 5 1/2 percent per annum, and if output per hour of work rises by 3 percent per annum, labor costs per unit of output will rise by app roximately 2 1/2 percent per annum. If prices rise in the same proportion as labor costs, which are the largest element in total costs for the economy as a whole, then prices wi 11 also rise by 2 1/2 percent, a rate within the range of the goal set by the CLS."

The 2.5% price increase is inflationary. If productivity were to increase faster and there was not a corresponding increase in returns to capital or other materials used, the price increase could be less inflationary. If productivity increased less, prices would be further inflated. This is one of the primary reasons for all the encouragement now being given to increasing productivity. The hoped-for result would be to increase productivity gains above the historical 3% level with the additional gains accruing to consumers in the form of lower price increases. The I imlts on waqe settlements and profits are designed to insure that labor productivity gains, in excess of 3%, are passed on to consumers in the form of lower price inflation {for the nation's economy as a whole.)

Productivity and Costs

Costs per unit of output change as a result of change~ in the prices and quantities of inputs requi red for each uni t of output. Changes in the per uni t cost of output are approximately equal to the percent change of the average input price less the percent change in the corresponding productivity -ratio. Thus, if labor rates per

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man-hour increase 5% and output per man-hour increases 3%, the approximate percentage increase in unit labor cost is 2%. If the rate of return on capital and/or prices of capital goods increases 2% and the output per unit of capital rises 1%, unit capital costs would increase approximately 1%. To determine the effect on total unit costs of output, one wo uld weight each input by its share of total costs, i.e., if labor cost constitutes 20% of the total, the 2% increase in unit labor cost would represent a .4% increase in cost per unit of output. (.02 x .20 = .4%). Likewise, if capital constitutes 20% of the total cost of output, the 1% increase in unit capital costs would represent a .2% increase in costs per unit of output. Thus, productivity ratios and indexes may easily be translated to approximations of unit co s ts.

The Fluid Mi lk Industry

The data used in this study come from the Annual Survey of Manufacturers and the Census of t~anufactures. It includes all plants whose primary operation is the production and/or distribution of fluid milk and fluid milk products. (Standard Indus­trial ClassificCltion 2026). The primary products produced in these plants include milk, lowfat mi lk, skim mi 1k, buttermi 1k, flavored mi 1k, creams, eggnog, yogurt, cottage cheese and related products.

Out pu t

The output of the indu s try consists of a combination of the physical products and wholesaling and distribution services associated with the marketing process. In order to capture this composite output, the value of shipments as reported by the Annual Survey of Manufacturers and the Census of Manufactures in census years was used. These shipments reflect current year revenues from fluid milk plants for all of these different kinds of output.

The data were then adjusted for changes in inventories, indirect business taxes, and to eliminate the double counting of intra-industry shipments.

Table 1 Index of Total Output

1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

102.2 103.3 99. 7 97.9 97.3 98.3

102.3 100.4 97.9

100.0 97.2 95.5 94. 7

While there has been a distinct downward trend in total output, there have been several upward fluctuations. The average rate of decline has been .6% per year.

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Labor

After calculating three different indexes designed to measure changes in labor inputs, an index weighting nonproduction workers by their average yearly compensation and production workers by their average hourly compensation was selected as the most appropriate measure of labor inputs.

Table 2 Labor Input Indexes (1967:;100)

1958 128.4 1959 125.8 1960 121.2 1961 119.7 1962 117.2 1963 111.2 1964 111. 5 1965 109.2 1966 103.2 1967 100.0 1968 94.5 1969 91.2 1970 85.5

The labor input index has decl ined at an annual average rate of 3.6% per year. The decl ine has been continuous over the twelve year period.

1958 1963 1970

1958-63 1963-70

·· 1958-70

1958-63 1963-70

1958~70

Table 3A Indexes of Employees and Production Man-Hours (1967=100)

Number of · Production Employees

142.6 113.4 81. 8

Production Man-Hou rs

144.2 116.4 82.4

Table 3B

Numbe r of Nonproduction Employees

120.3 108.6

87.1

End of Period as Percent of Beginning of Period

79.5 72.1

57.4

80.7 70.8

57.1

Table 3C Average Annual Percentage Rates of Change

-4.5 -4.2 -4.5 -4.8

-4.5 -4.5

90.3 80.2

72.4

-2.0 - 3.1

-2.7

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The decl ine in numbers of production workers and man-hours worked by production workers has been about equal indicating no significant change in the work week of production workers since 1958 (see Table 3). However, production workers h~3Ve decl ined much more rapidly than nonproduction workers. There was a 43% decline in production workers during the twelve year period beginning in 1958 compared to a 28% drop in nonproduction workers. The rate of dec1 ine in production workers has been quite stable, about 4.5 percent per year, whereas, there has been a tendency for the rate of dec1 ine of nonproduction workers to increase in more recent years.

The shift to a greater proportion of nonproduction workers relative to production workers and the greater increase in wages of production workers came about through the progressive mechanization of production. The industry has not been able to achieve the same level of capital substitution for the nonproduction workers who are concentrated mainly in the distribution of the products. Because production workers have been provided with increasing amounts of capital, their marginal productivity has increased. Under competition, their wages should be expected to increase relative to the nonproduction workers. This indeed has been the case.

The average yearly wage and average hourly wage, have increased sl ight1y more than the corresponding employment series dropped. (See Tables 3 and 4.) While the average annual decline in nonproduction workers was 2.7% throughout the entire period, the average yearly wage increased by 3.3 percent. Production workers declined at the rate of 4.5% per year, but their average annual wage increased 5%.

Table 4A Index of Average Yearly Wage and Hour 1 y Wage Rates

GNP Nonproduction Production Production Total Imp 1 ic it P rice Year1:t Wage Yea r 1:t Wage Hourly Wage Yea r 1 y Wage Deflator

1958 75.6 72.6 72.0 74.1 74.5 1963 88.2 88.7 86.5 87.0 88.4 1970 110.8 130. 1 129. 1 117.3 117. 1

Table 4B End of Period as Percentage of Beginning of Period

1958-63 116.7 122.2 120. 1 117.4 118.7 1963-70 125.6 146.7 149.2 134.8 132.5 1958,.,70 146.6 179.2 179.3 158.3 157.2

Table 4c Average Annual Percentage Rates of Change '

1958-63 3.2 4.1 3.8 3.3 3.5 1963-70 3.3 5.6 5.9 4.4 4.1 1958-70 3.3 5.0 5.0 3.9 3.8

Because the rate of increase in average wages has more than kept up with the rate of decline in employment, there has been a slight increase in total wage bill (compensation) in current dol lars (see Table 5). From 1958 to 1963, the total compensation received by all production workers (equals average yearly wage times the number of workers) actua11y dec1 ined in total dollar amount. Since 1963, however, production workers' compensation has gained not only abso1utely -bui atso relatively to nonproduction workers. The total increase for all workers has been constant.

1958 1963 1970

End

1958-63 1963-70

1958-70

1958-63 1963-70

1958-70

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Table 5A Index of Total Wages Paid

Nonproduct ion Production Total Wages Wages Wages

91.0 103.5 95.2 95.8 100.6 97.4 96.5 106.4 99.9

Table 5B of Pe ri od as Percentage of Beginning of Pe ri od

105.3 97.2 102.3 100.7 105.8 102.6

106.0 102.8 104.9

Table 5C Average Annual Percentage Rates of Change

1.1 0.1

0.5

-0.6 0.9

0.2

0.3 0.4

0.4

Tables 4 and 5 indicate the degree of success the industry has had in containing the growth of the wage bi 11. Much of this has, of course, been due to the decl ine in employment; but a sizable portion of the credit belongs to the abi lity of the industry to keep the growth in the wage rate near the national average.

Although the production workers have received increases larger than the national average through the period, particularly from 1963 to 1970, the nonproduction workers have counterbalanced this so that the total wage rate is only 0.1 greater than the national average (see Table 4). This excess over the national average has taken place from 1963-70 (4.4 vs. 4.1), and is due completely to the increased compensation given to production workers; nonproduction workers have maintained a steady 3.3 increase over the period (Table 4C).

An alternative way of looking at the different shifts in employment and wages is to take ratios of the two kinds of workers.

(See Table 6 on next page.)

1953 1963 1970

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Table 6 Ratios of Production and Nonproduction Workers and Compensation

Nonproduction Workers Average Yearly Compensation Production Workers Average Compenstlt ion

-------------------104.1 99.4 85.2

Table 68

Nonproduction \~o r ke rs P roduc t I on ~/o rke rs

84.3 35.8

106.4

End of Period as Percentage of Beginninq of P~riod

Nonproduction Workers Total Wages ~

Production Workers Tota 1 Wages

173.4 187.9 179.0

1958-63 1963-70

95.5 85.7

113.6 111. 1

1958-70

1958~63 1963-70

1958-70

81.8 126.2

Table 6C Average Annual Percentage Rates of Chanqe

-0.9 -2.2

-1.7

2.6 1.5

2.0

Table 6 shows how nonproduction worker's compensation has not increased as rapidly ""s production worker's over the complete period. At the same time the number of nonproduction employees has increased relative to production employees. As was seen in Table 3. this increase is explained by the lesser rate of decrease in employment of the nonproduction workers.

Whi le the actual level of nonproduction wages relative to production wages has decl ined over the period, total nonproduction compensation is still about 80% higher than production compensation (see Table 6). This is a consequence of both the larger number of nonproduction workers, and their higher average rates of compensation.

Capital

Expenditures for new plant and new equipment are reported in the Annual Survey and the Census of Manufactures. Since balance sheet estimates of capital investment for the fluid milk industry were not available, annual investment in new capital was used to derive the capital series.

(See Table 7 on next page.)

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Table 7 Capital Expenditures (Current Doll ars)

Millions of Dollars

Plant Mach i ne ry iTransportation Structures Total

1958 $ 46.7 $ 46.7 $ 42.4 $135.8 1959 56.4 56.4 35.1 147.9 1960 45.5 45.5 30.0 121.0 1961 44.1 44.1 29.5 117.7 1962 44. I 44.1 28.6 116.8 1963 46.8 46.8 32.6 126.2 1964 47.0 47.0 49.8 143 .. 8 1965 42.8 42.8 29.1 114.7 1966 29.8 44.7 30.6 105.1 1967 36.0 54.0 30.2 120.2 1968 29. I 43.6 37.7 110.4 1969 31.3 46.9 41.0 119.2 1970 42.8 64.3 35.7 142.8

With regard to current dollar investment during 1970, a significant increase for new plant machinery and structures is shown.

As a consequence of using new equipment investment, the capital index does not include working capital, land, nor investment in used equipment. Since industry sources indicate working capital is traditionally quite small and does . not change substantially, its omission will not greatly affect the index. Land is not generally regarded as depreciable and would be very difficult to include without having considerably more information concerning its use. While there are estimates avai lable for purchases of used equipment for the years 1954, 1958, 1963 and 1967, they were not differentiated as to kind, i.e., machinery and equipment or structures. In any case, the amount of used equipment expenditures was less than 10% of new capital in each year.

Since the study reflects relative changes, the effect of the omission of investments in used capital, working capital and land is to assume they change simultaneously and proportionately to changes in new equipment and buildings. The expenditures for structures include investment in new additions and for capital ized alterations.

To compute the capital index, each year's outlays were deflated by an appropriate price index to yield the year's outlays in constant 1967 dollar amounts. These outlays were summed and then retired after the end of their length of 1 ife. The summed outlays are the gross capital stocks.

To obtain the stocks of net capi tal, each year's real (constant 1967 dollars) gross capital outlay had to be depreciated, which in economic terms reflects the dimunition of its capacity to yield capital services. The straight-l ine method of depreciation was chosen. The stock of depreciated capital is, thus, the summed depreciated real gross capital outlays. Real depreciation is derived by subtracting real net capital stock from real gross capital stock.

The gross capital input was obtained by summing the deflated yearly new capital expendi­tures by the kind of capital and maintaining them according to length of 1 ife. Thus, the gross capital stock represents "real capital" as opposed to capital expenditures in current do ·llars. Net capital stocks followed the same procedure, but the gross deflated outlays were first depreciated on the straight-l ine method.

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Gross and net capital stock both demonstrate a steady decl ine and in about the same amounts. The two series reacted somewhat differently in the early 60 1 s.

Table 8

Index of Gross Capital Index of Net Capital

1958 114.3 114.1 1959 114.3 115. 1 1960 112.7 113.3 1961 110.9 111. 3 1962 108.5 109.4 1963 106.6 108.3 1964 106.1 109.1 1965 104.2 106.9 1966 101.2 103.7 1967 100.0 100.0 1968 97.7 99.2 1969 94.9 97.3 1970 93.7 97.5

Capital expenditures were divided into three categories: (1) buildings and structures; (2) plant machinery and equipment; and (3) transportation equipment. Buildings and structures were assumed to last 30 years. All machinery and equipment were given ten years. Separate estimates for plant equipment distinguished from transportation equip­ment were obtained by al locating equipment expenditures according to the empircal evidence of the industry.

1958 1963 1970

1958 1963 1970

Table 9A Percentage Contribution to Real Capital Input, by Kind

Plant Machinery

23.7 23.9 20.4

25.9 25.6 19.9

Gross Capital

Trans portat i on

19.5 21.1 23.9

Table 9B

Net Capital

21.8 23.0 26.4

Structures

56.8 55.0 55. 7

52.3 51.4 53.7

Total

100.0 100.0 100.0

100.0 100.0 100.0

Table 9 reveals that capital invested in structures kept its relative position over time. Investment in "transportation equipment has increased as a portion of total capital expenditures, capital invested in plant machinery was virtually unchanged from 1958 to 1963 but has declined since then. Plant equipment as a proportion of net capital stock decreased 6 percentage points from 1958 to 1970. The investment in transportation equipment as a percent of total investment increased by nearly 5 percentage points.

The movement of the individual components of the capital series indicates that each kind of capital must be considered separately.

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Table JOA Index of Rea 1 Capital Inputs, by Kind

Gross Ca~ital

Plant Machinery Transportation Structures Total

1958 120.0 99.6 117.9 114.3 1963 113. 1 100.4 106.4 106.6 1970 84.7 99.9 94.8 93.7

Table lOB End of Pe r i od as % of Beginning of Pe r i od

1958-63 94.3 100.8 90.2 93.3 1963-70 74.9 99.6 89.1 87.9

1958-70 70.6 100.3 80.4 82.0

Table 10C Average Ann ua 1 Percentage Rates of Growth

1958-63 -1.1 +0.2 -2.0 -1.4 1963-70 -4.0 -0.1 -1.6 -1. 8

1958-70 -2.9 +0.1 -1. 8 -1.6

All kinds of gross capital stocks declined from 1963 to 1970, with the rate of decl ine of plant equipment being 2 1/2 times that of structures. Because of the method of construction of annual capital expenditures prior to 1954, the values for 1958-1963 should be viewed as indicative more to the direction than to the magnitude of change. Investment in transportation equipment evidenced practically no change over the full period, although it increased as percent of total capital investment.

The evidence from both the gross capital and the net capital stock series suggests that the fluid milk industry has been most successful in adapting technological change to plant equipment, then to structures, and, lastly, to transportation equipment. For the first two kinds of capital, the rate of decline of both gross and net capital stocks has been larger than that of output reflecting a reduction in the unit cost of capital.

This conclusion, drawn from the constructed indexes, can be verified by the actual experience of the industry. The trend for the past fifteen years has been towards larger units of production as smaller firms have left the industry. The capital equipment expenditures, while decreasing absolutely, have reflected the increasing partial productivity of capital, particularly in the plant equipment. Structures have also been increased in size and have provided economies of scale. TransportatiQn eauipment, on the other hand, has not been able to keep pace with processing equipment capital expenditures. In fact, there has been an increase in the unit transportation cost of output for net capital from 1963-70. The distribution network heavily depends upon trucks and except for an increase in the size of capacity, and a few work saving devices in handl ing products, the structure of distribution has not been altered significantl~.

Intermediates - All Other Inputs (Including Raw Material)

Intermediates are the purchased goods and services which become transformed during the economic process and then comprise the output of a company. The term "intermediate

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inputs" can be thought of as "materials consumed." These terms wi 11 be used interchangeably throughout the report. Of the three kinds of inputs into the product i ve process, ita lone is not cons i de red a It factor of product ion. It It is more familiarly described . as the material upon which labor and capital operate, or the purchased materials used up in the productive process of adding value.

There were three main groupings of intermediates (materials consumed) for the fluid milk industry: raw mi lk and mi lk products, containers, and a residual which represents miscellaneous goods and services such as heat, electricity, etc., which are used up during the productive process. Each group of intermediates was deflated by the appropriate price index to yield the price series in constant 1967 dol lars. The container grouping was furth~r divided into paper and glass containers and individually deflated before summing . These four groups after deflation were then summed to produce total expenditures for materials consumed (intermediates) in constant 1967 dollars.

Intermediates (materials consumed) are important for analysis at the level of firms or industries, because they are necessary inputs to the productive process. The relative prices among the intermediates, and among the different kinds of inputs in general, must be entered into the decision-making of the individuals who dictate company policy. Intermediates are particularly important for thefood processing industries, because they traditionally account for the major part of expenditures and are the largest kind of input in dollar terms by a significant amount.

On a national basis intermediates are netted out when all industries are consolidated (because one firm's intermediate purchases are another firm's product). However, the aggregation appropriate for national accounting purposes would be misleading and would omit a considerable arena of economic decision-making for the firm or en individual industry.

Intermediates (materials consumed) constitute the major expenditure category of the fluid milk industry and accounts for almost two-thirds of the total dollar outlays. Of this, purchases of raw milk from milk producers compose by far the largest single item.

Tab 1 ell Index of Intermediate Inputs

1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

95.4 96.3 97.1 97.5 98.6

103 . 9 106.9 102.9 101. 3 100.0 98.8 98. 7 94.7

The fluid milk industry's processing and manufacturing are intimately and intricately tied to the disposition and utilization of raw milk purchases. Raw milk inputs constitute .a large proportion of total output, and there is little opportunity to increase yields of fluid mi lk products obtainable from the raw material. For these reasons, few technological economies are available to increase productivity of i nte rmed i ates.

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Table 12A Percent age of Totol Intermediat es Re presented Ly

Raw ~ilk and Cont ~ in e r s

1958 1963 1970

P,altl t ~ ilk

86.41 88 . 28 87.22

Cont ainers

8 . 69 9.21

11. 71

Total

100.0 100.0 100.0

Table 12 shows the dominance of raw milk in the intermediates index. Although it has decl ined from the high proportion of the mid 1960 1 s, the percentage is sti II higher in 1970 than in 1958.

1958 1963 1970

Table 13A Index of Ea ch Cateqory of Material s Consumr.d

Ra"J Mil k

95.23 106.11 96.32

Contai ner s

Tc:ble 13B

72.4 83.7 97.7

Total

95.4 103.9 94.7

End of Pe riod a s Pe rcentage of Beginning of Period

19)8--63 19G3-70

1958-70

1958-63 1963-70 ·

1958-70

111./1 90.8

101. I

Avera~e Annual

2.3 -1.3

-. I

115 . 6 II G. 8

13S . 0

Table 13C Pe rcentage Rates

3.0 2.3

2.5

of Chan~e

108 . 9 91.1

99.3

1.8 -1.3

-0.1

The constant dollar value of raw milk used increased in the mid 1960 l s and then decl ined to about the same level as prevailed in 1958 by the end of the period. The more recent decline of inputs of raw mi l k most probably represents a rapid shift to ICMIfat and skim milk items. The index reflects the reduced quantities of milk fat used in various fluid mi lk products. Only cartons shCMIed a consistent increase. The carton increase represents the shift to improved but more costly cartons. During the period shown, there was a rapid increase in waxed paper, later, plastic coated paper, and more recently to plastic and polyethlene containers. Tables 12 and 13 also reflect the changing technology of packaging in the fluid milk industry with containers becoming a large proportion of the total materials consumed.

Summary Findings of Productivity in the Fluid Milk Industry

The period of the study covers 1958-1970. The two subperiods, also analyzed are 1958-1963 and 1963-1970. 1963 was chosen as the separating year, because it was considered to be a year of Iinormalil compensation to the equity holders in the industry as well as a year

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in which the Census of Manufactures was conducted. The indexes are expressed in the base year 1967 = 100.

Table 14 Ou t pu t and ~')u t Indexes

Labor (tJ) Caeital ( K) Intermediates (M) Ouq~ut (0)

1958 128.4 114.3 95.4 102.2 1959 125.8 114.3 96.3 103.3 1960 121.2 112.7 97.1 99.7 1961 119.7 110.9 97.5 97.9 1962 117.2 108.5 98.6 97.3 1963 111.2 106.6 103.9 98.3 1 :.;G II 111.5 106.1 106.6 102.3 19G5 109.2 104.2 102.9 100.4 19(,6 103.2 101.2 101.3 97.9 lSG l 100.0 100.0 100.0 100.0 1 S()8 94.S 97.7 98.8 97.2 196':) 91.2 94.9 98.7 95.5 13/0 85.5 93.7 94.7 94.7

Both capital and labor inputs have behaved quite differently from the index of the goods consumed and output. There has been an inexorable decl ine of capital and labor inputs into the production of fluid milk. This decl ine is so steady that, except for capital from 1958-59, every succeeding year for both series show Jess input. F-or the intermediates, the trend was an increasing util ization of materials from 1958 through 1964 and then a steady decl ine. The shift to lowfat and skim milk, which began in 1955 and gained momentum in more recent years, probably accounts for the drop. Since less butterfat is used in lowfat and skim milk, there is a reduction in the materials purchased and used.

The movement in the output series is more regular than in the corresponding inputs. This reflects the dynamic changes taking place in the fluid milk industry. These include a declining per capita consumption of milk, a shift in the produc~ mix with an increasing proportion being in lowfat and skim mi lk products as well as increased sales of by-products such as yogurt, sour creams, and many dips and dressings. Also accounting for some of the change in output is the shift from home del ivery and full service wholesale delivery to distribution with less services. As previously noted, the method used to measure output reflects such a reduction in services.

Relative to 1967 = 100, the output of the industry has fluctuated between 103.3 and 97.2 from 1958 through 1968. There has been a sl ight fall ing off in 1969 and 1970.

The three categories of inputs were combined on the basis of their relative input shares in 1963, as measured by expenses plus profit. These shares were:

Tab 1 e 15

1963 Input Shares (Weights)

Labor Capital Intermediates Total

16.86% 18.48% 64.66% 100.00%

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Table 16

vieighted Combined Total of Inputs Compared to Outputs

~Je i ghted Index of Index of Total Total Inputs Output ---

1958 104.4 102.2 19S~ 104.6 103.3 1960 104.0 99.7 1961 103.7 97.9 1962 103.7 97.3 1963 105.6 98.3 1964 107.3 102.3 1965 104.2 100.4 1966 101.6 97.9 1967 100.0 100.0 1968 97.8 97.2 1969 96.7 95.5 1970 92.9 94.7

The input index is a weighted average of the three component indexes. As such, it illustrates the gradual saving in total resource cost in the production of the fluid milk industry. There h~s also been a decline in the input index relative to the output index, thus indicating a gain in total productivity. This can be seen better by constructing the partial productivity ratio indexes and tracing the movement of each input index relative to output over the period.

Table 17 ---

Total and Partial Productivity Ratios Total

Outeut/lnput Output/Labor Ou~/Cap~~ Output/Consumed HateriCj]

1958 97.9 79.6 89.4 107. 1 1959 98.8 82.1 90.4 107.3 1960 95.9 82.3 88.5 102.7 1961 94.4 81.8 88.3 100.4 1962 93.8 83.0 89.7 98.7 1963 93.1 88.4 92.2 94.6 1964 95.3 91.7 96.4 96.0 1965 96.4 91.9 96.4 97.6 1966 96.4 94.9 96.7 96.6 1967 100.0 100.0 100.0 100.0 1968 99.4 102.9 99.5 98.4 1969 98.8 104.7 100.6 96.8 1970 101.9 110.8 101.3 100.0

The total productivity index (i.e., total output divided by total inputs OIl), declines rather steadily until 1963. The decline is not large, but any decline in total productivity for more than a few years is an indication that the industry is having difficulties in successfully adapting it9~lf to the changing environment it faces. After 1963, total productivity picks up and increases steadily except for 1968 and 1969.

An inspection of the partial productivity ratios explains the changing usage per unit of output of the various inputs. The most important input is materials consumed,

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accounting for almost two-thirds of the movement of the aggregate total input index. And in the intermediates index, mi lk and milk products are the vast percentage. Therefore, this index and, thus, the total index, is exceedingly sensitive to any change in milk uti! ization throughout the production process. The partial productivity index of intermediates (O/M) shavs almost the identical movement to the total productivity index and indicates its domination.

The partial productivity ratio for labor (total output divided by labor input) reflects the fact that labor input s have decreased faster than output. The same general pattern can be found in the capital productivity index, (total output divided by capital inputs) . The decl ine in capital has not been as rapid or as extensive as the decl ine in labor. This, of course, means that there is an increasing amount of capital associated with each unit of labor. Thus, capital has been substituted for labor as shown in the following table.

1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970

Table 18 Capital-Labor Substitution Ratio

Capital/Labor

89.0 90.9 93.0 92.6 92.6 95.9 95.2 95.4 98.1

100.0 103.3 104.0 109.6

The capital-labor substitution ratio (capital input divided by labor input) demonstrates the changing relative participation of these resources to production. The secular trend of most industries has been an increasing capital-labor ratio, primarily, because of the industries' purchases of investment and production goods. This is the case in the fluid milk industry--the movement is steadily upward.

These capital investments have increased the output per unit of labor input, but since capital inputs have increased, the actual change in productivity must reflect the net gain in output per unit of both labor and capital inputs combined.

The increase in the capital-labor ratio in the fluid mi lk industry has occurred because of the introduction of more sophi s ticated equipment in mi lk processing and distribution, as well as a consol idation of processing units which have led to economies of scale. Thus, labor has had more capital per man which has made labor efforts more productive.

In order to get a better understanding of the changes in each category of input and total inputs and outputs, the following table ind i cates the status of the indexes in 1958, 1963 and 1970. Their relative change over these periods is shown, as well as the annual percentage rates of change.

(See Table 19 on next page.)

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Table 19

Ind exe s of Input Ca t eoories, Total Inr;;uts and Ou t put s .-

Labor Canital Int e rmediate s Inputs Ind exe s of Output

19 58 128.4 114.3 95.4 104.4 102.2 19 63 111.2 106 .6 103 .9 105.6 98.3 1970 85 .5 93.7 94.7 92.9 94.7

T<J ble 198

End of Period as Pc: r Ce nt of Begi nning of Pc r i od

195 8-63 86 . 6 93 . 3 108 . 9 101.1 96.2 1963-70 76.9 87.9 91.1 88.0 96.3

1958-70 66.6 82.0 99.2 88.9 92.7

Table 19C

Avera ~ e Annual Percent<l ge Rat~s of Cha no e

195 8- 63 -2. 8 -1.4 1.7 0.2 -0.8 1963-70 -3.7 -1.8 -1.3 -1.8 -0.5

1958-70 -3.3 -1.6 ~O. 1 -1.0 -0.6

Table 19C s hows the annual percentage change in the level of the indexe s between the two subperiods. Labor inputs declined at an increasing rate, averaging 3.7% per year during the 1963-70 period compared to 2.8% during the earl ier five-year period. Input of capital also decl ined but more consistently and not as rapidly. The rate of decl ine in total inputs was higher in the later period. However, the industry was able to effect savings in all inputs both absolutely and relatively to output. This is also true for capital and labor inputs over the full period of 1958-70. The same information can be viewed in an alternative way by expressing it in terms of productivity ratios and the capital-labor ratio. .

All input categories related to output (partial productivity ratio indexes) showed an increase in productivity during the 1963-1970 period over the 1958-1963 period. (Table 20B) In fact, productivity for the industry declined during the 1958-1963 period at the average annual rate of 1% per year. The total productivity gains since 1963 have averaged 1.3 percent per year.

In addition, capital and labor productivity showed an increase in 1958-63, although less than 1963-70. The rate of increase in the productivity of capital more than doubled during the more recent period (1.4/0.6) compared to a 57% acceleration (3.3/2.1) in the rate of change for the comparable labor productivity index .

Gains in output per unit of individual input categories have been the greatest for labor averaging 3.3% per year for the last seven years as compared to 1.4% for capital. However, the increase in capital investment per unit of labor, which has been increasing at an increasing rate, clearly tel Is the story. Output per unit of labor input has occurred ~n th,E? . I!)~_ in' because of the additional capital per worker, as well as becauseof technological advancement. Capital invested per worker increased nearly 2% per year during the 1963-1970 period and 5% during 1970 alone.

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Table 20A

Rates of Total and Partial Productivity Gains

Output/Labor Output/Capital Output/Materials Output/Input Capital/Labor Consumed

1958 79.6 89.4 107. I 97.9 89.0 1963 88.4 92.2 94.6 93. I 95.9 1970 110.8 101 .3 100.0 101 .9 109.5

Table 208

End of Per i od as Percent of Be<;1innin9 of Period

1958-70 Ill. I 103. I 88.3 95. I 107.8 1963-70 125.3 109.9 105.7 109.5 114.3

1958-70 139.2 113.3 93.4 104. I 123. 1

Table 20C

Avera~e Annual Pe rcen tage Rates of Change

1958-63 2. I 0.6 -2.4 -1.0 1.5 1963-70 3.3 1.4 0.8 1.3 1.9 1958-70 2.6 1.0 -0.6 0.3 1.7

Productivity Bargaining

The most important concept in productivity bargaining is the truism that each factor of production in and of itself is not productive. It is through the combination of labor, capital and all other inputs that productivity has been enhanced. The trick for successful management is to combine the input factors in such a way as to achieve the greatest output.

In the fluid mi lk industry, the two major factors of production which may be substituted for each other are labor and capital. Generally, those industries which have been able to increase the amount of capital per worker have been able to show the greatest rates of productivity growth. In the fluid milk industry, there has actually been a decl ine in the real capital expenditures for new equipment and plants. Capital investment in research and the development of new technology embodied in new equipment--plants--all of these stimulating new innovations -- is a prerequisite for improved productivity.

However, the availability of capital investment is largely dependent upon its alternative opportunities. The absolute decline in capital investment in the fluid milk industry suggests that the rate of r~turn has not been comparable to other alternatives. This is confirmed by numerous studies of the FTC, a study by the National Food Commission in 1965, a review of financial ratios publ ished by various commercial sources, a review of the Quarterly Financial Re ort for Manufacturing Corporations, publ ished by the Federal Trade Commission and the Internal Revenue Service orporatlon Source Book of Statistics of Income. While the difference between the rate of return in the dairy industry and other alternate investment varies, the return on investor capital in milk processors is low relative to, other opportunities.

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Thus, we come to the main thrust of productivity bargaining. It embodies an approach, by both labor and management, designed to identify those things which may be changed and which wi 11 increase total output per unit of total input. They m~y be attitudes, they may be an "esprit de corps" of management or workers or both. They may be work rules - including feather bedding provisions - and various other items.

Successful productivity bargaining wi 11 almost always include quid pro quols, i.e . , each party to the bargaining process must receive some value for items given up. In most cases, this boils down to management getting higher productivity reflected in a greater rate of return on investment (profits), and labor receiving greater remuneration, job security or some other item it views as important.

The first step is an attitude on the part of both management and labor that they want to improve the productivity of labor and capital in such a way that both can benefit.

The second step results from successfully increasing output per unit of input (all inputs). This wi 11 produce savings. These may accrue to consumers in the form of prices, labor in the form of wages and compensation, and management in the form of return on investment (p ro fit s) .

The third is an openness to recognize reasonable rates of return or a reasonable division of the savings which accrue from the increased productivity to the inputs of capital arid labor.

This study clearly identifies the fact that labor compensation in the fluid milk inqustry is comparable to the nation ls average. However, the net outflow of capital suggests a need for improvement in the rate of return to capital. Labor leaders need to approach the bargaining table with a receptive ear for both increasing productivity and for sharing the savings with the capital. New capital brings new technology and innovations. This, in turn, brings greater output per unit of input which is what productivity i~ all about.

SOURCES OF DATA

&

METHODS OF STATISTICAL ANALYSIS

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APPENDIX

Sources and Methods

I nt roduct i on

The primary sources of information were the Annual Survey of Manufactures (ASM) in non-census years, and the Census of Manufacturers (CM) for 1954, 1958, 1963 and 1969. Other sources of information were publ ications of the Department of Agriculture and the Milk Industry Foundation. Each of these sources will be referenced where used.

Output

Both the ASM and the CMprovided the continuous series from 1958-70 for value of shipments. Each year's current dollar value of shipments was deflated by a deflator constructed by the Office of Business Economics, Interindustry Division, Department of Commerce, for the fluid mi lk industry. This deflator (1967 = 100) for SIC 2026 is a weighted average of five five-digit deflators, 20260 through 20264. The weights reflect the relative contribution to sales of the different kinds of fluid mi lk industry products. They were obtained from the 1958 input-output matrix of the national economy on a four­digit basis, and have not been revised as of this date.

The deflated annual value of shipments was then adjusted for inventory change by adding current year's inventory and deducting the previous year's inventory. Because of the rapid turnover of stock, net change in inventories is a small contribution to the variation of the adjusted value of shipments.

Indirect business taxes were subtracted from value of shipments, adjusted, in constant 1967 dollars by the following procedure. Estimates of indirect business ta~s are not avai lable on a four-digit basis. The closest approximation to this is the estimate based on the two-digit SIC 20, food processing, which is also prepared by the Inter­industry Economics Division. The ratio of SIC 20 indirect business taxes to value of shipments, adjusted, was used to reduce the value of shipments, adjusted, of SIC 2026, the fluid milk industry.

As an intermediate step, the ratio was first constructed by relating indirect business taxes with intermediates, because intermediates comprise the major proportion of purchases subject to indirect business iaxes (labor compensation, the funds for which must be generated by -sales, does not contain any indirect business taxes.) In effect, this ass umed that all i nd i rect bus i ness taxes were allocated to i nte rmed i ates. The proportion of taxes was then appl ied to SIC 2026 intermediates to get the absolute amount, and then this was appl ied to the value of shipments, adjusted.

it: Net output was calculated by subtracting real depreciation from gross output.

Labor

All three labor indexes were based upon employment, rather than man-hours. [The ASM and the CM provide man-hours only for production workers.] The Department of Labor has estimated nonproduction man-hours, but they are not for publ ication nor citation.

-k See Page 22.

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In any case, they move closely with annual nonproduction employment and, hence, the indexes would show comparable movement. Because the employment figures are for the end of

2 the year, they were averaged to give average employment for the year. ((Year t + yeart-l)/ )

The first labor index is average annual employment. Because this is already in real physical quantities, .no deflation is required. Like all the indexes, it has a base year 1967 = 100.

The second index was the weighted sum of production workers and nonproduction workers. The weights were the average yearly compensation for 1967. After weighting and summing, it was put into index form.

The third index combined nonproduction employment with production hours. Total production hours were divided by production workers to obtain annual production hours, which were then weighted by the production hourly wage in 1967. The nonproduction workers were weighted, as in the second index, by the annual compensation.

Intermed i ates

Intermediates are the theoretical analogue to materials consumed in the CM. Because materials consumed are not available in non-census years, it was necessary to reduce the available figure, materials purchased, to the appropriate level. This was done by calculating the ratio of materials consumed to materials purchased in the census years. This ratio was then arithmetically interpolated for the non-censu~ years and appl ied to materials purchased to produce a consistent series comparable to materials consumed in current dollars. Materials consumed was then divided into four groupings.

Fluid milk intermediates are available from the same Table which provided aggregate materials consumed. The three categories were 013205 whole mi lk, 202612 fluid skim, and 202613 cream. Thses three categories were summed to give aggregate fluid mi lk intermediates in current dollars. This was then deflated by the USDA price p'rice series, put on an index basis, of the price received by farmers for milk el igible for the fluid market (Class 1). This produced constant 1967 dollar estimates of fluid milk intermediates for census years. For non-census years, the interpolation was achieved by first taking the ratio of constant 1967 dollar fluid milk intermediates to the milk util ization of milk used in fluid products sold by dealers in census years (USDA, Mi lk Production, Disposition, and Income, Table 13) . This ratio was then appl ied to non-census years to yield constant 1967 dollar fluid milk intermediates. Current dollar fluid milk intermediates were then constructed by multiplying the constant dollar estimates by the fluid mi lk price deflator. Finally, both the current dollar and the constant dollar estimates were inflated by a coverage factor to account for the firms which were not covered by the CM.

Manufactured milk intermediates fol lowed the same prodedure. These intermediates were taken to include 202101 butter, 202401 ice cream mix, 202210 cheeses, 202301 condensed milk and 202311 dried mi lk. They were deflated by the USDA series, on an index basis, of the price received by farmers for milk of manufacturing grade (Class 11). Again, the census years provided the ratio of constant 1967 dol lars manufactured milk intermediates to total manufactured products, exclusive of ice cream and other frozen dairy products. With these estimates, the series for manufactured mi lk intermediates on both a current and constant dollar basis was obtained. Finally, these intermediates were also inflated by the coverage factor mentioned above.

Container intermediates were constructed by applying the percentage of the income dollar spent on contain~rs to the value of shlpments. This estimate comes from the Milk Facts of the Milk Industry Foundation, "What Becomes of the Milk Distributor's Income Dollar." For years in which the calculation of the breakdown of the distributor's dollar

- 22 -

was not available, arithmetic interpolation was used. The container expenditures were futher disaggregated into paper and glass containers, the percentage distribution obtained from "Packaged Fluid Milk Sales in Federal Milk Order Markets," USDA. From 1963 forward, the deflator chosen was WPI 09-15-03-29, One-half Gallon Mi lk Carton; From 1963 backwards, WPI 09-15-03 Paper Boxes and Containers. They were 1 inked in 1963 by raising the six-digit series to the level of the eight-digit series. The price series for glass containers was WPI 13-8. The glass and the paper expenditures, both current and constant dollar, were summed to provide a container series.

T~e final intermediate grouping, the residual, was obtained by summing the current dollar outlays for fluid milk, manufactured milk, and containers, and subtracting this total from the current dollar materials consumed. This residual was then deflated by the Gross National Product Implicit Price Deflator, IIPrivate-Business-Nonfarm,11 Table 8.4, U.S. National Income and Product.

The four groupings, each expressed in constant dollar terms, were then summed to constitute the aggregate intermediates index.

Capital

Real gross and net capital stock estimates were derived from the ASM and the_CM new capital annual outlays.

Each year1s outlays were separated into structures and into machinery and equipment. Machinery and equipment was further separated into motor vehicles and processing equipment. These current dollar outlays were deflated to yield outlays in constant 1967 dol lars.

Separate deflators were used for dairy equipment and motor vehicle.s. For 1961-1970, WPI 11-61-01 Dairy equipment; for 1948-1961. Motor trucks were able to be deflated by WPI 14-11-02 from 1948-1970. The deflator for structures was the GNP Implicit Price Deflator, Private-NonResidential-New Construction-Nonresidential-Industrial, Table 8.7, U. S. Nat i ona 1 I ncome and Product.

There were two lengths of 1 ife applied to the capital expenditures. All machinery and equipment was assumed to be retired after 10 years, and structures were retired after 30 years. Because the estimates for capital outlays prior to 1954 were either nonexistent or unreliable, the annual level of capital expenditures was assumed to move with the level of output. A priori, a distributed lag of previous output would be a better determinant, but the imprecision of the data does not warrant such a fine treatment. The average outlays for 1954 and 1955 were taken as a proportion of the average milk utilization in those years. This proportion was applied to previous years l utilization to provide estimates of real capital outlays, after deflation of the current dollar estimates.

Real gross capital stocks were then constructed by summing each year1s deflated capital expenditure by type. At the end of each kind of capital1s length of life, the capital corresponding to that year was retired. The real gross stock thus contained ten year1s worth of expenditures for machinery and equipment, and thirty year1s worth for s t ructu res.

Real net capital stocks were obtained by following the same procedure, but depreciating the annual expenditures according to the straight-line method first. For machinery and equipment, one-tenth of the deflated annual expenditure was assumed to represent depreciation in anyone year. At the end of ten years, the machinery and equipment v-Jould be fully depreciated and nothing would be leff - to retire for scrap or salvage. A similar methodology was employed for structures, but based on the thirty-year life span.

Real depreciation was gotten simply by differencing the summed real depreciated (i.e., net) capital expenditures from the summed real gross capital expenditures.