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Nonprofits and the Productivity Stats

Posted by: Michael Mandel on May 07

I’ve had this post sitting here for a while, and I’ve decided to just put it up. It’s not earth-shaking, but it’s kind of interesting.

Last Wednesday the BLS announced strong productivity growth in the nonfarm business sector—2.2% in the first quarter. This number was a surprise to most economists, who expected a much lower number, closer to 1.5%.

The miss is because virtually all the private employment growth has been in nonprofits, which are not counted in productivity…and that suggests private business employment is dropping at a rapid rate.

Let’s step through this real slow. The headline number is “nonfarm business productivity.” The nonfarm business sector does not include nonprofit hospitals, nonprofit schools (like Harvard!), or nonprofit membership organizations, which would include political parties. Here’s what the BLS says on its site:

The business sector excludes many activities where it is difficult to draw inferences on productivity from GDP. These excluded activities are: General government, nonprofit institutions, paid employees of private households, and the rental value of owner-occupied dwellings.

So neither nonprofit output nor nonprofit employment are counted in the productivity stats. The BEA removes nonprofit output from the GDP, as part of its process of contructing the nonfarm business sector. (see NIPA tables 1.3.6 and 1.3.5) In the first quarter, for example, the output of “nonprofit institutions serving individuals” grew at a 3.3% annual rate, compared to 0.6% for GDP as a whole.

To calculate productivity, the BLS removes nonprofit employment from the employment stats. What’s in the nonprofit sector? You can construct a reasonable approximation to the BLS nonprofit employment series using 80% of private educational services (NAICS 61), 53% of healthcare and social assistance (62), 100% of museums, historical parks, zoos, and parks (712) and 100% of membership associations and organizations (813). The last one is a category which includes foundations, civic organization, religious organizations and the like.

So roughly about 60% of nonprofit employment is in health care. Another 20% or so is in membership organizations, and most of the rest is in education. All told, the BLS has about 13.6 million jobs in the nonprofit sector in 08Q1, about 12% of the total number of private jobs.

Under normal circumstances, nobody worries much about the removal of nonprofits. But it turns out in recent months, virtually all of the employment growth has been in nonprofits. Take a look at the chart below.


In the first quarter of 08, private sector jobs fell at an 0.6% annual rate. After taking out nonprofits, the rate of decline almost doubled, to 1.1%. That pretty much accounts for the entire miss in the productivity figures.

What’s the implication of this? If we are measuring the size of the nonprofit sector correctly, the implication is that private sector businesses are cutting much faster than the raw numbers show. That is to say, a -1.1% growth rate in private sector business employment in the first quarter.

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Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.

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