Quality-adjusted price indices to improve productivity measures in highway construction

Aerial view of highway and overpass in city on a cloudy day
Editor's note:

This paper is published as part of the Hutchins Center on Fiscal and Monetary Policy’s Productivity Measurement Initiative.

In this paper, Omar Swei, David Gillen and Anuarbek Onayev of University of British Columbia propose an approach to generate a quality-adjusted producer price index for highway construction. The authors use price data for highway construction projects across the contiguous United States from 2005 through 2017. The data set includes approximately 5,000 unique items for each project. These items are distilled to form 60 item baskets. The authors redefine their output from being lane-miles to ‘lane-miles of service.’ The indicator of quality is the deterioration rate of a roadway, which is measured using data on pavement roughness which links to deterioration and the time between required servicing; an improvement in quality reduces deterioration and increases the time span between maintenance and reconstruction, something which adds significant value to state budgets. They use a chained-Fisher price index and find that our proposed, quality-adjusted producer price index exhibits lower annual growth by 2.0 percent than the unadjusted price index. Given price inflation has been overestimated in the past by failing to account for quality changes, their finding suggests the lack of productivity growth in construction, specifically highways, bridges and infrastructure, may have been significantly underestimated.

Read the full paper here»

The authors did not receive financial support from any firm or person with a financial or political interest in this article. None is currently an officer, director, or board member of any organization with an interest in this article.