Quality-Adjusted Price Indices to Improve Productivity Measures in Highway Construction

In this paper we propose an approach to generate a quality-adjusted producer price index for highway construction. We 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. We redefine our 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. We 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, our finding suggests the lack of productivity growth in construction, specifically highways, bridges and infrastructure, may have been significantly underestimated. The authors are indebted to participants at the Brookings Productivity Measurement Initiative Authors Conference on April 23, 2020 for helpful discussion and comments. In particular, they thank Dan Sichel and Chad Syverson for their detailed comments and helpful suggestions. They also want to thank Emily Wong for her help in processing some of our original data. 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.