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Abstract: The U.S. Bureau of Economic Analysis (BEA) and the U.S. Bureau of Labor Statistics (BLS) use estimates of depreciation rates for structures and equipment to construct estimates of capital stock from data on capital investments. The depreciation rates are based on research by Frank C. Wykoff and Charles R. Hulten from the 1980s. More recent studies by Statistics Canada, from 2007 and 2015, use Canadian data on used asset transactions from Canada’s Annual Capital and Repair Expenditures Survey of establishments. They found faster depreciation rates, especially for structures. Sheharyar Bokhari and David Geltner’s 2019 study of U.S. used asset prices also found faster depreciation rates for structures. To illustrate the potential effects of implementing these estimates from newer studies, we created a concordance to match Canadian to U.S. asset categories. We reestimated BEA capital stock measures and the BLS capital and total factor productivity (TFP) measures using depreciation rates based on the Canadian Annual Capital and Repair Expenditures Survey. Using these faster depreciation rates results in substantially lower estimates of net capital stocks and higher estimates of depreciation in BEA accounts but has minimal effects on growth rates of TFP in the BLS accounts.

Conclusion
The published BEA and BLS capital measures use depreciation rates for equipment and structures that are mostly based on the widely respected Hulten and Wykoff studies from the early 1980s. These depreciation rates are important in BEA estimates of net capital stocks, net investment, and net saving and in BLS measures of productivity and capital services. Because the estimation of depreciation rates is difficult and requires specialized data sets of used equipment transactions, BEA and BLS have not updated most of these rates, although technological and other changes may cause depreciation patterns to change over time. Unfortunately, few resources are devoted to gauging the accuracy of these rates. As a step toward improving the accuracy of U.S. capital depreciation rates, BEA and BLS might consider selective revisions to depreciation rates of a subset of these asset categories, depending on the prevailing assessment and availability of empirical evidence.

In this article, we estimate simulated capital measures using alternative, typically faster, depreciation rates based on studies by Statistics Canada that principally apply the Hulten and Wykoff method to more recent data from Canada’s Annual Capital and Repair Expenditures Survey. The Statistics Canada results are consistent with those of Bokhari and Geltner who apply a similar approach to estimate depreciation rates for commercial buildings in the United States in recent years. Both studies find faster depreciation rates than those used by BEA and BLS, in which the largest differences in rates are for structures. While true depreciation rates vary across countries, the similarity of findings in these studies suggests that the U.S. rates—based on a patchwork of vintage research—may no longer adequately capture the depreciation of U.S. capital assets.

In this research, we evaluated the effect of using the Statistics Canada estimates in U.S. capital and TFP measures. Our results show that using the alternative depreciation rates produces substantial revisions to BEA capital measures. When we incorporate the faster depreciation rates from 1985 forward, we find that CFC is revised upward by $242 billion in current dollars (11 percent) in 2018, net investment is revised downward by the same amount, and net capital stocks are revised downward by $10.4 trillion (40 percent), with a $2.4 trillion downward revision to stocks of equipment and an $8.0 trillion downward revision to stocks of structures.

Capital stock levels that underlie U.S. productivity data are similarly affected. Constructing estimates of BLS private nonfarm business capital stock by using the Statistics Canada set 1 rates from 1985 forward results in substantial declines, from 0.002 to 24 percent, because much of the value of previous capital stock remains in place, particularly in structures. However, capital services, growth rates in capital services, and TFP growth rates for major sectors show a relatively small impact from using the Statistics Canada set 1 revised rates. The effects on capital stocks, capital services, and TFP are larger with the new depreciation rates implemented abruptly in 1985 than if they were introduced gradually.

We hope this comparison encourages additional research and discussion regarding the depreciation rates and service lives of U.S. equipment and structures used by BEA and BLS when constructing capital and related measures. Because the collection of survey data on used asset transactions can be costly, we especially encourage studies based on automated records of used asset transactions. In the meantime, users of these capital measures should be aware of the sensitivity of these measures to the choice of depreciation rates.
 
https://www.bls.gov/opub/mlr/2022/article/alternative-capital-asset-depreciation-rates-for-us-capital-and-total-factor-productivity-measures.htm

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