Improving our Understanding of the Non-profit Sector


Improving our Understanding of the Non-profit Sector

By Josh Martin

Our exploratory analysis of productivity in the non-profit sector highlights the importance of having more data on prices and outputs for the non-profit sector if we truly want to understand the contribution of the sector to our economy and how that is changing over time.

Measuring the modern services-dominated economy is hard, and measuring the public sector is arguably even harder. But a sector that has received relatively little attention and might be hardest of all is the non-profit sector.

Like the public sector, the non-profit sector operates outside the ‘market sector’, and thus charges prices that are not economically-meaningful (or charges nothing at all). This means that for both sectors the value of output for the sector is proxied by the value of inputs, primarily wages of employed staff. But unlike the public sector, the non-profit sector does not have as much administrative data available and has not benefitted from a concerted measurement effort over recent decades.

As such, we know relatively little about the non-profit sector – how big is it, what industries does it contain, has it grown or shrunk, how productive is it, and has its productivity changed over time? In my new ESCoE Discussion Paper, co-authored with Chief Economist of Pro Bono Economics (a charity using the power of economics to support the social sector), we aim to answer some of these questions.

First, what is the non-profit sector? It’s sometimes also known as the “social sector” or “third sector”. Driven by data availability, we focus on the Non-Profit Institutions Serving Households (NPISH) sector in the National Accounts. This is narrower than the full “non-profit sector” since some non-profits can be classified in other institutional sectors. But focussing on NPISH allows us to make progress given the data that are currently publicly available.

NPISH includes many (but not all) registered charities, trade unions, some nurseries and private schools, some social care organisations, religious organisations (e.g. churches), local community groups and sports clubs, and some research organisations. It also includes most universities in the UK, although these are not what most people think of as “non-profits”, so we present results with and without the education industry.

Second, what data are available? We use a variety of National Accounts data from ONS to construct a baseline level of GVA for the NPISH sector, by industry. We also calculate suitable deflators to account for the effects of inflation over time, using a weighted combination of deflators from relevant industries.

We make three main adjustments to National Accounts concepts to more fully capture the inputs, output and productivity of the sector. Most importantly, we add the value of volunteering time – this is unpaid labour input, not reflected in the cost of the output, but which does create value. To do this, we use data from the ONS Household Satellite account and Community Lifestyle survey from DCMS. These show volunteering rising then falling over the past 20 years.

We also inflate the value of wages and salaries to give a truer value to the labour services provided by workers in the non-profit sector. Evidence suggests that workers in the sector are paid less than similar counterparts in the rest of the economy, probably due to non-monetary benefits they get (e.g. the feeling of doing a job that is worthwhile). This means their pay undervalues their labour services, and thus undervalues the output of the sector (since the value of the sector is calculated by summing up the costs). We also increase the value of the capital input, since National Accounts rules mean it reflects only depreciation and not the cost of capital.

The result is that the NPISH sector goes from representing under 3% of GDP in 2019, to over 4% – about half the size of manufacturing. Remember, this doesn’t capture all the non-profits outside the NPISH sector, so the value of the broader sector is probably much larger.

The sector is growing fast – faster than the rest of the economy in terms of hours worked and nominal GVA. However, once adjusted for inflation, growth is slower than real GDP. There is considerable uncertainty around the suitability of the deflators, so the result might vary.

We estimate that the non-profit sector is less productive than the average in the economy, but similar to other labour-intensive industries like retail, and accommodation and food services. Our estimates suggest the sector has seen little productivity growth between 1997 and 2019, but this depends crucially again on the deflators.

Level of output per hour worked in the NPISH sector (including and excluding educatation), current prices, relative to the UK average and other industries. Source: Martin and Franklin, 2022

Hopefully in future work we’ll be able to identify non-profits outside the NPISH sector and expand these measures to capture the sector more broadly. We think that the best way to measure the sector in the long-run will be to develop measures in the same framework as the ONS public service productivity measures, with direct estimates of the volume of output, adjusted for changes in quality over time. That will be a long road, but for now we have some new measures to help us more fully understand the non-profit sector.

Read the full ESCoE discussion paper here.

ESCoE blogs are published to further debate.  Any views expressed are solely those of the author(s) and so cannot be taken to represent those of the ESCoE, its partner institutions or the Office for National Statistics.

The views expressed here are those of the author and should not be taken as the views of the Bank of England or any of its committees, or the ONS.

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