Skip to Content

PC Productivity Update 2016

1 Australia's productivity in 2014-15

Introduction

This analysis of Australia's productivity performance in 2014-15 is based on the latest Australian Bureau of Statistics (ABS) annual estimates of multifactor productivity (MFP) and labour productivity (LP) growth for both the 12 industry market sector as a whole, and for each of its 12 individual industries.

Productivity growth is a key source of long-term economic growth, business competitiveness and real per capita income growth. It is an important determinant of a country's living standards and wellbeing. (Productivity is defined in box 1.1)

Box 1.1 What is productivity?

  • Productivity (the ratio of output produced to inputs used) measures how efficiently inputs, such as capital and labour, are used to produce outputs in the economy. It is sometimes referred to as productive efficiency. Productivity increases if output grows faster than inputs (or shrinks more slowly). Growth of productivity is the growth of output over and above the growth of inputs.

    Multifactor productivity (output produced per unit of combined inputs of labour and capital) is the measure that comes closest to the underlying concept of productivity — efficiency of producers in producing output using both labour and capital. Growth of multifactor productivity is the growth of output over and above the growth of combined labour and capital.

    Labour productivity (output produced per unit of labour input) measures efficiency in the use of labour. Growth of labour productivity is the growth of output over and above the growth of labour input — it not only measures change in the efficiency of labour but also captures the value added from growth in capital (and more advanced technology intrinsic in the new investment) that supports increased output without increasing labour.

    The PC's Productivity Update 2013 provides a more detailed discussion of the measurement issues associated with multifactor productivity and labour productivity.

2014-15 market sector update

In 2014-15, the 12-industry market sector represented 64.2 per cent of total industry gross value added (IGVA)1. The non-market sector, including Health care and social assistance (7.8 per cent), Public administration and safety (6.2 per cent), and Education and training (5.7 per cent), totalled 19.8 per cent in 2013-14. The remaining four industries2 accounted for 16.1 per cent of IGVA. The division into market and non-market sectors arises from the difficulty of measuring MFP in industries where much of the output is not priced by the market. The lack of a reliable price index means that output is usually estimated based on the cost of production, so by definition productivity growth will be zero as output growth is determined directly by input growth.

In terms of output, the four largest market sector industries in 2014-15 were Financial and insurance services (10.3 per cent), Construction (9.8 per cent), Mining (8.0 per cent), and Manufacturing (7.6 per cent), which collectively represented about 35.7 per cent of total IGVA and more than half that of the market sector (box 1.2). Compared with the previous year, IGVA share of Mining declined by 1.7 per cent (from 9.7 per cent to 8.0 per cent), while the shares of Construction and Financial and insurance services increased, respectively, by 0.5 percentage points (from 9.3 per cent to 9.8 per cent) and 0.4 percentage points (from 9.9 per cent to 10.3 per cent).

Box 1.2 Output (IGVA) shares of the 12 industries in the market sector, 2014-15

    • Financial and insurance services: 10.3 per cent
    • Construction: 9.8 per cent
    • Mining: 8.0 per cent
    • Manufacturing: 7.6 per cent
    • Transport, postal and warehousing: 5.6 per cent
    • Retail trade: 5.3 per cent
    • Wholesale trade: 4.8 per cent
    • Information, media and telecommunications: 3.1 per cent
    • Accommodation and food services: 3.0 per cent
    • Electricity, gas, water and waste services: 2.9 per cent
    • Agriculture, forestry and fishing: 2.8 per cent
    • Arts and recreation services: 1.0 per cent.
    Source: ABS (Australian System of National Accounts, 2014-15, Cat. no. 5204.0, October 2015).

In 2014-15 market sector MFP recorded highest growth in recent years

Australia's market sector MFP is estimated to have grown by 0.8 per cent in 2014-15.3 Since 2011-12, annual MFP in the market sector has recorded uninterrupted increases and 2014-15 was the fourth consecutive year of positive growth. This growth was the highest in recent years and comparable with the long term average between 1973-74 and 2014-15 of 0.8 per cent (table 1.1).4 This was a result of higher growth in output (by 2.8 per cent) than growth in total inputs (by 2.0 per cent). On the input side, capital input (increasing by 3.2 per cent) was the larger source of input growth compared with the growth of labour (0.9 per cent).

Average annual MFP growth in the market sector remained flat in both the current (incomplete) productivity cycle from 2007-08 to 2014-15 and the last complete cycle from 2003-04 to 2007-08. However, long-term MFP growth from 1973-74 remained positive (table 1.1). In the current cycle:

  • output increased by 2.5 per cent, while total inputs by 2.4 per cent5
  • the positive MFP growth in the last four years just offsets the decline in the early years, resulting in zero growth for the whole period.

Growth of LP results from a growth in MFP and from capital-deepening, an increase in the level of capital relative to labour. This contribution of capital growth is typically positive and larger than MFP (table 1.1).

In 2014-15, LP growth was 1.9 per cent, down from 2.6 per cent in the previous year, the slowest since 2011-12. The reduced rate of LP growth was due to a significant decrease in the measured contribution of capital — capital deepening declined from 2.0 per cent in 2013-14 to 1.1 per cent in the last year. This was below its longer-term average between 1973-74 and 2013-14 (1.6 per cent).

Since 2011-12, LP growth has been less reliant on the growth of capital investment and more on the growth of MFP. This has been the pattern observed in the past four years.

Table 1.1 Summary productivity statistics, 12-industry market sectora,b
Per cent
Long term growth rate
1973-74 to 2014-15
Last complete cycle
2003-04 to 2007-08
Period since the last cycle
2007-08 to 2014-15
Latest years
2012-13 2013-14 2014-15
Output (GVA) 3.0 4.0 2.5 2.5 2.5 2.8
Total inputs 2.2 4.0 2.4 2.2 2.0 2.0
Labour input 0.7 2.4 0.1 -1.1 -0.1 0.9
Capital input 4.4 6.0 4.9 5.8 4.2 3.2
MFP 0.8 0.0 0.0 0.3 0.6 0.8
Capital deepeningc 1.6 1.7 2.3 3.3 2.0 1.1
Labour productivity 2.3 1.6 2.3 3.6 2.6 1.9
Capital labour ratio 3.7 3.6 4.8 6.9 4.3 2.3

a Annual growth rates or average annual growth rates in designated periods. Cycles refer to productivity cycles b Includes Divisions A to K and R. Excludes Divisions L Rental, hiring and real estate services; M Professional, scientific and technical services; N Administration and support services; and S Other services. These four service sectors are excluded from the analysis due to issues around the measurement of capital services in these industries. Also the 12-industry market sector has a longer time-series. See Experimental Estimates of Industry Multifactor Productivity, 2009-10 (ABS Cat. No 5260.0.55.002).c Capital deepening is the change in the ratio of capital to labour, weighted by the capital share of market sector income. Labour productivity growth equals the sum of the growths of MFP and capital deepening.

Source: Productivity Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2014-15, Cat. no. 5260.0.55.002, December 2015).

Most industries in the market sector exhibited positive MFP and LP growth in 2014-15

In 2014-15, MFP improved in 7 out of the 12 industries in the market sector. These industries are Agriculture, forestry & fishing (1.2 per cent), Mining (5.5 per cent), Electricity, gas, water & waste services (Utilities) (2.5 per cent), Wholesale trade (0.9 per cent), Accommodation and food services (2.0 per cent), Information, media & telecommunications (4.5 per cent) and Financial and insurance services (4.0 per cent).

Particularly significant was the change in the productivity of the Mining and Utilities industries. The strong MFP growth in the Mining industry in 2014-15 was associated with strong output growth (7.6 per cent) and moderate growth of total inputs (2.1 per cent). On the input side, labour input declined by 12 per cent and growth of capital was 7.4 per cent (compared with 11.6 per cent in the previous year) —reflecting a transition from an 'investment phase' into a 'production phase' (PC 2015). In 2014-15, the significant fall in labour input also led to an extraordinary growth in measured LP (22.4 per cent).

In 2014-15, a similar pattern of change happened in the Utilities industry where MFP growth (2.5 per cent) was associated with a 1.4 per cent growth in output and 1.1 per cent decline in total inputs. In this industry, input of labour fell by 5.9 per cent and capital recorded 1.6 per cent growth (down from 2.7 per cent in the previous year), resulting in a 7.8 per cent increase in measured LP.

The changes in these two industries had a significant influence on the measured MFP growth in the market sector. In the Mining industry, the measured MFP growth was consistently negative in the 2000s (Topp et al. 2008) and, in the Utilities industry, it was negative for more than two decades (Topp and Kulys 2012). The Commission found that these two industries (and Agriculture, forestry and fishing) were major contributors to the deterioration in the measured MFP of the market sector in the 2000s (PC 2009). The Commission's analysis (presented in PC 2015) suggested that MFP growth in Mining would turn positive in the near future; and with the move from the investment to the production phase this was confirmed in the 2014-15 data.

The five other industries that experienced positive MFP (as well as LP) growth in 2014-15 featured output growth that outpaced input growth — output increased by 7.0 per cent in Accommodation and food services, 9.4 per cent in Information, media & telecommunications, 4.6 per cent in Financial and insurance services, 2.5 per cent in Wholesale trade and 1.5 per cent in Agriculture, forestry and fishing. On the input side, capital services grew in all five industries, but labour declined in Agriculture, forestry & fishing (-1.1 per cent) and in Financial and insurance services (-1.4 per cent).

In 2014-15, five industries experienced negative MFP growth — Manufacturing (-0.5 per cent), Construction (-2.3 per cent), Retail trade (-0.6 per cent), Transport, postal & warehousing (-3.9 per cent) and Arts and recreation services (-4.3 per cent). The productivity performance of these industries can be classified into two groups.

In the first group, positive output growth was recorded in Retail trade (2.6 per cent) and Arts and recreation services (3.0 per cent). In Retail trade, MFP declined only marginally. Given the positive growth in output, the significant drop of MFP in Arts and recreation services was mainly attributable to a significant rise in the labour input (9.9 per cent).

Table 1.2 Industry productivity growth 2014-15
Per cent
Output (GVA) Total inputs Labour input Capital input Labour productivity MFP
Agriculture, forestry and fishing 1.5 0.3 -1.1 1.0 2.6 1.2
Mining 7.6 2.1 -12.0 7.4 22.4 5.5
Manufacturing -1.2 -0.7 -0.2 -1.5 -1.0 -0.5
Electricity, gas, water and waste services 1.4 -1.1 -5.9 1.6 7.8 2.5
Construction -0.7 1.6 0.1 5.6 -0.8 -2.3
Wholesale trade 2.5 1.5 1.0 2.6 1.5 0.9
Retail trade 2.6 3.2 2.5 5.1 0.1 -0.6
Accommodation and food services 7.0 4.9 6.0 1.1 0.9 2.0
Transport, postal and warehousing -0.9 3.2 3.8 2.3 -4.5 -3.9
Information, media and telecommunications 9.4 4.7 7.7 2.8 1.5 4.5
Financial and insurance services 4.6 0.5 -1.4 1.8 6.1 4.0
Arts and recreation services 3.0 7.6 9.9 3.1 -6.3 -4.3
Market sector (12) 2.8 2.0 0.9 3.3 1.9 0.8

Source: Productivity Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2015-15, Cat. no. 5260.0.55.002, December 2015).

The three other industries recorded a fall in the level of output — Manufacturing by -1.2 per cent, Construction by -0.7 per cent and Transport, postal & warehousing by -0.9 per cent. For Manufacturing, a decline in output was accompanied by a fall in the inputs of both capital and labour but, for Construction and Transport, postal & telecommunication, total inputs increased.

Taking a longer-term perspective, eight of the twelve industries in the market sector recorded positive MFP growth in nearly all sub-periods between 1989-90 and 2014-15 (figure 1.1). Over this period, average annual MFP growth was highest in Agriculture, forestry and fishing (2.6 per cent) and financial and insurance services (2.3 per cent). They were followed by Wholesale trade (1.8 per cent) and Retail trade (1.7 per cent).

In the Mining and Utilities industries, average annual MFP growth was negative for the whole period and has remained negative in all sub-periods since 1998-99. MFP growth in Manufacturing has also been weak since 1998-99, at 0.3 per cent over the whole period. MFP growth in Arts and recreation services was negative over the whole period (-0.5 per cent) and in the most recent subperiod.

  • Figure 1.1 Industry MFP, 1989-90 to 2014-15a
    Per cent per year

    Text alternative of table follows

    Text alternative for the table in Figure 1.1

    Figure 1.1 Industry MFP, 1989-90 to 2014-15a
    Per cent per year
    1989-90 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2007-08 2007-08 to 2014-15 1989-90 to 2014-15
    Agriculture, forestry and fishing 3.4 3.8 3.5 -0.9 2.6 2.6
    Mining 2.1 0.4 -0.2 -3.8 -4.1 -1.4
    Manufacturing 0.7 0.9 1.0 -1.2 -0.1 0.3
    Electricity, gas, water and waste services 2.8 1.9 -2.2 -4.9 -2.8 -1.2
    Construction 0.3 2.8 1.0 0.9 0.9 1.2
    Wholesale trade -2.0 5.3 3.1 -0.1 1.5 1.8
    Retail trade 2.0 2.3 2.0 0.4 1.7 1.7
    Accommodation and food services -0.7 2.0 1.0 0.6 0.1 0.6
    Transport, postal and warehousing 2.1 2.2 1.6 0.9 -0.8 1.0
    Information, media and telecommunications 5.1 3.1 -1.1 0.1 0.5 1.4
    Financial and insurance services 4.5 2.3 0.7 3.7 1.4 2.3
    Arts and recreation services -0.7 -1.7 0.9 -1.6 0.1 -0.5
    Market sector 1.2 2.6 1.0 0.0 0.0 0.9

    a Figures in this table are average annual growth rates. Periods defined according to productivity cycles.

    Source: Productivity Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2014-15, Cat. no. 5260.0.55.002, December 2015).

Footnotes

  • 1 IGVA shares presented in box 1.2 are based on current values of all industry gross value added which excludes Ownership of dwellings. Return to footnote 1
  • 2 These industries are Rental, hiring and real estate services, Professional scientific and technical services, Administrative support services and Other services. They are included in what is known as the 16 industry market sector but are not covered in this analysis.Return to footnote 2
  • 3 The growth rates used in the latest ABS publication of productivity estimates (ABS, Estimates of Industry Multifactor Productivity, 2014-15, Cat. no. 5260.0.55.002) are expressed as changes in natural logarithms multiplied by 100. For consistency, this paper has also applied this method to productivity data sourced from ABS publications.Return to footnote 3
  • 4 Annual rates of MFP and LP growth are affected by the utilisation rate of inputs (notably capital) as well as other factors. Hence some of this annual change can be due to the effect of the business cycle. For this reason, the ABS also reports estimates over the productivity cycles which match peaks in the business cycle. This concept was explained in the PC Productivity Update 2013 (PC 2013, p. 13). Return to footnote 4
  • 5 By definition, MFP growth equals the difference between the growth rates of output and total inputs. In Table 1.1, this equality does not hold exactly, due to the rounding of the numbers for MFP and total inputs. Return to footnote 5

Update homeChapter 2