Recent movements

Productivity data have been unusually weak in recent years. Labour productivity (output per hour worked) in Australia’s market sector increased by only 0.4 per cent in 2006-07, while multifactor productivity (output per combined input of labour and capital) fell by 0.6 per cent (table 1).

This is now the third successive year in which multifactor productivity growth has been well below average and, taking these years together, multifactor productivity is estimated to have fallen by 0.9 per cent since 2003-04. The decline in productivity has resulted from very strong growth in demand for inputs — both capital and labour (figure 1). Over this period, output growth has continued at around the long-run average rate.

For a number of reasons, the estimates of short-term movements in productivity do not necessarily indicate a deterioration in the underlying trend rate of productivity growth. Productivity growth tends to move in cycles and some of the apparent slowing reflects the choice of 2003-04, a cyclical peak in multifactor productivity, as the point from which to measure average growth rates. Productivity growth is also very volatile in the short term, and recently it has been affected by unusual movements in a number of industries, most notably agriculture and mining. (For a broader discussion of industry productivity volatility, see Issues in measurement of industry productivity).

In agriculture, drought conditions caused multifactor productivity to decline by 24 per cent in 2006-07 and this industry subtracted around 1.3 percentage points from market sector productivity growth in that year. However, past experience suggests that agriculture productivity tends to rebound quickly, within a year or two, as weather conditions improve.

In mining, multifactor productivity has been trending lower over recent years as the increase in world mineral prices has boosted the demand for additional labour and capital to expand production capacity while lags have meant that this new production capacity has only just started to come on stream. Over the three years to 2006-07 as whole, the number of hours worked in mining increased by 39 per cent and the volume of capital services consumed increased by 24 per cent, while the volume of mine output has risen by only 14 per cent. Mining subtracted around 0.2 per cent per year from multifactor productivity growth over this period. Productivity Commission staff are currently undertaking research on recent declines in productivity growth in the mining sector.

Since productivity in these two industries is expected to recover somewhat over coming years an estimate of market sector productivity growth that excludes mining and agriculture may give a better indication of overall productivity trends. Figure 2 shows that, ignoring these two industries, multifactor productivity has been trending upwards over recent years, albeit somewhat more slowly than average.

Other industries have made smaller contributions to the recent movements. Wholesale trade and accommodation, cafes and restaurants both recorded multifactor productivity falls in 2006-07 associated with very strong employment growth. ABS estimates of productivity in the electricity, gas and water supply industry have also continued to trend lower, and are now 23 per cent below their peak in 1997‑98. Drought explains a small part of the fall over this period; the decline in the output of the water supply industry has subtracted around 4 percentage points from multifactor productivity in electricity, gas and water supply. On the other hand, MFP has continued to grow strongly in other industries, most notably in communication services, transport and storage, and construction.

Table 1

Annual growth in productivity and its components

Per cent

Data source: ABS, Australian System of National Accounts, 2006-07.

Figure 1

Growth in output, inputs and multifactor productivity, 1988-89 to 2006-07

Per cent per year

Figure 1. Growth in output, inputs and multifactor productivity, 1988-89 to 2006-07

Data source: ABS, Australian System of National Accounts, 2006-07.

Table 2

Recent growth in multifactor productivity and industry contributions

Data source: ABS, Experimental Estimates of Industry Multifactor Productivity, 2006-07.

Figure 2

Multifactor productivity in the market sector excluding mining and agriculture,
1996-97 to 2006-07

Index 1999-2000 = 100

Figure 2. Multifactor productivity in the market sector excluding mining and agriculture.

Data source: Calculations are based on data from ABS, Experimental Estimates of Industry Multifactor Productivity, 2006-07.