Skip to Content

PC Productivity Update 2015

1 2014 Australian productivity

1.1 Introduction

Analysis of Australia's productivity performance in 2013-14 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 performance has been the main source of Australia's 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.)

Section 1.2 contains an update of 2013-14 productivity growth and the proximate causes (relative changes in output, labour and capital) in the (12 industry) market sector. Additional insights are provided in section 1.3 on the influences of productivity in four industries — Agriculture, forestry and fishing; Mining; Electricity, gas, water and waste services; and Information, media and telecommunications.

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). Conventionally, growth of productivity is measured as the growth of output over and above the growth of inputs.

    The ABS aggregate multifactor productivity (value adding 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 labour and capital inputs.

    Labour productivity measures output produced per unit of labour input. Growth of labour productivity is the growth of output over and above the growth of labour input — it captures the value added from growth in capital (including more advanced technologies intrinsic in the new investment) that supports increased output without the increased use of labour (referred to as capital deepening) and multifactor productivity.

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

1.2 2013-14 market sector update

In 2013-14, the 12 industry market sector represented 65 per cent of total industry gross value added. The non-market sector, including Health care and social assistance (7.5 per cent), Public administration and safety (6.2 per cent), and Education and training (5.5 per cent), totalled 19 per cent in 2013-14. The remaining four industries1 accounted for 16 per cent of gross value added.

In terms of output, the four largest market sector industries in 2013-14 were Financial and insurance services, Mining, Construction, and Manufacturing, which collectively represented about 36 per cent of total industry value added and more than half that of the market sector (box 1.2).

Box 1.2 Shares of GDP of the 12 industries in the market sector, 2013-14

    • Financial and insurance services (9.9 per cent)
    • Mining (9.8 per cent)
    • Construction (9.3 per cent)
    • Manufacturing (7.5 per cent)
    • Transport, postal and warehousing (5.6 per cent)
    • Retail trade (5.2 per cent)
    • Wholesale trade (4.6 per cent)
    • Information, media and telecommunications (3.3 per cent)
    • Electricity, gas, water and waste services (3.2 per cent)
    • Agriculture, forestry and fishing (2.8 per cent)
    • Accommodation and food services (2.7 per cent)
    • Arts and recreation services (0.9 per cent)
    Source: ABS (Australian System of National Accounts, 2013-14, Cat. no. 5204.0, November 2014).

Market sector MFP recorded positive growth in 2013-14

Australia's market sector MFP is estimated to have grown by 0.4 per cent in 2013-14,2 achieving the same level of growth as in the previous year (table 1.1)3. This was a result of higher growth in output (2.5 per cent) than growth in total value adding inputs (2.1 per cent). As labour input remained unchanged, capital input (increasing by 4.4 per cent) was the source of growth of value adding inputs.

In the current (incomplete) productivity cycle from 2007-08 to 2013-14, annual MFP growth in the market sector remains negative (at -0.1 per cent). This contrasts with positive growth of long-term productivity performance from 1973-74 (table 1.1). In the latest period, the negative MFP growth was the result of:

  • relatively low output growth (2.4 per cent per year), compared with the longer-term average of 3.0 per cent per year
  • slightly higher growth in total inputs (2.5 per cent), compared with the longer-term average of 2.3 per cent per year.

Growth of labour productivity (LP) results from a growth in MFP and the contribution of capital. The latter, captured by the measure of 'capital-deepening', is typically positive and larger than MFP (box 1.3). In 2013-14, LP growth was 2.5 per cent. This was close to its longer-term average between 1973-74 and 2013-14 (2.3 per cent), though down from 3.7 per cent in the previous year. The reduced rate of LP growth in the latest year was due to a significant decrease in the measured contribution of capital — capital deepening declined to 2.1 per cent in 2013-14, down from 3.3 per cent in the previous year. But the contribution of capital deepening was still well above the longer-term average of 1.6 per cent per year.

Table 1.1 Summary productivity statistics, market sector (12)a. Per cent.
Long term growth rate
1973-74 to 2013-14
Last complete cycle
2003-04 to 2007-08
Period since the last cycle
2007-08 to 2013-14
Latest yearsc
2011-12 2012-13 2013-14
Output (GVA) 3.0 4.0 2.4 4.5 2.6 2.5
Total inputs 2.3 4.0 2.5 3.4 2.2 2.1
Labour input 0.7 2.4 0.0 0.2 -1.1 0.0
Capital input 4.4 5.9 5.3 6.8 5.9 4.4
MFP 0.8 0.0 -0.1 1.1 0.4 0.4
Capital deepeningb 1.6 1.6 2.5 3.1 3.3 2.1
Labour productivity 2.3 1.6 2.4 4.2 3.7 2.5
Capital labour ratio 3.7 3.5 5.2 6.6 7.0 4.4

a Annual growth rates or average annual growth rates in designated periods. b 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. c Productivity statistics for years prior to 2013-14, in particular year 2012-13, differ from the estimates released by the ABS in previous years, as a result of revisions by the ABS to historical hours worked series, as outlined by the ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.055.002, December 2014). This flowed through to measured labour productivity and multifactor productivity estimates. Readers are encouraged to exercise caution in comparing historical statistics between data released at different points in time.

Source: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

Box 1.3 Importance of capital to the growth of labour productivity

  • Between 1973-74 and 2013-14, LP increased by 2.3 per cent per year, of which about two thirds (1.6 per cent) was attributable to 'capital deepening' (KD) with the remainder to MFP growth. The contribution of capital varied across sub-periods (figure below) and, in all sub-periods before 1993-94 and after 1998-99, it was consistently above 50 per cent (table below). In fact, since 2003-04, MFP growth has been on average zero or negative and LP growth has been reliant on the contribution of capital.

    • Market sector (12) contribution of MFP and capital to the growth of labour productivity, 1973-74 to 2013-14a
      Index 1973-74 = 100

      Figure Market sector 12 contribution of MFP and capital to the growth of labour productivity, 1973-74 to 2013-14. More details can be found within the text immediately before and the table after this image.
    Average annual growth rates, per cent
    1973-74 to 1981-82 1981-82 to 1984-85 1984-85 to 1988-89 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2007-08 2007-08 to 2013-14
    LP 2.1 2.3 1.3 2.4 3.9 2.3 1.6 2.4
    KD 1.6 1.6 0.7 1.5 1.3 1.3 1.6 2.5
    MFP 0.5 0.7 0.6 0.9 2.6 1.0 0.0 -0.1

    While investment in capital is expected to benefit future productivity (and income) growth, it comes at a cost to the economy — consumers have to sacrifice current consumption in return for higher income in the future. The returns however are not guaranteed and will depend on how successful investment decisions are and how efficiently capital is used in production. Any waste will detract from future productivity (and income) growth.

    The contribution of capital to LP growth has been substantial. This means that, along with the growth of MFP, an improvement in the efficient use of investment resources will have a significant impact on the future growth of output and average income in the Australian economy.

    a In addition to economies of scale and capacity utilisation (PC 2013a, p. 5), these measures of MFP and capital deepening may also be affected by changes in the human capital embedded in the labour force (or human capital deepening) and changes in the relative sizes of the 12 industries in the market sector.

    Sources: Commission estimates based on the data from ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014) and Barnes (2011).

Mixed results for industry MFP growth in 2013-14

In 2013-14, MFP growth and the underlying proximate causes differ between the 12 industries in the market sector (table 1.2).4 However, broadly speaking, they can be classified into three groups.

The first group consists of six service industries, each of which recorded positive MFP growth in 2013-14:

  • Wholesale trade (3.1 per cent)
  • Retail trade (1.5 per cent)
  • Accommodation and food services (1.1 per cent)
  • Information, media and telecommunications (3.1 per cent)
  • Financial and insurance services (3.3 per cent)
  • Arts and recreation services (5.4 per cent).

The source of productivity growth in four of the six service industries was tied to higher output — they produced more output using fewer or proportionally less inputs. The exceptions were Wholesale trade and Accommodation and food services which produced less output (by -2.2 and -0.2 per cent respectively) with even less inputs (by -5.4 and -1.3 per cent).

All the six industries also recorded a positive growth in LP as a result of solid MFP growth and capital growth. LP growth was particularly high in three industries — Information, media and telecommunications (by 13.9 per cent), Arts and recreation services (8.2 per cent), and Wholesale trade (6.0 per cent). In these industries, LP growth was associated with significant declines in the use of labour.

The second group consists of three industries. Among the six industries that recorded negative MFP growth in 2013-14, positive output growth was recorded in Mining (9.1 per cent), Construction (3.8 per cent), and Agriculture, forestry and fishing (2.1 per cent). In these industries, MFP declined but only marginally, as input growth only slightly exceeded output growth. In fact, Mining recorded its highest LP growth (8.1 per cent) since 2000-01 due to the contribution of capital input (up 11.8 per cent).

The statistics indicate that the three remaining industries were lagging others in 2013-14. Output growth dropped by 2.1 per cent in Electricity, gas, water and waste services, 1.8 per cent in Manufacturing, and 0.6 per cent in Transport, postal and warehousing. MFP growth in these industries was negative because total input use did not decline by the same proportion. In Electricity, gas, water and waste services, labour and capital inputs actually increased by 6.5 per cent and 1.6 per cent respectively, which resulted in significant declines in both MFP (-5.4 per cent) and LP (-8.6 per cent). For the same reason, Transport, postal and warehousing also posted negative MFP (-3.1 per cent) and LP (-1.9 per cent) growth.

Table 1.2 Industry productivity growth 2013-14. Per cent.
Output (GVA) Total inputs Labour input Capital input Labour productivity MFP
Agriculture, forestry and fishing 2.1 2.2 4.9 1.1 -2.8 -0.1
Mining 9.1 9.2 1.0 11.8 8.1 -0.1
Manufacturing -1.8 -1.5 -1.8 -1.1 0.0 -0.3
Electricity, gas, water and waste services -2.1 3.3 6.5 1.6 -8.6 -5.4
Construction 3.8 4.6 4.8 4.0 -1.0 -0.7
Wholesale trade -2.2 -5.4 -8.3 1.1 6.0 3.1
Retail trade 2.3 0.7 0.0 2.8 2.3 1.5
Accommodation and food services -0.2 -1.3 -2.0 1.0 1.7 1.1
Transport, postal and warehousing -0.6 2.5 1.3 4.4 -1.9 -3.1
Information, media and telecommunications 2.4 -0.8 -11.5 6.0 13.9 3.1
Financial and insurance services 5.2 1.9 2.3 1.6 2.9 3.3
Arts and recreation services 2.6 -2.8 -5.6 2.7 8.2 5.4
Market sector (12) 2.5 2.1 0.0 4.4 2.5 0.4

Source: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

Taking a longer-term perspective (figure 1.1), eight of the twelve industries recorded positive MFP growth in nearly all sub-periods between 1989-90 and 2013-14. The average annual MFP growth was highest in Agriculture, forestry and fishing (2.7 per cent) and Financial and insurance services (2.3 per cent). They were followed by Retail trade (1.8 per cent) and Wholesale trade (1.7 per cent).

MFP growth lagged behind in four industries. In particular, negative MFP growth in Mining and Electricity, gas, water and waste services in the last decade has suppressed the average between 1989-90 and 2013-14. Arts and recreation services has turned around negative MFP growth in the latest sub-period (from 2007-08 to 2013-14) but still recorded an average annual negative growth (-0.3 per cent per year) in the period from 1989-90. Historically, MFP growth was relatively lower in Manufacturing and it has remained flat since 2007-08.

As observed in previous years, specific factors were behind the variability in MFP growth among the 12 industries. The following section provides a closer examination of the proximate causes of productivity growth for Agriculture, forestry and fishing, Mining, Electricity, gas, water and waste services, and Information, media and telecommunications. Chapter four presents a more detailed analysis of the productivity in Mining and Financial and insurance services.

  • Figure 1.1 Industry MFP, 1989-90 to 2013-14, by ABS productivity cyclea. Per cent per year.

    Text alternative of table follows

    Text alternative for the table in Figure 1.1

    Table for figure 1.1 Industry MFP, 1989-90 to 2013-14, by ABS productivity cyclea. 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 2013-14 1989-90 to 2013-14
    Agriculture, forestry and fishing 3.4 3.8 3.5 -0.9 3.1 2.7
    Mining 2.1 0.5 -0.2 -3.6 -5.8 -1.6
    Manufacturing 0.7 0.9 1.0 -1.2 0.0 0.3
    Electricity, gas, water and waste services 2.8 1.9 -2.3 -4.9 -3.6 -1.3
    Construction 0.3 2.8 1.0 0.9 1.4 1.3
    Wholesale trade -2.1 5.5 3.1 0.0 1.2 1.7
    Retail trade 2.0 2.3 2.0 0.4 2.2 1.8
    Accommodation and food services -0.7 2.0 1.0 0.6 -0.2 0.6
    Transport, postal and warehousing 2.1 2.2 1.7 0.9 -0.4 1.2
    Information, media and telecommunications 5.1 3.0 -1.2 0.1 -0.3 1.2
    Financial and insurance services 4.5 2.3 0.7 3.7 1.1 2.3
    Arts and recreation services -0.7 -1.7 0.9 -1.6 1.1 -0.3
    Market sector 1.2 2.6 1.0 0.0 -0.1 0.9

    a Figures in this table are average annual growth rates in each designated productivity cycle.

    Sources: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

1.3 Industry developments

Agriculture, forestry and fishing

MFP growth was slightly negative in 2013-14

Historically, the trend of MFP growth in Agriculture, forestry and fishing has been considerably higher than the market sector average but year-to-year movements have been volatile (figure 1.2). The volatility in agricultural productivity has been more influenced by the changes in output than changes in inputs. The year-to-year changes in output have arisen, in large part, from variations in weather and market conditions.

In 2013-14, the output of Agriculture, forestry and fishing increased by 2.1 per cent (against a long-term average of 2.5 per cent per year between 1989-90 to 2013-14), while capital input increased by 1.1 per cent (compared to a long-term trend of 0.6 per cent per year) and labour input increased by 4.9 per cent.5

With the substantial increase in labour inputs, which was unusual in the context of negative growth of -1.5 per cent per year on average in the past two and half decades, total value adding input growth was slightly higher than output at 2.2 per cent. Consequently, MFP was estimated to have declined by 0.1 per cent (figure 1.36).

  • Figure 1.2 MFP in Agriculture, forestry and fishing, 1989-90 to 2013-14
    Index 1989-90 = 100

    Figure 1.2 MFP in Agriculture, forestry and fishing, 1989-90 to 2013-14. This figure shows that the trend of MFP growth in Agriculture, forestry and fishing has been considerably higher than the market sector average but that year-to-year movements in that series have been volatile

    Data source: ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

  • Figure 1.3 MFP growth in Agriculture, forestry and fishinga
    Per cent

    Text alternative of table follows

    Text alternative for the table in Figure 1.3

    Table for figure 1.3 MFP growth in Agriculture, forestry and fishinga. Per cent.
    Output Value adding inputs MFP
    Longer term average 1989-90 to 2013-14 2.5 -0.2 2.7
    2011-12 1.4 -0.1 1.4
    2012-13 -0.6 -0.8 0.2
    2013-14 2.1 2.2 -0.1

    a Average annual growth rates and annual growth rates in designated periods.

    Data source: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2012-13, Cat. no. 5260.0.55.002, December 2013).

Weather conditions varied across States and the Northern Territory

Weather conditions are a powerful determinant of agricultural productivity and rainfall, in particular, is highly influential in the short term. But the actual impact on productivity growth varies in magnitude (figure 1.4). In 2013-14, rainfall remained low — with below average rainfall recorded in the Murray-Darling Basin — but its influence on the growth of agricultural productivity was less pronounced.

In this year, weather conditions were unfavourable particularly in Queensland and northern New South Wales (ABARES 2014a). By the end of January 2014, around two-thirds of Queensland had been drought declared by the Queensland Government — 23 shires were fully declared and another four shires partially declared. According to ABARES (2014b), in 2013-14, winter crop production in Queensland was expected to decline by 31.1 per cent from the previous year and by 17.4 per cent in New South Wales.

However, 2013-14 presented relatively favourable weather conditions in other states and the Northern Territory. As a result, the winter crop was expected to increase by 2.9 per cent in Victoria, 24.9 per cent in South Australia and 34.8 per cent in Western Australia (ABARES 2014b).

The net result of these different weather conditions was an increase in output in 2013-14. The flat MFP growth was associated with a substantial increase in measured labour inputs.

  • Figure 1.4 Rainfall in the Murray-Darling Basin (MDB)a and MFP in Agriculture, forestry and fishing, 1989-90 to 2013-14b
    Index 2012-13 = 100

    Figure 1.4 Rainfall in the Murray-Darling Basin (MDB) and MFP in Agriculture, forestry and fishing, 1989-90 to 2013-14. This figure shows that in 2013-14, rainfall recorded in the Murray-Darling Basin was below its historical average between the period of 1989-90 to 2013-14. Its association with agricultural productivity was less pronounced.

    a Rainfall in MDB is a crude indicator of seasonal conditions that affect agriculture and it has various limitations. For example, it is a measure for only part of the country; total rainfall does not account for factors such as the timing of rainfall; nor does it reflect extreme events such as heatwaves and frosts which significantly affect agricultural production. b The MFP index is measured on a fiscal year basis (1 July to 30 June), while the rainfall index is measured on a calendar year basis.

    Data sources: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014); Bureau of Meteorology (2014).

Opportunities for MFP growth in Agriculture, forestry and fishing

According to a report released by ABARES (Sheng et al. 2013), despite strong growth (1.6 per cent per year) in total factor productivity (TFP)7 over four and half decades since 1961, the level of TFP in Australian broadacre agriculture was 30 per cent lower than in the United States and 5 per cent lower than in Canada. While the differences reflect dithering growing conditions, including variability in weather in Australia relative to the economies compared, an issue is whether, given these differences, there is scope to narrow the productivity gap.

Future growth in Australian agriculture is likely to depend on the more productive use of land, water and other natural endowments through the application of the most up-to-date equipment and technologies against the background of changing productive potential. The growth in Australia's population, which is expected to reach around 38 million by 2060 (PC 2013b), and a rapidly expanding middle class population in neighbouring Asian economies will provide increasing demand for agricultural produce (ABARES 2013; Hamshere et al. 2014).

Mining

MFP growth remained marginally negative in 2013-14

MFP growth in Mining remained negative in 2013-14 but its improvement (to -0.1 per cent) contrasts sharply with the downward movement of MFP by nearly 46 per cent between 2000-01 and 2012-13 (figure 1.5).

In 2013-14, negative MFP growth (figure 1.6) in Mining was caused by:

  • output growth of 9.1 per cent
  • slightly higher growth of total inputs (9.2 per cent), of which,
    • capital input increased by 11.8 per cent, and
    • hours worked increased 1.0 per cent.

Previous PC analysis (Topp et al. 2008) reported that the decline in measured MFP for Mining was, in part, due to a lag effect — where the surge of large capital investment in the industry did not coincide with a rise in production.8 This was likely to be a temporary phenomenon observed in the 'investment phase' of the mining boom. Once this investment is used in production, productivity is expected to increase because, with the new productive capacity coming on stream, output growth is likely to outpace the increase in inputs required during the 'production phase'.

It was indicated in the last issue of the PC Productivity Update (PC 2014) that it would not take long before the expanding mining activities moves into the production phase. The departure from strong negative MFP growth observed in 2013-14 is likely to be a sign of the beginning of this transition.

  • Figure 1.5 MFP in Mining, 1989-90 to 2013-14
    Index 1989-90 = 100

    Figure 1.5 MFP in Mining, 1989-90 to 2013-14. This figure shows that MFP growth in Mining remained negative in 2013-14 (to -0.1 per cent) but at a less negative rate than in recent years. Data source: ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).
  • Figure 1.6 MFP growth in Mininga
    Per cent

    Text alternative of table follows

    Text alternative for the table in Figure 1.6

    Table for figure 1.6 MFP growth in Mininga. Per cent.
    Output Value adding inputs MFP
    Longer term average 1989-90 to 2013-14 4.1 5.8 -1.6
    2011-12 7.2 17.7 -10.5
    2012-13 8.3 13.5 -5.2
    2013-14 9.1 9.2 -0.1

    a Average annual growth rates and annual growth rates in designated periods.

    Data source: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

This transition into the production phase is also evident from statistics on Australia's terms of trade and capital investment in the industry (figure 1.7). The fundamental driver of the investment boom in mining was the surge in commodity prices on the international market, particularly a rise in the prices of iron ore and other minerals that Australia exports. This rise in commodity prices was reflected in the substantial increase of the terms of trade (figure 1.7, left hand panel) — a measure of Australia's export prices relative to import prices. In the decade between 2000-01 and 2010-11, Australia's terms of trade index almost doubled (from 58.4 to 110.6).

  • Figure 1.7 Terms of trade (LHS) and Real capital expenditure in Mining (RHS)a 1998-99 to 2013-14

    Index 2012-13 = 100 (LHS) and annual growth rates, per cent (RHS)

    Figure 1.7 Terms of trade (Left Hand Side) 1998-99 to 2013-14. This chart shows a substantial increase in the terms of trade in the decade between 2000-01 and 2010-11, followed by declines in the most recent years.

    $ million, 2012-13 constant prices

    Figure 1.7 Real capital expenditure in Mining (Right Hand Side) 1998-99 to 2013-14. This chart similarly to the Left Hand Side chart shows a pattern of substantial capital investment in Mining, which peaked in 2012-13. Growth in Mining capital investment declined in 2013-14.

    a Gross fixed capital formation from both public and private sources.

    Data source: ABS (Australian System of National Accounts, 2013-14, Cat. no. 5204.0, November 2014).

The terms of trade index reached a peak in 2010-11. The pattern of capital investment in Mining followed a broadly similar pattern — after the recent peak in 2012-13, the growth in Mining capital investment declined in 2013-14 (figure 1.7, right hand panel).

These trends are consistent with the slowing of negative growth in Mining MFP as observed in 2013-14. If mining has transitioned into the production phase, it is likely to show positive MFP growth in the years to come.

A more detailed analysis of recent Mining productivity by sub-industry is provided in Chapter 4.

Electricity, gas, water and waste services (Utilities)

MFP growth in Utilities continues to decline

A slight improvement in Utilities MFP growth in 2012-13 gave way to a further decline in productivity in 2013-14, continuing a trend towards negative MFP growth for the industry (figures 1.8 and 1.9).

For 2013-14, the turnaround to negative MFP growth (from 0.9 per cent in the previous year to -5.4 per cent in 2013-14) was driven by:

  • negative output growth (-2.1 per cent compared with 0.7 per cent growth in the previous year)
  • a significant increase in input growth (3.3 per cent from -0.2 per cent in the previous year).

In 2013-14, a key factor for the significant drop in the MFP of Utilities (-5.4 per cent) and LP growth (-8.6 per cent) was a surge of labour input (6.5 per cent). According to ABS (2014b) employment statistics, this reflected a decline in the Electricity industry (down 10 per cent) but increased employment in the Gas supply (up 77.2 per cent) and Waste collection, treatment and disposal services (up 40.6 per cent) industries. The growth in the Gas supply industry was likely associated with the considerable activity and expected demand from LNG projects around Australia (Department of Industry and BREE, 2014) and, once they start producing output, measured productivity is likely to increase. Therefore, the negative impact of the LNG projects on measured MFP is unlikely to continue into the longer term.

  • Figure 1.8 MFP in Utilities, 1989-90 to 2013-14
    Index 1989-90 = 100

    Figure 1.8 MFP in Utilities, 1989-90 to 2013-14. This figure shows that a slight improvement in Utilities MFP growth in 2012-13 gave way to a further decline in productivity in 2013-14, continuing a trend towards negative MFP growth for the industry.

    Data source: ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

  • Figure 1.9 MFP growth in Utilitiesa
    Per cent

    Text alternative of table follows

    Text alternative for the table in Figure 1.9

    Table for figure 1.9 MFP growth in Utilitiesa. Per cent.
    Output Value adding inputs MFP
    Longer term average 1989-90 to 2013-14 1.4 0.5 -1.3
    2011-12 0.6 3.7 -3.1
    2012-13 0.7 -0.2 0.9
    2013-14 -2.1 3.3 -5.4

    a Average annual growth rates and annual growth rates in designated periods.

    Data source: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

Recent productivity drivers

Previous editions of the PC Productivity Update (PC 2013a, 2014) highlighted three non permanent influences that contributed to negative MFP growth in Utilities since 1997-98:

  • a surge in investment in large scale and often one-off infrastructure projects
  • rising peak relative to average demand for electricity, lowering the average utilisation rate of transmission capacity
  • the effect of drought on the output of the water supply sector.

There are signs that negative productivity effects of these influences are starting to diminish.

  • Figure 1.10 Real capital expenditure in Utilities,a 1989-90 to 2013-14
    $million, 2012-13 constant prices

    Figure 1.10 Real capital expenditure in Utilities, 1989-90 to 2013-14. This figure shows capital investment in Utilities declined in 2013-14 compared to the previous year. This contrast with significant capital investment since the early 1990s which peaked in 2009-10.

    a Gross fixed capital formation including both public and private investments.

    Data source: ABS (Australian System of National Accounts, 2013-14, Cat. no. 5204.0, November 2014).

Capital investment

Capital investment in Utilities declined by around 37 per cent in 2013-14 compared to the previous year (figure 1.10). The significant surge in capital investment that has added to installed capital capacity over recent years appears to continue to exert a downward influence on MFP growth. This is likely to dissipate if increases in capital through new investment were to stabilise over time and as the utilisation of installed capacity were to increase.

Electricity demand

The demand on the electricity network is expected to increase slightly before 2016-17 due to the growth in large industrial consumption, primarily driven by Queensland's LNG projects coming online from 2014-15 (AEMO 2014). This growth is likely to be moderated by the closure of other energy intensive sites, including the Bulwer Island refinery in Queensland, Point Henry aluminium smelter in Victoria, and others, such as car manufacturing plants in 2017.

In 2014-15, electricity demand is forecast to fall by 3.1 per cent before increasing in the short and medium-terms. AEMO (2014) forecasts average annual growth in electricity demand to be 0.2 per cent per year in the decade to 2012-24.9 This rate of growth contrast with AEMO forecasts of 1.5 and 2.9 per cent per year growth in population and GDP respectively during this period.

Another historical driver of growth in energy investment has been the steady rise in peak relative to average demand for electricity, resulting in lower utilisation of the electricity network (PC 2013a). The rising peak demand was a consequence of more intensive use of air conditioning during a succession of hot summers in Australia up to 2008-09 (AER 2014). Since then, the impact of peak demand has tapered off. Despite further average trend summer temperatures, peak demand plateaued in 2013-14 when peak summer demand was around 6.2 per cent below 2008-09 levels.

The AER (2014) suggests that the underlying causes for this fall are similar to those that have reduced average electricity demand (i.e. slowing economic growth and reduced industrial loads; increased use of rooftop solar and adoption of energy efficiency measures; and changes in consumer behaviour in response to higher electricity costs). AEMO (2014) forecasts are based on the assumption that peak demand will remain below 2008-09 levels in most regions for at least the next 20 years.

Assuming declining demand and subdued growth in peak demand, AEMO (2014) has projected that national electricity market would require no additional capacity to maintain adequate supply for the next 10 years. To the extent that continued output growth in the industry is achieved without significant further capital investment, measured MFP growth should become positive in the electricity sector.

Drought

The third influence on productivity in Utilities has been the major drought of the 2000s. This saw a dramatic reduction in water availability and the introduction of water consumption restrictions, resulting in reduced output in the water sector. However, according to the latest ABS figures, household water consumption levels were the highest in 2012-13 (1851 GL) since 2008-09 (when the ABS started the Water Account Australia series). This was 7.9 per cent higher than the previous year (1715 GL) but only 1.8 per cent higher than in 2008-09 (1818 GL).

Given the water supply industry relies on a relatively fixed capital cost structure (including a number of recently installed, but underutilised, desalination plants), productivity of this industry will largely be determined by output growth for some time to come. But, in the short to medium term, output of this industry will be influenced by two factors — the availability of water and changes in the demand by households and businesses in Australia's major cities and towns10. The evolution of these two factors are likely to shape productivity growth of the water supply industry in the foreseeable future.

As the factors underlying the productivity of Utilities are complex, short-term MFP growth in this industry will be uncertain. Over time, and with efficient investment in utility service infrastructure, increasing levels of demand by households and industry may see a reversal of the persistent decline in measured MFP growth.

Information, media and telecommunications
Information, media and telecommunications reversed MFP declines

Information, media and telecommunications recorded significant MFP growth in 2013-14, a considerable improvement on two previous years of negative MFP growth (figures 1.11 and 1.12). The result in 2013-14 was more than double its average MFP growth between 1989-90 and 2013-14.

The reversal to positive MFP growth for the Information, media and telecommunications industry (3.1 per cent in 2013-14 from -3.9 per cent in the previous year) reflected:

  • a moderate positive growth in output (2.4 per cent)
  • a decline in total inputs (-0.8 per cent), of which
    • labour input dropped by 11.5 per cent, but
    • capital input increased by 6.0 per cent.
  • Figure 1.11 MFP in Information, media and telecommunications, 1989-90 to 2013-14
    Index 1989-90 = 100

    Figure 1.11 MFP in Information, media and telecommunications, 1989-90 to 2013-14. This figure shows Information, media and telecommunications recorded significant MFP growth in 2013-14, a considerable improvement on two previous years of negative MFP growth.

    Data source: ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

  • Figure 1.12 MFP growth in Information, media and telecommunicationsa
    Per cent

    Text alternative of table follows

    Text alternative for the table in Figure 1.12

    Table for figure 1.12 MFP growth in Information, media and telecommunicationsa. Per cent.
    Output Value adding inputs MFP
    Longer term average 1989-90 to 2013-14 4.9 3.8 1.2
    2011-12 0.8 3.2 -2.4
    2012-13 -0.5 3.4 -3.9
    2013-14 2.4 -0.8 3.1

    a Average annual growth rates and annual growth rates in designated periods.

    Source: Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014).

Recent productivity drivers

According to the ABS (2014b) employment statistics, Publishing (except Internet & Music Publishing) and Telecommunications services — the two largest employing industries in Information, media and telecommunications — are likely to have been the main sources of the fall in hours worked in the whole industry.

More broadly, it is recognised that digital technology is having considerable impact on employment in Publishing. For example, IBISWorld (2014) found that newspaper publishing in Australia had 23 472 employees in 2010-11 and predicted that number would fall to 18 871 in 2013-14. This reduction accounts for almost a third of the employment decline estimated by the ABS during this period (ABS 2014b). With the influence of digital technology, newspapers around the world are changing their business models in order to reverse the decline in advertising revenue. In 2013 and 2014, paywalls were erected to the online content of Australia's major daily newspapers and other major organisational restructuring was announced. For example, in 2013-14, Fairfax Media continued to implement its Fairfax of the Future program announced in 2012, which aims to achieve annualised cost savings of around $311 million by 2015 (Fairfax Media 2014). Cost saving initiatives under the program were originally estimated to result in a reduction of 1 900 staff (Fairfax Media 2012).

It is also recognised that in telecommunications services many of the biggest telecommunication service providers have reported moves to either cut or outsource jobs in 2013-14 in anticipation of a post-NBN environment. That is, once the NBN is fully operational, these providers will be competing to add value and on-sell a wholesale product supplied by NBN. For example, in 2013-14, Telstra Group reported around 2 500 fewer jobs than the previous year (Telstra Corporation 2013, 2014).11 Moreover, it was reported that Singtel-Optus shed around 1 700 jobs in the period between January 2012 and April 2014 (Ramli 2014).

It should be noted that, historically, employment in the Publishing and Telecommunication industries has been subject to substantial year-to-year variation, which have flowed through to affect year-to-year changes in productivity. The influence of recent reported changes in labour inputs on future productivity levels and growth are therefore uncertain.

References

  • ABS (Australian Bureau of Statistics) 2014a, Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260,0,55,002, December 2014.
  • ABS (Australian Bureau of Statistics) 2014b, Labour Force, Australia, Detailed, Quarterly, November 2014, Cat. no. 6291.0.55.003.
  • ABARES (Australian Agricultural and Resource Economics and Sciences) 2013, What Asia wants: long-term food consumption trend in Asia, Research report 13.12, ABARES, Canberra.
  • ABARES (Australian Agricultural and Resource Economics and Sciences) 2014a, Agricultural Commodities: March Quarter, Volume 4 No. 1, ABARES, Canberra.
  • ABARES (Australian Agricultural and Resource Economics and Sciences) 2014b, Australian crop report: June 2014: No. 170, ABARES, Canberra.
  • AER 2014, State of the energy market 2014, AER, Melbourne.
  • AEMO (Australian Energy Market Operator) 2014, National electricity forecasting report, June.
  • Barnes, P. 2011, Multifactor Productivity Growth Cycles at the Industry Level, Productivity Commission Staff Working Paper, Canberra.
  • Bureau of Meteorology 2014, 'Annual Rainfall - Murray Darling Basin (1990-1914)', Australian climate variability & change - Time series graphs, Canberra, http://www.bom.gov.au/cgi-bin/climate/change/timeseries.cgi?graph=rain&area=mdb&season=0112&ave_yr=0 (accessed 30 June 2015).
  • Department of Industry and BREE 2014, Eastern Australian Domestic Gas Market Study, Canberra, January.
  • Fairfax Media Limited 2012, Fairfax of the future, Media Release, Fairfax Media Limited, Sydney, 18 June.
  • Fairfax Media Limited 2014, Annual Report 2014, Fairfax Media Limited, Sydney.
  • Hamshere, P. Y. Sheng, B. Moir, F Syed and C. Gunning-Trant 2014, What China wants: analysis of China's food demand to 2050, paper presented at the 44th ABARES Outlook conference 4-5 March 2014, Canberra.
  • IBISWorld 2014, 'Newspaper publishing in Australia', IBISWorld Market Research Report, IBISWorld, Melbourne.
  • PC (Productivity Commission) 2013a, PC productivity update, May.
  • PC (Productivity Commission) 2013b, An Ageing Australia: Preparing for the Future, Commission Research Paper Overview, Canberra.
  • PC (Productivity Commission) 2014, PC productivity update, April.
  • Ramli, D. 2014, 'Optus set to slash 200 jobs', Sydney Morning Herald, April 29, Sydney.
  • Sheng, Y, K. Nossal and E. Ball 2013, Comparing agricultural total factor productivity between Australia, Canada and the United States, Paper presented at the 57th AARES Annual Conference, Sydney.
  • Telstra Corporation Limited 2013, Annual Report 2013, Telstra Corporation Limited, Melbourne.
  • Telstra Corporation Limited 2014, Annual Report 2014, Telstra Corporation Limited, Melbourne.
  • Topp, V., Soames, L., Parham, D. and Bloch, H. 2008, Productivity in the Mining Industry: Measurement and Interpretation, Productivity Commission Staff Working Paper, Canberra.
  • Topp, V. and Kulys, T. 2012, Productivity in Electricity, Gas and Water: Measurement and Interpretation, Productivity Commission Staff Working Paper, Canberra.

Footnotes

  • 1 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 1
  • 2 The growth rates used in the latest ABS publication of productivity estimates (ABS, Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002) are expressed as natural logarithms multiplied by 100. For consistency, this paper has also applied this method to productivity data sourced from this ABS publication. Return to footnote 2
  • 3 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 reports estimates over the productivity cycle which matches peaks in the business cycle. This concept was explained in the PC Productivity Update 2013 (PC 2013a, p. 13). Return to footnote 3
  • 4 Historical statistics for the 12 industries prior to 2013-14 may differ from the ABS data released in previous years. The discrepancy was caused by the statistical revisions done by the ABS in December 2014 (see footnote C in table 1.1). Return to footnote 4
  • 5 The magnitude of this growth in labour input was very rare for Agriculture, forestry and fishing. Although the exact reason for the change is unclear, it may be attributable, in part, to the recent statistical revision as explained in the footnote C of Table 1.1. Return to footnote 5
  • 6 The estimates of productivity for Agriculture, forestry and fishing differ significantly from those reported in the PC Productivity Update (2014). The differences was a result of the statistical revision that the ABS undertook in 2014 (See footnote C of table 1.1). The revision also affected the ABS productivity statistics presented in the rest of Section 1.3. Return to footnote 6
  • 7 TFP and MFP are similar in concept but differ in measurement. In the measure of TFP, intermediate input is included in both output and input but it is excluded from both in the measure of MFP. Return to footnote 7
  • 8 The other important cause of the negative growth of the measured MFP for Mining was a general decline in the quality of mineral and energy deposits being extracted. Return to footnote 8
  • 9 This forecast is based on the expected growth in the take-up of rooftop solar (13.6 per cent per year) and energy efficiency of 36 per cent per year (from a low base), and zero growth in residential and commercial electricity demand over this period. Return to footnote 9
  • 10 According to Topp and Kulys (2012), supplying irrigation water for agriculture is also a business of this industry but it is very small — typically accounting for only about 4 per cent of the Water supply, sewage and drainage subdivision. Return to footnote 10
  • 11 This is a PC estimate based on Telstra Corporation Annual reports 2014 and 2013. It includes full time, part time and casual staff in controlled entities within the Telstra Group but excludes contractors and agency staff. Return to footnote 11

Update homeChapter 2