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PC Productivity Update 2015

4 Insights from recent productivity research

4.1 Productivity growth within Mining

Aggregate data indicate that Mining is transforming from a substantial investment phase to a predominantly production phase. To shed more light on the transition in Mining, the Commission has updated the productivity estimates for the four major industries in Mining:

  • Coal mining
  • Oil and gas extraction
  • Iron ore mining
  • Other metal ore mining.

Collectively, these four industries accounted for over 90 per cent of total Mining output in 2013-14 based on industry value added shares.

The multifactor productivity (MFP) estimates of these industries have been derived using ABS data and follow a similar methodology to that used by the ABS to derive MFP estimates for Mining as a whole. They are, nevertheless, Commission estimates not ABS estimates.

The updated estimates indicate that different industries within Mining are at different stages in their investment/production phases or cycles, and hence exhibit different MFP growth rates, particularly in the post 2011-12 period.

In two industries — Coal mining and Other metal ore mining — MFP growth was estimated to have been positive in 2012-13, even though there was no MFP growth in Mining as a whole (figure 4.1). These two industries appear to be further along the post-investment or 'production phase' of the commodity price boom, with input growth now slowing or decreasing and output growth stable or, in the case of Coal mining, increasing more rapidly in 2012-13.

In contrast, total input growth in both Oil and gas extraction and Iron ore mining continued at high rates in 2012-13, so that MFP growth continued to be negative. In fact, aggregate capital investment in Oil and gas was at record levels in 2012-13, and was close to record levels in Iron ore mining in that year (figure 4.1). Both industries also recorded comparatively high rates of growth in labour inputs. These results suggest that both groups were still largely in an investment phase during 2012-13.

Due to data limitations, it has not been possible to produce subdivision MFP estimates for 2013-14.1 However, based on broad information and data that is available from the ABS, it is likely that MFP in Coal mining continued to increase in 2013-14, given that output growth appears to have been comparatively strong (6.5 per cent), while capital investment was receding compared with the previous year (down 33.1 per cent) (figure 4.1). Output in Other ore mining declined slightly in 2013-14 (-0.7 per cent) and therefore MFP growth could be positive only if capital investment and labour input in this industry declined even further.

Based on ABS National Accounts data, Iron ore mining recorded historically high output growth in 2013-14 (22 per cent), suggesting that many of the major new projects that have been developed over the last five to ten years moved further to the production phase. This trend suggests that MFP growth in this subdivision in 2013-14 was likely to be higher than in the previous year (but possibly still slightly negative), although this will not be confirmed until additional data on inputs and output are available. Over the next few years, iron ore production is forecast to grow significantly (BREE 2014). With investment now slowing,2 continued output growth is likely to underpin further increases in MFP growth in this subdivision over the next few years.

In contrast, MFP growth in the Oil and gas subdivision is likely to have been firmly negative in 2013-14, as output growth was comparatively low (1.4 per cent) while labour use was up substantially (27 per cent) and capital investment continued at record levels (up 16 per cent) (figure 4.1). Very large investments in LNG capacity in 2013-14 underpinned high input growth, although based on forecasts of LNG production by the Bureau of Resource and Energy Economics (BREE 2014), production from these investments is not expected to contribute to output growth in this subdivision before 2015-16. In essence, the Oil and gas subdivision was still in an investment phase in 2013-14, and measured productivity is likely to remain subdued for a number of years to come.

In summary, if forecasts are achieved — particularly for Coal and Iron ore — Mining MFP growth should be positive over the next few years and contrast with a decline during the investment phase of the mining boom. More broadly — and given the increase in the relative size of the industry as a result of the commodity price boom — achieving positive MFP growth in Mining would flow through to raise productivity growth in the market sector in aggregate.

  • Figure 4.1 MFP and Investment
    MFP index 2011-12 = 100 (LHS); Investment, $ millions (RHS)a

    • Coal mining

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.
    •  

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.
    • Other metal ore mining

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.
    •  

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.
    • Oil and gas

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.
    •  

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.
    • Iron ore mining

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.
    •  

      Figure 4.1 MFP and Investment for the four major industries in Mining. More details can be found within the text immediately before this image.

    a Coal mining and Oil and gas investment data is private new capital formation available to 2013-14 (at current prices, September 2014), Other metal ore and iron ore mining investment data is gross fixed capital formation only available to 2012-13 (at current prices, 2012-13).

    Source: Commission estimates; ABS (Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December 2014); ABS (Private New Capital Expenditure and Expected Expenditure, Australia, Cat. no. 5625.0, September 2014).

4.2 Productivity in Financial and insurance services

MFP growth consistently above market sector average

For more than two decades, multifactor productivity (MFP) in Financial and insurance services has increased ahead of average MFP growth in the market sector of the Australian economy — 2.3 per cent per year compared with 0.9 per cent per year over the 24-year period to 2013-14. Productivity growth for other market sector industries (combined) averaged 0.5 per cent per year and, while increasing to 2003-04, it has been on the decline since then (figure 4.2). This has offset the increase in Financial and insurance services, leading productivity in the market sector as a whole to decline over the 2003-04 to 2013-14 period.

MFP growth for Financial and insurance services, however, was interrupted in 2000-01 following the economic slowdown and again in 2007-08 following the global financial crisis.

  • Figure 4.2 MFP in Financial and insurance services and the market sector
    Index 1989-90 = 100

    Figure 4.2 MFP in Financial and insurance services and the market sector. This chart shows that over the 24-year period to 2013-14, MFP in Financial and insurance services has increased ahead of average MFP growth in the market sector of the Australian economy. Average productivity growth for other market sector industries (combined) was lower than for the market sector as a whole and, while increasing to 2003-04, it has been on the decline since then - offsetting the growth in Financial and insurance services. MFP growth for Financial and insurance services, however, was interrupted in 2000-01 following the economic slowdown and again in 2007-08.

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

MFP growth differs across parts of Financial and insurance services

Recent Commission research (forthcoming) has been undertaken to provide a more disaggregated picture of aggregate productivity estimates for Financial and insurance services published by the ABS, by estimating MFP for Finance separately from Insurance, superannuation and auxiliary services (combined).3 The disaggregated data indicate that estimates for Financial and insurance services as a whole conceals considerable variation in estimated MFP across the industries in the sector (figure 4.3).4 In particular, these disaggregated estimates show that the bulk of Financial and insurance services' MFP slowdown, from the high growth rates up to 2007-08, was attributable to Insurance, superannuation and auxiliary services (combined) (figure 4.3). It also suggests that MFP in the Finance industry declined over the first half of the decade before increasing.

While there has been some year-to-year variations in labour and capital inputs around trend values, overall, it was variations in value added between years that have been the main drivers of changes in MFP over the period.

In particular, the large increase in MFP in the Insurance, superannuation and auxiliary services industry (combined), over the period 2000-01 to 2007-08, reflects the expansion in output of auxiliary services and the (imputed) insurance services charge. The subsequent decline in estimated MFP reflected a contraction in all services income (with the exception of rental income). Similarly, the above trend growth in MFP in the Finance industry in the years 2005-06 to 2008-09 reflected the above trend growth in the (imputed) output of the Finance industry. On the other hand, capital deepening in the Finance industry ahead of relatively flat output growth over the period 2000-01 to 2004-05 was the main proximate cause of the MFP decline for the industry over the period (figure 4.4).

  • Figure 4.3 MFP for the Financial and insurance services and for its industriesa
    Index 1994-95 = 100

    Figure 4.3 MFP for the Financial and insurance services and for its industries. This chart shows that bulk of Financial and insurance services' MFP slowdown, from the high growth rates up to 2007-08, was attributable to Insurance, superannuation and auxiliary services (combined). It also suggests that MFP in the Finance industry declined over the first half of the decade before increasing.

    a Financial and insurance services (ABS) differs from the aggregate of the subdivision estimates due to limitations on available data and associated differences in estimation methodology.

    Source: Commission estimates.

  • Figure 4.4 MFP and its proximate causes for Finance, and Insurance, superannuation and auxiliary servicesa
    Index 1994-95 = 100

    • Finance

      Figure 4.4 MFP and its proximate causes for Finance, and Insurance, superannuation and auxiliary services. More details can be found within the text immediately before this image.
    •  

      Figure 4.4 MFP and its proximate causes for Finance, and Insurance, superannuation and auxiliary services. More details can be found within the text immediately before this image.
    • Insurance, superannuation and auxiliary services

      Figure 4.4 MFP and its proximate causes for Finance, and Insurance, superannuation and auxiliary services. More details can be found within the text immediately before this image.
    •  

      Figure 4.4 MFP and its proximate causes for Finance, and Insurance, superannuation and auxiliary services. More details can be found within the text immediately before this image.
    • Financial and insurance services in total

      Figure 4.4 MFP and its proximate causes for Finance, and Insurance, superannuation and auxiliary services. More details can be found within the text immediately before this image.
    •  

      Figure 4.4 MFP and its proximate causes for Finance, and Insurance, superannuation and auxiliary services. More details can be found within the text immediately before this image.
    Figure 4.4 legend

    a Value added and capital are chain volume measures. Labour is hours worked.

    Source: ABS (Experimental Estimates of Industry Multifactor Productivity, 2012-13, Cat. no. 5260.0.55.002); and Commission estimates.

Measurement of output affects the interpretation of productivity estimates

The output concept used to estimate MFP is real value added — measured as the difference between the real value of services produced and the intermediate inputs used in the process of producing these services. For most market sector industries, the value of production can be directly measured. But, for much of Financial and insurance services, it is not possible to directly measure output so that the value of services produced must be imputed.

The implicit fees for intermediation services provided by the industry are often embedded in margins of financial transactions. For banks and financial companies it is the margin between the interest paid on borrowing and interest received on loans. The imputed output measured for these services is referred to as 'Financial intermediation services indirectly measured' (FISIM). For most types of insurance, the margin is the difference between premiums and claims plus net income earned on reserves. For superannuation service providers, output is measured as administrative costs incurred. Only for Auxiliary services is the output directly measured from service revenue.

As a proportion of the value of Financial and insurance services production, the value of FISIM has increased over time (figure 4.5). In the period between 1994-95 and 2011-12, in real, inflation adjusted terms, the value of FISIM increased as a share of industry gross output from 41 to 45 per cent. Estimation of FISIM involves a wide range of conceptual and technical issues, including the effect of changes in market risk and the extent to which risk premia should be included in the output measure.

Imputed insurance service charges represented 20 per cent of gross output in 2011-12. Estimation of imputed insurance charges is also sensitive to trends in underlying premia and claims as well as the level of net income from reserves. While both FISIM and insurance service charges are based on the margin in intermediation services, the imputed service charge relating to superannuation is based on a business activity measure. Superannuation services account for 10 per cent of Financial and insurance services output in 2011-12, up from 6 per cent in 1994-95.

  • Figure 4.5 Components of real production of Financial and insurance servicesa,b
    2011-12 $million

    Figure 4.5 Components of real production of Financial and insurance services. More details can be found within the text immediately before this image.

    a Other imputed income includes imputed output of financial intermediaries nec, and of the RBA; and imputed income for insurance and superannuation. 'Explicit charges and other income' includes fees, rental income, income from trading securities, sales of goods and services for Auxiliary services, and own account software and R&D. b Deflated by CPI (All groups).

    Source: Commission estimates based on unpublished ABS data.

Measuring of inputs is also important

In productivity analysis, labour inputs are measured in terms of hours worked. While this concept is relatively straightforward, the estimates are influenced by assumptions about days worked during each year after account is taken of public holidays, the average hours worked during each year, as well as data sampling and industry classifications conventions applied by the ABS. In particular, the industry estimates are reliant on the accurate recognition of the industry in which each sampled worker is engaged and population-based workforce benchmarks.

Estimates of capital inputs are dependent on the accuracy of the translation of investment data into a measure of net capital stock of an industry and associated productive capital inputs, using a statistical construct termed the 'perpetual inventory system.' Estimates of capital inputs and changes over time are sensitive to modelling assumptions. Of particular importance in the context of the Financial and insurance services industries is the take up of ICT technologies and the restructuring of business operations around the new technologies.

References

  • ABS (Australian Bureau of Statistics) 2014, Estimates of Industry Multifactor Productivity, 2013-14, Cat. no. 5260.0.55.002, December, ABS, Canberra.
  • BREE (Bureau of Resources and Energy Economics) 2014, Resources and Energy Quarterly, March Quarter 2014, BREE, Canberra, March.
  • Topp, V., Soames, L., Parham, D. and Bloch, H. 2008, Productivity in the Mining Industry: Measurement and Interpretation, Productivity Commission Staff Working Paper, Canberra.

Footnotes

  • 1 Further extension of annual MFP estimates requires more detailed data on capital investment for 2013-14. Aggregate investment data is available for the industries of Coal mining and Oil and gas but only available for Other metal ore mining and Iron ore mining as a whole. Further, investment data for 2013-14 is not available by asset types. For these reasons, in figures 4.1, MFP for all the industries and investment for Coal mining and Oil and gas do not go beyond 2012-13. Return to footnote 1
  • 2 According to ABS data, capital investment in 'total ore mining', which includes the industries of Iron ore mining and Other metal ore mining, declined by 29.5 per cent in 2013-14. Return to footnote 2
  • 3 Data availability limits further disaggregation. This research only covers the period until 2012-13. Return to footnote 3
  • 4 While estimates for the division as a whole are available from 1989-90 to 2013-14, insufficient data were available to estimate productivity at the subdivision level for the period 1989-90 to 1993-94 and for years after 2012-13. Return to footnote 4

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