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FEATURE ARTICLE: A SPOTLIGHT ON QUARTERLY LABOUR PRODUCTIVITY
Figure 1 also shows that labour productivity for the economy growing at a slower rate than for the market sector. This is because output from non-market activities such as government administration cannot be directly measured. Non-market output is estimated by summing the factor inputs. This implies there is no productivity growth in non-market activities.
While labour productivity growth is highly volatile in the short term, there is evidence of long term trends. The drivers of labour productivity growth over the long term are unlikely to alter significantly in the short term, with improvements in systems, technology and training potentially taking significant time to fully implement. Fluctuations in labour productivity growth from quarter to quarter are more likely to reflect movements in capacity utilisation or fluctuations in seasonal factors rather than a shift in underlying technical progress.
Interpreting peaks and troughs in labour productivity
Labour productivity can be a valuable tool for understanding the relationship between output and labour inputs. There are occasional disparities between GDP and labour productivity where labour productivity growth peaks later than GDP growth. There are a number of possibilities as to why this might occur. One possibility is that during a recession, low skilled workers are often the first to leave the workforce, hence labour productivity can actually grow during a recession if employment declines faster than output. The reverse is true during periods of expansion, as it is often the least skilled and least productive workers who enter the workforce last, so labour productivity may slow down or even fall towards the end of an output growth cycle when the employment level peaks as these less productive workers enter the workforce. Further, quarterly data on GDP and employment have peaked in different years, as employment can lag GDP by anywhere up to four quarters (ABS 2005, cat. no. 5206.0, June).
Another possible cause of the disparity between labour productivity and GDP growth is the influence of capital. For example, there may be instances where investment is occurring, but there may be no output because of a lag between new investment and production. This is sometimes highlighted towards the end of an output cycle as capacity constraints, especially in capital intensive industries. Recent experience in the Australian mining industry is one example of this. Growth in output in this industry is being constrained by the construction of new mines and infrastructure which take time to complete.
Labour productivity as an indicator of labour utilisation
Quarterly labour productivity when used in conjunction with employment data could be an indicator of spare labour capacity within the economy. For example, a period of low labour productivity growth combined with high GDP growth may indicate that spare capacity in the labour market is being utilised. However, if there is little or no spare capacity in the labour market, such as during periods of low unemployment, this may lead to unmet demand for labour, and hence rising wage costs to attract labour.
ACCURACY OF QUARTERLY LABOUR PRODUCTIVITY ESTIMATES
A comparison of annual labour productivity estimates (figure 2) with the quarterly estimates (figure 1) shows the relative stability of the annual measure, with the peaks in the productivity cycle much easier to identify. The figure shows peaks occurring in 1984-85, 1993-94, 1998-99 and 2003-04 and although these peaks are still identifiable in the quarterly estimates, they are less clear. On a peak-to-peak basis, annual average growth in labour productivity is approximately the same irrespective of whether annual or quarterly data are used.
Figure 3 shows the quarterly fluctuations in labour productivity. From the chart it appears that volatility in labour productivity is declining. Quarterly movements can be as high as 10% in the original data, but they are still as much as 2% in trend terms. One of the reasons behind the volatility is that the components of labour productivity, GDP and employment are independent of each other and reflect their own seasonality. This means that these movements will be exacerbated in the labour productivity estimates, creating a highly volatile series.
Figure 3 also shows that seasonal factors can vary considerably, both in the short and long term. The apparent reduction in seasonality in labour productivity since 1978-79 may be a reflection of the changing composition of the Australian economy. Highly seasonal industries such as Agriculture and Retail represent a smaller proportion of GDP than previously, while other industries with different seasonal patterns such as Construction and Mining have become more important. This could be seen as one reason for the decline in volatility. Another reason for the reduction in volatility over time is that there is greater consistency between the constituent series due to better data and measurement techniques toward the end of the series.
There are also other issues concerning the accuracy of labour productivity because of potential revisions to published estimates. For instance, as more comprehensive data become available, revisions to GDP or hours worked may occur and these impact on labour productivity. One recent example was the changes to hours worked estimates with revisions back to 2001. This had the effect of changing some estimates of labour productivity growth by as much as 0.2%.
Measuring improvements in underlying technical efficiency, which is the normal aim of productivity analysis, is better achieved using MFP. MFP is conceptually better for analysing underlying growth in productivity as it takes into account all factor inputs, rather than just labour. MFP is not available on a quarterly basis because capital services are not available on a quarterly basis. It is therefore less timely than quarterly labour productivity estimates. This means that growth in labour productivity may reflect changes in capital intensity, which needs to be incorporated into any analysis of the estimates.
Further information on this article may be obtained by contacting Paul Roberts, National Accounts Branch on (02) 6252 5360 or email <firstname.lastname@example.org>.
Eldridge LP, Manser ME and Otto PF, (2005) U.S. Quarterly Productivity Measures: Uses and Methods, U.S. Bureau of Labor Statistics
(a) MFP is published in the Australian System of National Accounts (cat.no.5204.0) on an annual basis.
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