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1370.0 - Measuring Australia's Progress, 2002  
Previous ISSUE Released at 11:30 AM (CANBERRA TIME) 19/06/2002   
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A nation that achieves productivity growth produces more goods and services from its labour, its capital and its land, energy and other resources. Productivity growth can generate higher incomes that are distributed among those who provide the labour, or own the capital, land, etc. Benefits might also accrue in the form of lower consumer prices.

In recent years, Australia has experienced improved rates of productivity growth. During its most recent growth cycle (from 1993-94 to 1999-2000), Australia's multifactor productivity rose by 1.8% a year on average.(SEE FOOTNOTE 1) This was higher than the average rate of rise observed during the preceding thirty years.


Multifactor productivity(a)
Graph - Multifactor productivity(a)



A nation's productivity is the volume of goods and services it produces (its output) for a given volume of inputs (such as labour and capital). Much - but not all - of Australia's output growth can be accounted for by increases in the inputs to production. The amount by which output growth exceeds input growth is the productivity improvement. For example, during the six years of the most recent growth cycle, real output grew by 4.7%. In part, this reflected 1.7% growth in labour and 4.7% growth in capital, or 2.9% growth in labour and capital combined; the remaining 1.8% of output growth reflected productivity improvement.

Productivity can be measured in a variety of ways. The most comprehensive Australian measure available at present is multifactor productivity for the market sector. Multifactor productivity represents that part of the growth in output that cannot be explained by growth in labour and capital inputs (see box).

The intensity with which inputs to production are used varies with the ups and downs of economic activity (the 'growth cycle'). For example, during the early stages of a downturn, firms may retain the same quantity of labour as before even though their sales and output have been reduced. Influences of this kind can mask the underlying trends in productivity. So it is common practice to assess a rate of productivity change only for a whole growth cycle (say, from peak-to-peak).


MEASURING AUSTRALIA'S PRODUCTIVITY

Productivity measures are, in concept, ratios of the form:
    Productivity = Output volume / Input volume

This ratio derives from the 'production function':
    Output = Productivity * f(Input)

which expresses the notion that growth in the volume of goods and services produced can result from growth in the volume of inputs used in the production process or growth in productivity or a combination of both.

There are many different measures of productivity; the main difference between the measures lies in which inputs are used in the denominator of the productivity ratio.

The most comprehensive measure of productivity is total factor productivity, which takes account of all inputs to production. Typically, the inputs are classified into capital (K), labour (L), energy (E), materials (M) and services (S) - so this is referred to as the KLEMS approach to productivity measurement. In principle, all the output and input measures are adjusted for quality change. But this approach demands a lot of data, and estimates of total factor productivity are available for very few countries.

More easily implemented are multifactor productivity (MFP) approaches which typically take account of just two inputs - capital and labour. MFP is the most comprehensive measure of productivity available for Australia at present. In principle, the labour input measure should be adjusted for improvements in the quality of labour ('human capital'), but this is not done at present, so such improvements flow through to the MFP measure.

If only one input appears in the denominator, a single factor productivity measure is obtained. The most common such measures are labour productivity (the ratio of output to labour input) and capital productivity (the ratio of output to capital input). MFP is superior to such single-factor measures because the latter may be distorted by substitutions between capital and labour inputs.

The MFP measure available for Australia at present relates to the market sector and does not take account of the efficiency with which inputs from other sectors (such as energy, subsoil assets, materials and services) are used in production.


A LONGER TERM VIEW

Multifactor productivity estimates for Australia extend back to the mid-1960s. Australia has experienced seven growth cycles during the past thirty five years. The 1.8% average annual improvement in multifactor productivity recorded during the most recent growth cycle (1993-94 through 1999-2000) is the highest rate of average annual improvement observed over any single cycle. The average rate of productivity improvement during the preceding seven growth cycles was 1.1% a year, and not since the growth cycle that ended in the mid-1970s had annual average improvement exceeded 1%.

Multifactor productivity: longer term view(a)
Graph - Multifactor productivity: longer term view(a)



FACTORS INFLUENCING CHANGE

A nation's productivity improvement is the outcome of a wide variety of interrelated influences. At the level of the individual firm or industry, key influences include technological advances and improvements to the quality of labour, or to management practices and work arrangements. National productivity may also improve with a shift of labour, capital and other inputs away from firms or industries that produce less output for a given level of input (i.e. are less productive) toward firms or industries that produce more (i.e. are more productive).

Such changes may in turn be prompted or assisted by changes in the overall economic environment, such as increased levels of domestic competition, reduced barriers to resource reallocation and greater openness to the international marketplace.

During the past few decades, successive Australian governments have enacted reforms that have sought to create an economic environment favourable to increased competition, better allocation of resources and more innovation. Key policy influences have included reduction of tariffs and other barriers to international trade, relaxation of barriers to international investment, changes to the structure and rates of taxation, domestic competition policy and reforms to financial, labour and other markets.


SOME DIFFERENCES WITH AUSTRALIA

Rates of productivity improvement are not uniform across the whole economy; they can differ appreciably from industry to industry. Estimates of multifactor productivity dissected by industry are not yet available for Australia. But it is possible to examine industry changes in labour productivity (the ratio of output to labour input). These figures must be read with some care, as part of the rise in labour productivity will be due to 'capital deepening' (an increase in the ratio of capital to labour) or to changes in intermediate inputs.

During the last growth cycle, the most rapid increases in labour productivity were achieved by: Mining (7.3% a year on average), Electricity, gas and water supply (6.7%), Communication services and Wholesale trade (both 6.0%). Some of these industries have experienced significant technological advance or industrial reorganisation.


Labour productivity(a), average annual growth rate - 1993-94 to 1999-2000

Industry(b)
%

Agriculture, forestry and fishing
2.7
Mining
7.3
Manufacturing
2.8
Electricity, gas and water supply
6.7
Construction
1.0
Wholesale trade
6.0
Retail trade
1.9
Accommodation, cafes and restaurants
1.2
Transport and storage
2.4
Communication services
6.0
Finance and insurance
3.9
Health and community services
1.2
Cultural and recreational services
-0.5
All market sector industries
3.0

(a) Gross product per hour worked. (b) Estimates are not available for Property and business services,
Government administration and defence, Education, and Personal and other services.
Source: Australian System of National Accounts.(SEE FOOTNOTE 1)


LINKS TO OTHER DIMENSIONS OF PROGRESS

Productivity is an important source of output growth; it contributes to growth in national income. During a period of productivity growth, it is possible to raise real wages and other incomes without increasing inflationary pressures. Also, countries that experience higher rates of productivity growth than others can enhance their international competitiveness.

Knowledge and innovation and a more highly educated work force can contribute to productivity growth because they enhance the prospects of technological advances and of improvements to management and workplace practices.

Natural assets (such as soil, minerals, water and timber) are used in production. If Australian industry can use such assets more efficiently, economic growth will require less draw-down of these resources and so have a smaller impact on the environment.

See also the commentaries National income, Competitiveness, Inflation, Knowledge and innovation, Openness, Education and training, Land degradation, and Inland waters.


FOOTNOTES

1 All data in this commentary are derived from Australian Bureau of Statistics 2001, Australian System of National Accounts 2000-01, Cat. no. 5204.0, ABS, Canberra.

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