Estimates of Industry Multifactor Productivity methodology

This release contains the estimates of multifactor productivity (MFP) for industry and market sector aggregates. There are different measures of productivity and the choice between them usually depends on the purpose of use and the availability of data. Broadly, productivity measures can be either partial productivity measures, which relate a measure of output to a single measure of input, or MFP measures, which relate a measure of output to a combined input of labour and capital.

The Australian Bureau of Statistics (ABS) has been producing aggregate MFP statistics since 1985. The ABS produces annual indexes of labour productivity and MFP for the market sector, and since 2007, for each industry division within the market sector. The market sector consists of industries which predominantly produce goods and services which are sold at market prices, that is, the transaction price at which the goods and services are exchanged. Industries included in the market sector are detailed in Data collection. 

Output, capital services and intermediate inputs are sourced from the Australian System of National Accounts (ASNA). Labour inputs are based on total hours worked in all jobs sourced historically from the Labour Force Survey and since 2021 from the Labour Account Australia. Further information about the data source change for labour inputs is outlined in Improved estimates of the annual national accounts: Results of the 2021 historical revisions.

In addition to the hours worked measure, the ABS also compiles a quality adjusted labour input (QALI) measure which capture changes in hours worked and in labour composition. Changes in labour composition such as changes in educational achievement and experience are sourced from the Census of Population and Housing which is conducted every five years. Inter-census periods are interpolated so care should be taken interpreting year on year changes in labour composition.

Ideally, MFP measures should cover all economic activities, but this is only possible if all the necessary data are available. Currently, the ABS publishes MFP measures for all market sector industries and the aggregates. The market sector comprises sixteen industries under the 2006 Australian and New Zealand Industry Classification (ANZSIC06); that is, from ANZSIC06 Divisions A to N, plus Divisions R and S. The market sector consists of industries which predominantly produce goods and services which are sold at market prices, that is, the transaction price at which the goods and services are exchanged. The detailed industries currently included in the market sector are as follows:

Until 2009-10, the market sector consisted of twelve industries (Divisions A to K and P of Australian and New Zealand Standard Industrial Classification 1993). The current market sector definition improves relevance in two key respects: it reflects the growing contribution of services industries in the economy; and improves economic coverage. The current estimates are not directly comparable to those published prior to the adoption of ANZSIC06 due to significant changes in coverage. To facilitate analysing productivity performance of a longer time series, productivity estimates are available for 12 selected industries (Divisions A to K and R) back to 1973-74. Chapter 19 of Australian System of National Accounts: Concepts, Sources and Methods provides further information on the compilation of MFP statistics. 

The approach taken for estimating MFP is based on the standard growth accounting framework, which is widely adopted by leading statistical agencies and recommended by the OECD. The framework relies on two main assumptions: constant returns to scale; and that the marginal products of capital and labour are equal to their respective real market prices. While these assumptions may not hold in practice, the framework is useful in identifying the relative importance of proximate sources of growth. OECD Manual: Measuring Productivity and Chapter 19 of Australian System of National Accounts: Concepts, Sources and Methods provide more detailed information about growth accounting assumptions and associated productivity interpretation.

The productivity estimates benefit from the use of supply and use methodology to confront the data and balance the components of annual GDP, a major unifying feature within the ASNA. The supply and use methodology is a powerful tool to compare and contrast data from various sources and improve the coherence of the economic information system. It reconciles the supply of products within the economy within an accounting period with their use for intermediate inputs, final consumption, capital formation, and exports. The balancing process also facilitates additive growth accounts within and across industries.

Productivity statistics are subject to revisions. Revisions are an inevitable consequence of the compilation process, reflecting both the complexity of economic measurement and the need to provide economic policy advisers and other users with initial estimates that are timely to maximise their use in analysis of current economic conditions. Revisions arise from the progressive incorporation of more up to date data, re-weighting of chain volume series and from time-to-time the introduction of new economic concepts, data analysis and improved data sources and methods.

Annual estimates of MFP for the market sector aggregate are released as part of the Australian System of National Accounts (ASNA), which generally occurs around the last week of October following the end of the most recent financial year. Estimates of industry MFP are released around a few weeks after the release of the ASNA. The gross-output based MFP measures are less timely than the value added based MFP measures, as gross output and intermediate input indexes are compiled using the Supply and Use tables, which are compiled and balanced up to the reference year (T-1). Estimates for current year (T) are not available.

The interpretation of productivity indexes depends on how output and inputs are measured. For example, one can arrive at a different interpretation for MFP growth when gross output as opposed to value added is used as the output measure. Ideally, the output indexes will measure all output produced from the input which is measured by the input indexes. Caution is required when interpreting productivity statistics due to the various inputs and output measurement issues and the complexity of the production processes. The ABS measures of productivity growth reflect a mix of factors, including:

• technical change
• changes in processes, structures, knowledge or management practices
• reallocation of inputs between firms and industries
• changes in capacity utilisation or economies of scale
• investment and natural resources
• government policies and external shocks such as weather conditions and
• measurement error and revisions.

In practice, both output and inputs can be difficult to measure. As productivity is estimated as the ratio of a volume measure of output to a volume measure of input, the timing of recording output and input affects productivity indexes. For example, when production takes longer than a year, inputs will be measured before the corresponding output leading to a decline in measured productivity. 

MFP estimates are most useful when analysed between productivity growth cycle peaks. Productivity growth cycle peaks are determined by comparing the annual MFP estimates with their corresponding long-term trend estimates. The peak deviations between these two series are the primary indicators of a growth cycle peak, although general economic conditions at the time are also considered. The purpose is to minimise the effects of cyclical factors that may cause the year-to-year changes in MFP to deviate from its conceptual definition. In this way, most of the effects of variations in capacity utilisation and much of the random error are removed. By averaging between peaks, it is assumed that these peaks represent similar levels of capacity utilisation, allowing more like-for-like comparisons of MFP between different growth cycles. Detailed information about productivity growth cycles is available in the Feature Article: Experimental Estimates of Industry Value Added Growth Cycles. 

The ABS produces annual indexes of labour, capital and multifactor productivity for the market sector as well as for each industry division within the market sector.