Services in the Australian economy

Released
25/10/2019

Introduction

Over the past 24 years, the structural composition of the Australian economy has shifted from the production and consumption of goods towards services. Services are an increasingly important driver of Australia’s economic growth, both in terms of their contribution to domestic production and their use as intermediate inputs in the process of producing other goods and services.

This paper explores the relative importance of services as inputs into the production process of selected industries and how this has changed over time. The drivers of the increased use of services by enterprises over the past two decades include the increase in outsourcing, access to skilled and specialist labour, and advances in technology, which have enabled service providers to be increasingly agile in response to changing business conditions. This paper will examine the above trends at the whole of economy level, supplemented by analysis on the Finance and Health Care and Social Assistance industries.

Definition and scope

For this article, goods are defined as products primary to the following industries in the Australian and New Zealand Standard Industry Classification 2006 (ANZSIC 2006):

  • Division A - Agriculture, Forestry and Fishing;
  • Division B - Mining; and
  • Division C - Manufacturing.
     

The exceptions are the following services products primary to the goods-producing industries:

  • Agriculture, forestry and fishing support services; and
  • Exploration and mining support services.
     

Services are defined as products primary to all Divisions from D to S as well as the services identified above. The analysis in this paper uses the Supply and Use Industry Classification (SUIC) and the Supply and Use Product Group (SUPG). A concordance linking these classifications to ANZSIC 2006 divisions can be found in Appendix 1.

Analysis

The changing composition of total intermediate use

The shift from goods to services is most apparent in the changing share of Australian production and total intermediate use across the economy. Graph 1 shows that services as a share of Australian production increased from 72.8% to 80.0% between 1994-95 and 2017-18. The proportion of total intermediate use on services rose from 57.2% to 71.2% over the same period, with 31 out of 52 services products recording increases. In contrast, the declining proportion of total intermediate use on goods (53 out of 63 goods products recording decreases) was driven mainly by the fall in size of the Manufacturing industry, which typically used goods intensively as inputs into its production process.

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Graph 2 shows the changing composition of products used in the total intermediate use matrix by examining the ten products that have experienced the largest aggregate change (in percentage point terms) in the share of total intermediate use between 1994-95 and 2017-18.

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Over this period, the largest increases in share of total intermediate use are Construction services, Professional, scientific and technical services and Auxiliary finance and insurance services. The growth in Construction services (4.2 percentage points) was driven by demand for residential housing construction and construction services during the mining boom. Growth in Professional, scientific and technical services (3.4 percentage points) was driven by increased outsourcing of services like legal and accounting, and high demand for engineering services. The rise in Auxiliary finance and insurance services (1.5 percentage points) reflected broad-based growth across the Finance and Insurance industry.

The products that recorded the most significant decreases in share of total intermediate use are Telecommunication services, Basic chemical manufacturing and Motor vehicles and parts manufacturing. The decline in Telecommunication services (-1.7 percentage points) contrasts the rise in Internet services (1.2 percentage points) and Computer systems design and related services (1.1 percentage points). The rapid growth in these two products, mainly from 2010-11 onwards, reflected the growth in cloud computing and software-as-a-service in recent years (Graph 3). Intermediate use of Telecommunication services has increased in level terms over the period, but at a relatively slow pace, mainly due to increased use of mobile data and broadband services compared to traditional call and text services, as well as the rapid decline in prices over the period.

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Basic chemical manufacturing (-1.7 percentage points) declined due to competition from cheaper imports. Motor vehicles and parts manufacturing (-1.6 percentage points) experienced reduced demand due to the ceasing of motor car manufacturing in Australia in 2017-18. The largest falls were dominated by manufactured products. Non-manufactured goods products (those products primary to the Agriculture and Mining industries) did not generally record the same declines as manufactured products, due to the inability to substitute some of these products and relatively low import penetration.

Technological change and specialist knowledge

Rapid advancements in information technology have contributed to the structural shift towards services across the Australian economy (Heath, 2017). Businesses are increasingly outsourcing their requirements to experts and subcontractors to meet the challenges presented by the modern complexity of information technology and the changing expectations of consumers.

Outsourcing allows businesses to access technical skills and make use of the economies of scale generated by increased specialisation within the information technology industries (Adeney, 2018). This phenomenon is demonstrated by the rapid increase in the share of total intermediate use of Computer systems design and related services and Internet services across the economy.

Advancements in computing and communication technology have contributed to a significant shift in the composition of total intermediate use in industries such as Finance and Insurance. Graph 4 shows that the combined total intermediate use of Computer systems design and related services and Internet services by the Finance industry has risen significantly, increasing their contribution threefold since 1994-95. Over the period, the use of Computer systems design and related services tripled in size, growing from 6.3% of total intermediate inputs to 23.1%. The rise in the use of Internet services was even more pronounced, growing from 0.1% contribution to total intermediate use in 1994-95 to 5.6% in 2017-18. The Finance industry is leveraging specialist knowledge to integrate new technologies into their business processes for both internal use and customer facing products.

Australian consumers have been fast adopters of digital services and technology, with above average rates of internet use compared to other OECD countries (OECD, 2017). Businesses are seeking to capitalise on increased digitalisation by further integrating digital technologies into business practice. The uptake of paid cloud computing has risen sharply over the last few years across all business sizes (ABS, 2019).

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Index 1994-95=100

Increased use of employment placement and labour hire services

Computer services are not the only example of increased outsourcing in the economy. Increasing use of Employment, travel agency and other administrative services has been observed across the majority of industries identified in the Supply and Use framework since 1994-95. Graph 5 shows industries that recorded substantial increases in the use of these services.

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Businesses have increasingly turned towards outsourcing recruitment and administration services to reduce costs and focus on their core functions. As the economy becomes increasingly complex, enterprises require access to increasingly skilled labour. This shift has been complemented by employment and administration services that offer increased outsourced specialisation and can leverage economies of scale to reduce costs for their services (Adeney, 2018).

Labour hire is a logical employment solution for enterprises that require workers with specialised skill sets. Employment agencies often possess extensive databases of workers with a broad range of skills, qualifications and experiences to match an industry’s requirements, which can make it easier for a business to find a qualified candidate than by using their own resources. This is particularly the case for technical roles sought out by the Professional, Scientific and Technical Services industry (increase of 5.0 percentage points in share of total intermediate use since 1994-95) and the Computer Systems Design and Related Services industry (4.7 percentage points), as well as the increased outsourcing activity reported by the Health Care and Social Assistance industry (6.8 percentage points). It is expected that the use of labour hire and other administrative services will continue to grow, as they allow businesses to outsource their recruitment processes in order to focus on the core functions of their business and access specific skills.

Health care and social assistance leads the way in shifting to service based inputs

The Health Care and Social Assistance industry has experienced a shift in the composition of its total intermediate use from goods towards services. Graph 6 displays the change from services representing 48.7% of total intermediate use in 1994-95 to 63.2% in 2017-18.

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This shift was driven by an increased contribution from services such as Employment services (6.8 percentage points), Auxiliary finance and insurance services (3.4 percentage points), Non-residential property operators (3.3 percentage points), and Professional, scientific and technical services (2.7 percentage points). Slowing growth in the use of manufactured products including Clothing (-3.8 percentage points), Basic chemicals (-3.7 percentage points), and Human pharmaceutical and medicinal products (-3.1 percentage points) were also contributing factors (Graph 7).

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While the compositional change of products used in the Health Care and Social Assistance industry can largely be attributed to the ageing population and rising incidence of chronic illness, other factors are likely at play such as increasing demand for hospitals and other medical facilities (and therefore more staff and resources within those facilities). In particular, the move for health care providers to outsource staff to reduce costs has been noted as a key reason for the increasing level of labour hire usage across the Health Care and Social Assistance industry (Alday, 2019).

Conclusion

This paper highlights a major structural change in the Australian economy and uses the Supply and Use framework to analyse key themes underpinning this change. Some of the drivers of this continued transition from production and use of goods towards services include outsourcing to reduce costs, access to skilled and specialised labour, and technological innovations. The paper provides users with an insight into the potential analytical uses of Supply and Use tables as a way of understanding changes in the structure of the Australian economy.

References

ABS (2019), Characteristics of Australian Business, 2017-18, cat. no. 8167.0, ABS, Canberra.

Adeney, R. (2018), Structural Change in the Australian Economy, Reserve Bank of Australia, Available at: https://www.rba.gov.au/publications/bulletin/2018/mar/structural-change-in-the-australian-economy.html#fn4 [14 October, 2019].

Alday, A. (2019), Temporary Staff Services in Australia, IBISWorld, N7212.

Heath, A. (2017), Structural Change in Australian Industry: The Role of Business Services, Reserve Bank of Australia, Available at: https://www.rba.gov.au/speeches/2017/sp-so-2017-09-06.html [14 October, 2019].

OECD (2017), OECD Science, Technology and Industry Scoreboard 2017: The digital transformation, OECD Publishing, Paris, Available at: https://doi.org/10.1787/9789264268821-en [14 October, 2019].

Appendix 1 - product industry concordance

Show all

Product code (SUPG)Product descriptorIndustry code (SUIC)Industry descriptorANZSIC 2006 Division
0101Sheep, Grains, Beef and Dairy Cattle010AgricultureA Agriculture, Forestry and Fishing
0102Poultry and Other Livestock010AgricultureA Agriculture, Forestry and Fishing
0103Other Agriculture010AgricultureA Agriculture, Forestry and Fishing
0201Aquaculture020Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishingA Agriculture, Forestry and Fishing
0301Forestry and Logging020Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishingA Agriculture, Forestry and Fishing
0401Fishing, hunting and trapping020Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishingA Agriculture, Forestry and Fishing
0501Agriculture, Forestry and Fishing Support Services020Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishingA Agriculture, Forestry and Fishing
0601Coal mining060Coal miningB Mining
0701Oil and gas extraction070Oil and gas extractionB Mining
0801Iron Ore Mining081Iron ore miningB Mining
0802Non Ferrous Metal Ore Mining082Non Ferrous Metal Ore MiningB Mining
0901Non Metallic Mineral Mining090Non Metallic Mineral MiningB Mining
1001Exploration and Mining Support Services100Exploration and Mining Support ServicesB Mining
1101Meat and Meat product Manufacturing110Food product manufacturingC Manufacturing
1102Processed Seafood Manufacturing110Food product manufacturingC Manufacturing
1103Dairy Product Manufacturing110Food product manufacturingC Manufacturing
1104Fruit and Vegetable Product Manufacturing110Food product manufacturingC Manufacturing
1105Oils and Fats Manufacturing110Food product manufacturingC Manufacturing
1106Grain Mill and Cereal Product Manufacturing110Food product manufacturingC Manufacturing
1107Bakery Product Manufacturing110Food product manufacturingC Manufacturing
1108Sugar and Confectionery Manufacturing110Food product manufacturingC Manufacturing
1109Other Food Product Manufacturing110Food product manufacturingC Manufacturing
1201Soft Drinks, Cordials and Syrup Manufacturing120Beverage and tobacco product manufacturingC Manufacturing
1202Beer Manufacturing120Beverage and tobacco product manufacturingC Manufacturing
1205Wine, Spirits and Tobacco120Beverage and tobacco product manufacturingC Manufacturing
1301Textile Manufacturing130Textiles, leather, clothing and footwear manufacturingC Manufacturing
1302Tanned Leather, Dressed Fur and Leather Product Manufacturing130Textiles, leather, clothing and footwear manufacturingC Manufacturing
1303Textile Product Manufacturing130Textiles, leather, clothing and footwear manufacturingC Manufacturing
1304Knitted Product Manufacturing130Textiles, leather, clothing and footwear manufacturingC Manufacturing
1305Clothing Manufacturing130Textiles, leather, clothing and footwear manufacturingC Manufacturing
1306Footwear Manufacturing130Textiles, leather, clothing and footwear manufacturingC Manufacturing
1401Sawmill Product Manufacturing140Wood product manufacturingC Manufacturing
1402Other Wood Product Manufacturing140Wood product manufacturingC Manufacturing
1501Pulp, Paper and Paperboard Manufacturing150Pulp, paper and converted paper product manufacturingC Manufacturing
1502Paper Stationery and Other Converted Paper Product Manufacturing150Pulp, paper and converted paper product manufacturingC Manufacturing
1601Printing (including the reproduction of recorded media)160Printing (including the reproduction of recorded media) C Manufacturing
1701Petroleum and Coal Product Manufacturing170Petroleum and coal product manufacturingC Manufacturing
1801Human Pharmaceutical and Medicinal Product Manufacturing180Chemical manufacturingC Manufacturing
1802Veterinary Pharmaceutical and Medicinal Product Manufacturing180Chemical manufacturingC Manufacturing
1803Basic Chemical Manufacturing180Chemical manufacturingC Manufacturing
1804Cleaning Compounds and Toiletry Preparation Manufacturing180Chemical manufacturingC Manufacturing
1901Polymer Product Manufacturing190Polymer and rubber product manufacturingC Manufacturing
1902Natural Rubber Product Manufacturing190Polymer and rubber product manufacturingC Manufacturing
2001Glass and Glass Product Manufacturing200Non-metallic mineral product manufacturingC Manufacturing
2002Ceramic Product Manufacturing200Non-metallic mineral product manufacturingC Manufacturing
2003Cement, Lime and Ready-Mixed Concrete Manufacturing200Non-metallic mineral product manufacturingC Manufacturing
2004Plaster and Concrete Product Manufacturing200Non-metallic mineral product manufacturingC Manufacturing
2005Other Non-Metallic Mineral Product Manufacturing200Non-metallic mineral product manufacturingC Manufacturing
2101Iron and Steel Manufacturing210Primary metal and metal product manufacturingC Manufacturing
2102Basic Non-Ferrous Metal Manufacturing210Primary metal and metal product manufacturingC Manufacturing
2201Forged Iron and Steel Product Manufacturing220Fabricated metal product manufacturingC Manufacturing
2202Structural Metal Product Manufacturing220Fabricated metal product manufacturingC Manufacturing
2203Metal Containers and Other Sheet Metal Product manufacturing220Fabricated metal product manufacturingC Manufacturing
2204Other Fabricated Metal Product manufacturing220Fabricated metal product manufacturingC Manufacturing
2301Motor Vehicles and Parts; Other Transport Equipment manufacturing230Transport equipment manufacturingC Manufacturing
2302Ships and Boat Manufacturing230Transport equipment manufacturingC Manufacturing
2303Railway Rolling Stock Manufacturing230Transport equipment manufacturingC Manufacturing
2304Aircraft Manufacturing230Transport equipment manufacturingC Manufacturing
2401Professional, Scientific, Computer and Electronic Equipment Manufacturing240Other machinery and equipment manufacturingC Manufacturing
2403Electrical Equipment Manufacturing240Other machinery and equipment manufacturingC Manufacturing
2404Domestic Appliance Manufacturing240Other machinery and equipment manufacturingC Manufacturing
2405Specialised and other Machinery and Equipment Manufacturing240Other machinery and equipment manufacturingC Manufacturing
2501Furniture Manufacturing250Furniture and other manufacturingC Manufacturing
2502Other Manufactured Products250Furniture and other manufacturingC Manufacturing
2601Electricity Generation260Electricity supplyD Electricity, Gas, Water and Waste Services
2605Electricity Transmission, Distribution, On Selling and Electricity Market Operation260Electricity supplyD Electricity, Gas, Water and Waste Services
2701Gas Supply270Gas SupplyD Electricity, Gas, Water and Waste Services
2801Water Supply, Sewerage and Drainage Services 280Water Supply, Sewerage and Drainage Services D Electricity, Gas, Water and Waste Services
2901Waste Collection, Treatment and Disposal Services290Waste Collection, Treatment and Disposal ServicesD Electricity, Gas, Water and Waste Services
3001Residential Building Construction301Residential Building ConstructionE Construction
3002Non-Residential Building Construction302Non-Residential Building ConstructionE Construction
3101Heavy and Civil Engineering Construction310Heavy and Civil Engineering ConstructionE Construction
3201Construction Services320Construction ServicesE Construction
3301Wholesale Trade330Wholesale TradeF Wholesale Trade
3901Retail Trade390Retail TradeG Retail Trade
4401Accommodation440AccommodationH Accommodation and Food Services
4501Food and Beverage Services450Food and Beverage ServicesH Accommodation and Food Services
4601Road Transport460Road TransportI Transport, Postal and Warehousing
4701Rail Transport470Rail TransportI Transport, Postal and Warehousing
4801Water, Pipeline and Other Transport480Water, Pipeline and Other TransportI Transport, Postal and Warehousing
4901Air and Space Transport490Air and Space TransportI Transport, Postal and Warehousing
5101Postal and Courier Pick-up and Delivery Service510Postal and Courier Pick-up and Delivery ServiceI Transport, Postal and Warehousing
5201Transport Support services and storage520Transport Support services and storageI Transport, Postal and Warehousing
5401Publishing (except Internet and Music Publishing)540Publishing (except Internet and Music Publishing)J Information, Media and Telecommunications
5501Motion Picture and Sound Recording550Motion Picture and Sound RecordingJ Information, Media and Telecommunications
5601Broadcasting (except Internet)560Broadcasting (except Internet)J Information, Media and Telecommunications
5701Internet Service Providers, Internet Publishing and Broadcasting, Websearch Portals and Data Processing570Internet Service Providers, Internet Publishing and Broadcasting, Websearch Portals and Data ProcessingJ Information, Media and Telecommunications
5801Telecommunication Services580Telecommunication ServicesJ Information, Media and Telecommunications
6001Library and Other Information Services600Library and Other Information ServicesJ Information, Media and Telecommunications
6201Finance620FinanceK Financial and Insurance Services
6301Insurance and Superannuation Funds630Insurance and Superannuation FundsK Financial and Insurance Services
6401Auxiliary Finance and Insurance Services640Auxiliary Finance and Insurance ServicesK Financial and Insurance Services
6601Rental and Hiring Services (except Real Estate)660Rental and Hiring Services (except Real Estate)L Rental, Hiring and Real Estate Services
6701Ownership of Dwellings671Ownership of DwellingsOwnership of Dwellings
6702Non-Residential Property Operators and Real Estate Services672Non-Residential Property Operators and Real Estate ServicesL Rental, Hiring and Real Estate Services
6901Professional, Scientific and Technical Services 690Professional, Scientific and Technical Services M Professional, Scientific and Technical Services
7001Computer Systems Design and Related Services700Computer Systems Design and Related ServicesM Professional, Scientific and Technical Services
7210Employment, Travel Agency and Other Administrative Services720Administration and support servicesN Administrative and Support Services
7310Building Cleaning, Pest Control and Other Support Services720Administration and support servicesN Administrative and Support Services
7501Public Administration and Regulatory Services750Public Administration and Regulatory ServicesO Public Administration and Safety
7601Defence760DefenceO Public Administration and Safety
7701Public Order and Safety770Public Order and SafetyO Public Administration and Safety
8010Primary and Secondary Education Services (incl Pre-Schools and Special Schools)801Primary and Secondary Education Services (incl Pre-Schools and Special Schools)P Education and Training
8110Technical, Vocational and Tertiary Education Services (incl undergraduate and postgraduate)802Technical, Vocational and Tertiary Education Services (incl undergraduate and postgraduate)P Education and Training
8210Arts, Sports, Adult and Other Education Services (incl community education)803Arts, Sports, Adult and Other Education Services (incl community education)P Education and Training
8401Health Care Services840Health Care and Social AssistanceQ Health Care and Social Assistance
8601Residential Care and Social Assistance Services840Health Care and Social AssistanceQ Health Care and Social Assistance
8901Heritage, Creative and Performing Arts890Heritage, Creative and Performing ArtsR Arts and Recreation Services
9101Sports and Recreation 910Gambling, sports and recreationR Arts and Recreation Services
9201Gambling910Gambling, sports and recreationR Arts and Recreation Services
9401Automotive Repair and Maintenance940Repair and MaintenanceS Other Services
9402Other Repair and Maintenance940Repair and MaintenanceS Other Services
9501Personal Services950Personal ServicesS Other Services
9502Other Services950Personal ServicesS Other Services