Understanding labour quality and its contribution to productivity measurement

Productivity is a measure of the effective use of resources and is expressed as the ratio of output to inputs. An important component in measuring productivity is labour input, typically measured by hours worked. However, hours worked measures do not recognise changes to the quality of labour over time. That is, they do not recognise the evolving abilities of workers from varying educational achievements and experience as contributing factors to labour input.

Alongside the hours worked measure, the ABS produces a Quality Adjusted Labour Inputs (QALI) index. This measure of labour input captures both changes in hours worked and changes in labour quality of the workforce. This article examines the improvements to labour quality in the Australian economy over recent decades and demonstrates the impact on productivity statistics.

QALI adjusts labour input to account for important dimensions of labour quality such as education and work experience. Worker characteristics are determined by cross classifying the workforce by industry of employment, sex, educational attainment, and age group. These variables are sourced from the Census of Population and Housing.

The census is only conducted every five years (in 1986, 1991, etc.). Therefore, QALI measures for the years falling between the census years are estimated. Data for the most recent 2021 census became available in October 2022; this has been incorporated into the latest QALI estimates which form the basis of analysis presented in this article. Since QALI captures improvements in labour quality of the workforce, the rate of growth of labour input measured by QALI is generally higher than the growth measured by hours worked. Consequently, productivity will grow at a slower rate when measured on a QALI basis compared to an hours worked basis.

For more information on the compilation of QALI, see Chapter 19 of the Australian System of National Accounts: Concepts, Sources and Methods.

Growth in labour composition reflects improvements to labour quality arising from a more skilled and experienced workforce. Table 1 below compares the average growth in labour compositional change over Census periods, for the market sector industries and the aggregate.

All market sector industries experienced an improvement in labour quality over the seven census periods. The market sector aggregate recorded an average annual growth of 0.47% from 1986 to 2021. There was a slowdown in growth in labour quality from 2001-2011 across several industries. This decade was also a quiet period for the Australian labour market[1]. Growing participation by females in the workforce and amongst younger workers, contributed to higher part-time labour force participation and weaker wages across some industries. This coincides with a broader productivity slowdown experienced internationally across many large economies[2].

Financial and insurance services saw the strongest growth in labour quality, averaging 0.81% growth annually from 1986 to 2021. Accommodation and food services experienced the least improvement, growing 0.1% on average over the same period.

The market sector saw steady improvement in labour quality between 1986 and 2021 (Table 1). Figure 1 shows that the QALI index grew faster than the corresponding hours worked index. By 2021-2022, the QALI index was 20.5 percentage points (ppts) higher than on an hours worked basis reflecting marked improvements in labour quality from advancements in educational attainment and experience in the workforce.

The steady growth in QALI resulted in slower growth in multifactor productivity (MFP) on a QALI basis compared with MFP on an hours worked basis (Figure 2). By 2021-22, MFP on an hours worked basis had grown 9.5 ppts more than on a QALI basis. Slower MFP growth on QALI basis reflects the impact of the improved quality of labour in the estimates of labour input.

This section examines drivers of changes in labour quality for Financial and insurance services and Accommodation and food services. These are the two industries experiencing the greatest and smallest changes to labour quality respectively.

Financial and insurance services (FIS) experienced the largest improvement in labour quality from 1986 across all market sector industries. One of the key drivers for the improvement in the industry was the advancement in educational attainment. In 1986, more than three-quarters of the total hours worked in FIS were attributed to unqualified workers[3] (Table 2). The latest 2021 Census data shows a significant shift in educational attainment. The share of hours worked among unqualified workers fell dramatically to less than one-fifth, while workers with a university degree rose to make up 58% of the hours worked share in 2021. The introduction of ATMs and internet banking has greatly changed the labour requirements of this industry with less demand for under qualified workers.

Similarly, the age composition of the workforce underwent considerable changes. The share of hours worked by workers aged 35 years or older, rose from 38% in 1986, to 71% in 2021. The tendency to employ more experienced workers has contributed positively to the labour quality and is likely to boost productivity growth over time.

The shift towards employing university-level, educated workers with greater experience, has driven strong labour input growth on a QALI basis (Figure 3). This was particularly evident in the last two decades where a significant increase in the QALI index can be seen.

The 90’s recession was the catalyst for rapid change in experience and education. As hours worked bottomed in 1997-98, sustained growth in the QALI index from this point on saw the two labour input series diverge. The rapid rate of growth in labour input from 2012-13 onwards, was more evident in the QALI index and by 2021-22, the two hours worked series were separated by 45.3 ppts.

Between 1986 and 2021, the Accommodation and food services (AFS) industry experienced the slowest growth in labour quality among the market sector industries. Modest changes in experience were seen over time (Table 3). Hours worked share of younger workers (15-24 years old) rose from 25% in 1986 to 30% in 2021, while the share of more experienced workers (35-64 years) dropped from 51% to 47% over the same period. By 2021, just over half the workers employed in AFS were young (under 35 years) and relatively inexperienced.

Conversely, considerable improvement was observed in educational attainment. In 1986, most of the hours worked in AFS were by unqualified workers. A sizeable shift by 2021 saw 20% of the hours worked from workers holding a university degree and 33% from skilled workers. This compares with only 23% of hours worked coming from skilled workers and university graduates in 1986.

Notwithstanding the shift towards more educated workers, the minimal changes in experience has limited improvements in labour quality of the industry. By 2021-22, the QALI index was only 3.2 ppts higher than on an hours worked basis (Figure 4).

The ABS publishes QALI indexes for the market sector industries and the aggregates in Estimates of Industry Multifactor Productivity. In this publication, multifactor productivity and labour productivity indexes have also been produced on both an hours worked and a QALI basis. Contributions from improved industry labour quality are also published in Estimates of Industry Level KLEMS Multifactor Productivity.

[1] See The Australian Labour Market in the 2000s: The Quiet Decade | Conference – 2011 | RBA

[2] See Productivity: The Lost Decade | Conference – 2011 | RBA

[3] See Measurement of labour input in the Australian System of National Accounts: Concepts, Sources and Methods, for a description of education categories.