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Feature article: Services in the Australian economy
The exceptions are the following services products primary to the goods-producing industries:
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.
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. Figure 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.
Figure 1: Services share of Australian production and total intermediate use (%)
Figure 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.
Figure 2: Share of total intermediate use between 1994-95 and 2017-18 (%)
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 (Figure 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.
Figure 3: Total intermediate use of Telecommunication services and Internet services ($m)
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. Figure 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).
Figure 4: Contributions of intermediate inputs of the Finance industry, selected products (index)
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. Figure 5 shows industries that recorded substantial increases in the use of these services.
Figure 5: Employment, travel agency and other administrative services share of TIU for selected Supply and Use industries (%)
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. Figure 6 displays the change from services representing 48.7% of total intermediate use in 1994-95 to 63.2% in 2017-18.
Figure 6: Total intermediate use in the Health Care and Social Assistance industry (%)
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 (Figure 7).
Figure 7: Share of total intermediate use between 1994-95 and 2017-18, Health Care and Social Assistance industry (%)
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).
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.
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
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