Chapter 19 Productivity measures

19.1    The ABS produces annual indexes of labour and multifactor productivity (MFP) for the market sector as well as for each industry division within the market sector. The ABS also produces quarterly estimates of labour productivity (i.e. GDP per hour worked) for the market sector and for the whole economy, and quarterly and annual GDP per capita. The annual productivity measures for the market sector are published in Australian System of National Accounts (ASNA), and annual industry level MFP indexes in Estimates of Industry Multifactor Productivity. Quarterly indexes of GDP per hour worked are published in Australian National Accounts: National Income, Expenditure and Product (NIEP).

19.2    Estimates of industry level KLEMS (Capital (K), Labour (L), Energy (E), Materials (M) and Services (S)) multifactor productivity (MFP) for the 16 market sector industries are also published from 1995–96, in Estimates of industry level KLEMS Multifactor Productivity (KLEMS). The KLEMS datacube is supported by the companion Information Paper: Experimental Estimates of Industry Level KLEMS Multifactor Productivity, 2015.

19.3    Productivity is typically measured as output divided by input; that is, as output per unit of input. Partial measures of productivity take into consideration a single input like labour or capital. Labour productivity is frequently used as an indicator of productivity growth, which is simply measured as output per hour worked. When multiple inputs such as labour and capital are taken into consideration, it is called multifactor productivity (MFP), which is measured as output per unit of a combined bundle of labour and capital.

19.4    Of specific interest to economists are the underlying causes of economic growth. Typically, single indexes are not sufficient for this purpose. Labour productivity indexes reflect not only the contribution of labour to changes in production per labour unit, but are also influenced by the contribution of capital and other factors affecting production such as technological change. In comparison, MFP measures offer more comprehensive explanations to the sources of output growth. Specifically, MFP statistics are designed to inform how much economic growth originates from productivity growth (increased outputs from the same quantity of inputs) and how much from increased inputs (increased outputs from more capital goods or additional working hours). MFP, therefore, is most commonly used in rigorous productivity analysis.

19.5    The MFP measures are compiled in the standard growth accounting framework, which originates from the neoclassical theory of economic growth formulated by Solow.⁶⁶  In the original Solow growth accounting framework, the stock of capital was used as a measure of capital input, and labour input was measured as hours worked without accounting for compositional changes in the labour force.  Using his traditional growth accounting framework, Solow attributed almost all of the U.S. economic growth to the productivity growth, measured as the well-known Solow residual.

19.6    In comparison, the modern growth accounting framework is characterised by incorporation of quality changes into the measurement of capital and labour input.⁶⁷ The major cornerstone underlying this development was the introduction of constant quality indexes of capital and labour inputs by Griliches and Jorgenson⁶⁸ and Jorgenson, Gollop & Fraumeni.⁶⁹ Within the modern growth accounting framework, a substantial fraction of the Solow residual (technical progress) can be explained by changes in the quality of inputs. The part of technical progress captured in constant quality of input indexes is referred to as embodied technical progress, while disembodied technical progress relates to spill-over effects through diffusion of advances in science and technology, which is beyond the input measurement. In this context, productivity growth (technical progress) within the modern growth accounting framework is interpreted as disembodied technical progress. According to the modern growth accounting analysis, economic growth is largely driven by input growth and (disembodied) technical progress contributes only a small proportion.

19.7    The OECD has produced a number of handbooks and manuals to set out a guide for 'best practice' in productivity measurement by statistical agencies, to assist official statistical agencies to compile MFP statistics employing the growth accounting framework.⁷⁰ The ABS was a major contributor to the development of the OECD Capital Manual, which is an important document for guiding practitioners on how to measure the capital services component of productivity measures.⁷¹

19.8    The methods used by the ABS in compiling productivity statistics align with international best practice as implemented by most OECD countries. The ABS MFP statistics are compiled on the basis of the standard growth accounting framework, which is widely adopted by leading statistical agencies and recommended by the OECD.

19.9    In 1989, ABS first released its experimental MFP estimates in the information paper, Development of Multifactor Productivity Estimates for Australia, 1974-75 to 1987-88.⁷² In 1990, the detailed technical issues in relation to those preliminary MFP estimates were covered in the occasional paper: Estimates of Multifactor Productivity Australia.⁷³ Estimates of MFP were first included in the publication, Australian National Accounts: Multifactor Productivity, released in June 1994. From 1999, the aggregate MFP statistics were incorporated into the ASNA.

19.10    The availability of Supply Use tables since 1995 makes it possible to compile industry level MFP statistics and KLEMS growth accounts. The ABS started to compile and release industry level MFP statistics data cube since 2007, and, since 2015, KLEMS growth accounts. Both data cubes provide MFP estimates for individual industries in the Australian economy. They go beneath the aggregate economy in order to measure the productivity of individual industries.