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Measurement of labour input

Australian System of National Accounts: Concepts, Sources and Methods
Reference period
2020-21 financial year

19.96    There are three common methods of measuring labour input:

  • number of employed persons;
  • hours worked; and
  • quality-adjusted hours worked.

19.97    Indexes of hours worked are preferred to employment numbers because hours worked captures changes in overtime, standard weekly hours, leave, and part-time work. Quality adjusted hours worked further captures changes in the education and experience of the workforce. The ABS publishes productivity statistics on both an hours worked basis and quality adjusted hours worked basis.

Hours worked indexes

19.98    The ABS publishes indexes of hours worked for each ANZSIC06 industry, the market sector, and the whole economy in the ASNA.⁹¹ These indexes capture trends in hours worked and are derived from estimates of hours actually worked obtained from the Labour Force Survey (LFS). They measure the hours worked by all workers engaged in the production of goods and services by civilian wage and salary earners, employers, self-employed persons, unpaid family workers, and members of the Australian Defence Force.

19.99    For productivity measurement, the aggregate indexes of hours worked are considered to be of good quality, though they are published as indexes as levels may be subject to reporting bias. That is, there may be a tendency for respondents in the LFS to either overestimate or underestimate their hours worked. Industry levels of hours worked may also be subject to a reporting bias due both to the number of hours reported, as well as self-selecting the industry they work in.⁹² Industry-based hours worked levels are thus considered less reliable than the aggregate levels. The indices are expected to be of good quality since it is reasonable to assume that the bias does not change over time and so does not affect the growth rate.

19.100    The ABS surveys hours worked for one week in each month, so hours worked for the unobserved weeks are imputed. Adjustments are made for non-random events such as public and school holidays. The labour force survey collects hours worked by industry for the four mid-quarter weeks, so industry proportions for the representative week are assumed to hold for the quarter. Similarly, the arithmetic average of the four representative weeks of each quarter is used to estimate the annual industry proportions. Both of these methods assume that the effects of holidays and other seasonal factors are constant across all industries.⁹³ For a more technical description of the estimation method, see Research Paper: Estimating Average Annual Hours Worked.

Quality adjusted hours worked index

19.101    Measuring labour input as hours worked implicitly assumes that the workforce is homogeneous. That is, it does not recognise improvements to human capital due to the varying educational achievements and experience within the workforce. An alternative approach is to use quality adjusted labour inputs (QALI). QALI indexes are published for the market sector; each market-sector industry; and the twelve selected industries aggregates in Estimates of Industry Multifactor Productivity.⁹⁴

19.102    The quality changes in labour input are captured through accounting for heterogeneity across different types of workers. The traditional method of measuring labour input is to simply sum hours of all types of worker with identical weights. The modern growth accounting framework measures labour input as weighted aggregates of different types of workers with weights reflecting differences in productive capacity across different types of workers. In this way, increases in labour input can be divided between total hours worked and compositional changes in the labour force. As the workforce evolves with more educated workers replacing less educated workers, this compositional change can directly affect how much output can be produced from a given quantity of hours worked. The labour compositional change combined with labour share has become a standard method for quantifying the contribution of human capital to economic growth within the modern growth accounting framework.⁹⁵

19.103    The underlying conceptual framework for QALI is discussed in more detail in the Research paper, Quality-adjusted Labour Inputs, Nov 2005. Estimation methods have changed and are described below; in particular, of wage rates for each type of workers.

19.104    The workforce is cross-classified by sex, education and age groups. The details of this classification are provided in Tables 19.1 and 19.2.

Table 19.1 Classification of workers for each industry
CharacteristicCategories
SexMale
 Female
EducationUnqualified
 Skilled labour
 Bachelor degree
 Higher degree
Age15 to 24 years
 25 to 34 years
 35 to 44 years
 45 to 54 years
 55 to 64 years
Table 19.2 Descriptions of education categories
Education categoryDescription
UnqualifiedWorkers with at most a high school qualification
Skilled labourWorkers with a non-university post-secondary qualification (e.g. a TAFE qualification of an apprenticeship)
Bachelor degreeWorkers with a university degree other than a Masters or a Doctorate
Higher degreeWorkers with a Masters or a Doctorate

19.105    Hours worked indexes for each group are combined as a Törnqvist index using income shares as the weights. So, a QALI index measures both changes in hours worked and changes in quality (that is, changes in educational achievement and experience). In the productivity growth accounts, the changes in quality are also referred to as labour composition.

19.106    The aggregate QALI indexes have grown faster than the corresponding unadjusted hours worked indexes, implying that labour quality has been increasing. Assuming that higher wages reflect a higher marginal product of labour, labour quality will increase when the high wage rate groups of workers increase their hours worked faster than the low wage rate groups.

19.107    MFP on an hours-worked basis has generally exceeded MFP on a quality adjusted hours worked basis. The difference in the MFP growth rates represents the change in labour composition, which is explicitly identified when the growth accounts are expressed on a quality adjusted hours worked basis.

19.108    Aggregate QALI indexes for the market sector and twelve selected industries are compiled using full Australian Census data. Note that since the census data are used, the inter-census periods are interpolated so care should be taken interpreting year on year changes in labour composition.

Endnotes

  1. Hours worked indexes for the market sector and the whole economy are also published in the quarterly national accounts (NIEP). Estimates of industry multifactor productivity also include hours worked for each industry, the market sector and the twelve selected industries.
  2. Caution is recommended making level comparisons, particularly for industries as differences in collection methods between the LFS and variables sourced from other economic collections (using the ABS business register) may distort comparisons.

  3. The hours worked indexes published in the ASNA and the industry productivity data cubes contain the holiday correction; however, this correction has not been applied to the ABS’ detailed labour force estimates.

  4. Wei and Zhao present some preliminary QALI results for each of the twelve selected industries in 'The Industry Sources of Australia’s Productivity Slowdown', paper presented at the Second World KLEMS Conference at Harvard University, 2012.

  5. For example, see Chapter 1 The Human Capital Century in Goldin, C. and L.F. Katz (2008) The Race between Education and Technology. Cambridge, MA:  Harvard University Press.