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.
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.
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.
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).
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.
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.
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).
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 descriptor | Industry code (SUIC) | Industry descriptor | ANZSIC 2006 Division |
---|---|---|---|---|
0101 | Sheep, Grains, Beef and Dairy Cattle | 010 | Agriculture | A Agriculture, Forestry and Fishing |
0102 | Poultry and Other Livestock | 010 | Agriculture | A Agriculture, Forestry and Fishing |
0103 | Other Agriculture | 010 | Agriculture | A Agriculture, Forestry and Fishing |
0201 | Aquaculture | 020 | Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishing | A Agriculture, Forestry and Fishing |
0301 | Forestry and Logging | 020 | Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishing | A Agriculture, Forestry and Fishing |
0401 | Fishing, hunting and trapping | 020 | Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishing | A Agriculture, Forestry and Fishing |
0501 | Agriculture, Forestry and Fishing Support Services | 020 | Forestry, aquaculture, fishing, hunting, trapping and services to agriculture, forestry and fishing | A Agriculture, Forestry and Fishing |
0601 | Coal mining | 060 | Coal mining | B Mining |
0701 | Oil and gas extraction | 070 | Oil and gas extraction | B Mining |
0801 | Iron Ore Mining | 081 | Iron ore mining | B Mining |
0802 | Non Ferrous Metal Ore Mining | 082 | Non Ferrous Metal Ore Mining | B Mining |
0901 | Non Metallic Mineral Mining | 090 | Non Metallic Mineral Mining | B Mining |
1001 | Exploration and Mining Support Services | 100 | Exploration and Mining Support Services | B Mining |
1101 | Meat and Meat product Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1102 | Processed Seafood Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1103 | Dairy Product Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1104 | Fruit and Vegetable Product Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1105 | Oils and Fats Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1106 | Grain Mill and Cereal Product Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1107 | Bakery Product Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1108 | Sugar and Confectionery Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1109 | Other Food Product Manufacturing | 110 | Food product manufacturing | C Manufacturing |
1201 | Soft Drinks, Cordials and Syrup Manufacturing | 120 | Beverage and tobacco product manufacturing | C Manufacturing |
1202 | Beer Manufacturing | 120 | Beverage and tobacco product manufacturing | C Manufacturing |
1205 | Wine, Spirits and Tobacco | 120 | Beverage and tobacco product manufacturing | C Manufacturing |
1301 | Textile Manufacturing | 130 | Textiles, leather, clothing and footwear manufacturing | C Manufacturing |
1302 | Tanned Leather, Dressed Fur and Leather Product Manufacturing | 130 | Textiles, leather, clothing and footwear manufacturing | C Manufacturing |
1303 | Textile Product Manufacturing | 130 | Textiles, leather, clothing and footwear manufacturing | C Manufacturing |
1304 | Knitted Product Manufacturing | 130 | Textiles, leather, clothing and footwear manufacturing | C Manufacturing |
1305 | Clothing Manufacturing | 130 | Textiles, leather, clothing and footwear manufacturing | C Manufacturing |
1306 | Footwear Manufacturing | 130 | Textiles, leather, clothing and footwear manufacturing | C Manufacturing |
1401 | Sawmill Product Manufacturing | 140 | Wood product manufacturing | C Manufacturing |
1402 | Other Wood Product Manufacturing | 140 | Wood product manufacturing | C Manufacturing |
1501 | Pulp, Paper and Paperboard Manufacturing | 150 | Pulp, paper and converted paper product manufacturing | C Manufacturing |
1502 | Paper Stationery and Other Converted Paper Product Manufacturing | 150 | Pulp, paper and converted paper product manufacturing | C Manufacturing |
1601 | Printing (including the reproduction of recorded media) | 160 | Printing (including the reproduction of recorded media) | C Manufacturing |
1701 | Petroleum and Coal Product Manufacturing | 170 | Petroleum and coal product manufacturing | C Manufacturing |
1801 | Human Pharmaceutical and Medicinal Product Manufacturing | 180 | Chemical manufacturing | C Manufacturing |
1802 | Veterinary Pharmaceutical and Medicinal Product Manufacturing | 180 | Chemical manufacturing | C Manufacturing |
1803 | Basic Chemical Manufacturing | 180 | Chemical manufacturing | C Manufacturing |
1804 | Cleaning Compounds and Toiletry Preparation Manufacturing | 180 | Chemical manufacturing | C Manufacturing |
1901 | Polymer Product Manufacturing | 190 | Polymer and rubber product manufacturing | C Manufacturing |
1902 | Natural Rubber Product Manufacturing | 190 | Polymer and rubber product manufacturing | C Manufacturing |
2001 | Glass and Glass Product Manufacturing | 200 | Non-metallic mineral product manufacturing | C Manufacturing |
2002 | Ceramic Product Manufacturing | 200 | Non-metallic mineral product manufacturing | C Manufacturing |
2003 | Cement, Lime and Ready-Mixed Concrete Manufacturing | 200 | Non-metallic mineral product manufacturing | C Manufacturing |
2004 | Plaster and Concrete Product Manufacturing | 200 | Non-metallic mineral product manufacturing | C Manufacturing |
2005 | Other Non-Metallic Mineral Product Manufacturing | 200 | Non-metallic mineral product manufacturing | C Manufacturing |
2101 | Iron and Steel Manufacturing | 210 | Primary metal and metal product manufacturing | C Manufacturing |
2102 | Basic Non-Ferrous Metal Manufacturing | 210 | Primary metal and metal product manufacturing | C Manufacturing |
2201 | Forged Iron and Steel Product Manufacturing | 220 | Fabricated metal product manufacturing | C Manufacturing |
2202 | Structural Metal Product Manufacturing | 220 | Fabricated metal product manufacturing | C Manufacturing |
2203 | Metal Containers and Other Sheet Metal Product manufacturing | 220 | Fabricated metal product manufacturing | C Manufacturing |
2204 | Other Fabricated Metal Product manufacturing | 220 | Fabricated metal product manufacturing | C Manufacturing |
2301 | Motor Vehicles and Parts; Other Transport Equipment manufacturing | 230 | Transport equipment manufacturing | C Manufacturing |
2302 | Ships and Boat Manufacturing | 230 | Transport equipment manufacturing | C Manufacturing |
2303 | Railway Rolling Stock Manufacturing | 230 | Transport equipment manufacturing | C Manufacturing |
2304 | Aircraft Manufacturing | 230 | Transport equipment manufacturing | C Manufacturing |
2401 | Professional, Scientific, Computer and Electronic Equipment Manufacturing | 240 | Other machinery and equipment manufacturing | C Manufacturing |
2403 | Electrical Equipment Manufacturing | 240 | Other machinery and equipment manufacturing | C Manufacturing |
2404 | Domestic Appliance Manufacturing | 240 | Other machinery and equipment manufacturing | C Manufacturing |
2405 | Specialised and other Machinery and Equipment Manufacturing | 240 | Other machinery and equipment manufacturing | C Manufacturing |
2501 | Furniture Manufacturing | 250 | Furniture and other manufacturing | C Manufacturing |
2502 | Other Manufactured Products | 250 | Furniture and other manufacturing | C Manufacturing |
2601 | Electricity Generation | 260 | Electricity supply | D Electricity, Gas, Water and Waste Services |
2605 | Electricity Transmission, Distribution, On Selling and Electricity Market Operation | 260 | Electricity supply | D Electricity, Gas, Water and Waste Services |
2701 | Gas Supply | 270 | Gas Supply | D Electricity, Gas, Water and Waste Services |
2801 | Water Supply, Sewerage and Drainage Services | 280 | Water Supply, Sewerage and Drainage Services | D Electricity, Gas, Water and Waste Services |
2901 | Waste Collection, Treatment and Disposal Services | 290 | Waste Collection, Treatment and Disposal Services | D Electricity, Gas, Water and Waste Services |
3001 | Residential Building Construction | 301 | Residential Building Construction | E Construction |
3002 | Non-Residential Building Construction | 302 | Non-Residential Building Construction | E Construction |
3101 | Heavy and Civil Engineering Construction | 310 | Heavy and Civil Engineering Construction | E Construction |
3201 | Construction Services | 320 | Construction Services | E Construction |
3301 | Wholesale Trade | 330 | Wholesale Trade | F Wholesale Trade |
3901 | Retail Trade | 390 | Retail Trade | G Retail Trade |
4401 | Accommodation | 440 | Accommodation | H Accommodation and Food Services |
4501 | Food and Beverage Services | 450 | Food and Beverage Services | H Accommodation and Food Services |
4601 | Road Transport | 460 | Road Transport | I Transport, Postal and Warehousing |
4701 | Rail Transport | 470 | Rail Transport | I Transport, Postal and Warehousing |
4801 | Water, Pipeline and Other Transport | 480 | Water, Pipeline and Other Transport | I Transport, Postal and Warehousing |
4901 | Air and Space Transport | 490 | Air and Space Transport | I Transport, Postal and Warehousing |
5101 | Postal and Courier Pick-up and Delivery Service | 510 | Postal and Courier Pick-up and Delivery Service | I Transport, Postal and Warehousing |
5201 | Transport Support services and storage | 520 | Transport Support services and storage | I Transport, Postal and Warehousing |
5401 | Publishing (except Internet and Music Publishing) | 540 | Publishing (except Internet and Music Publishing) | J Information, Media and Telecommunications |
5501 | Motion Picture and Sound Recording | 550 | Motion Picture and Sound Recording | J Information, Media and Telecommunications |
5601 | Broadcasting (except Internet) | 560 | Broadcasting (except Internet) | J Information, Media and Telecommunications |
5701 | Internet Service Providers, Internet Publishing and Broadcasting, Websearch Portals and Data Processing | 570 | Internet Service Providers, Internet Publishing and Broadcasting, Websearch Portals and Data Processing | J Information, Media and Telecommunications |
5801 | Telecommunication Services | 580 | Telecommunication Services | J Information, Media and Telecommunications |
6001 | Library and Other Information Services | 600 | Library and Other Information Services | J Information, Media and Telecommunications |
6201 | Finance | 620 | Finance | K Financial and Insurance Services |
6301 | Insurance and Superannuation Funds | 630 | Insurance and Superannuation Funds | K Financial and Insurance Services |
6401 | Auxiliary Finance and Insurance Services | 640 | Auxiliary Finance and Insurance Services | K Financial and Insurance Services |
6601 | Rental and Hiring Services (except Real Estate) | 660 | Rental and Hiring Services (except Real Estate) | L Rental, Hiring and Real Estate Services |
6701 | Ownership of Dwellings | 671 | Ownership of Dwellings | Ownership of Dwellings |
6702 | Non-Residential Property Operators and Real Estate Services | 672 | Non-Residential Property Operators and Real Estate Services | L Rental, Hiring and Real Estate Services |
6901 | Professional, Scientific and Technical Services | 690 | Professional, Scientific and Technical Services | M Professional, Scientific and Technical Services |
7001 | Computer Systems Design and Related Services | 700 | Computer Systems Design and Related Services | M Professional, Scientific and Technical Services |
7210 | Employment, Travel Agency and Other Administrative Services | 720 | Administration and support services | N Administrative and Support Services |
7310 | Building Cleaning, Pest Control and Other Support Services | 720 | Administration and support services | N Administrative and Support Services |
7501 | Public Administration and Regulatory Services | 750 | Public Administration and Regulatory Services | O Public Administration and Safety |
7601 | Defence | 760 | Defence | O Public Administration and Safety |
7701 | Public Order and Safety | 770 | Public Order and Safety | O Public Administration and Safety |
8010 | Primary and Secondary Education Services (incl Pre-Schools and Special Schools) | 801 | Primary and Secondary Education Services (incl Pre-Schools and Special Schools) | P Education and Training |
8110 | Technical, Vocational and Tertiary Education Services (incl undergraduate and postgraduate) | 802 | Technical, Vocational and Tertiary Education Services (incl undergraduate and postgraduate) | P Education and Training |
8210 | Arts, Sports, Adult and Other Education Services (incl community education) | 803 | Arts, Sports, Adult and Other Education Services (incl community education) | P Education and Training |
8401 | Health Care Services | 840 | Health Care and Social Assistance | Q Health Care and Social Assistance |
8601 | Residential Care and Social Assistance Services | 840 | Health Care and Social Assistance | Q Health Care and Social Assistance |
8901 | Heritage, Creative and Performing Arts | 890 | Heritage, Creative and Performing Arts | R Arts and Recreation Services |
9101 | Sports and Recreation | 910 | Gambling, sports and recreation | R Arts and Recreation Services |
9201 | Gambling | 910 | Gambling, sports and recreation | R Arts and Recreation Services |
9401 | Automotive Repair and Maintenance | 940 | Repair and Maintenance | S Other Services |
9402 | Other Repair and Maintenance | 940 | Repair and Maintenance | S Other Services |
9501 | Personal Services | 950 | Personal Services | S Other Services |
9502 | Other Services | 950 | Personal Services | S Other Services |