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The Contribution of Services & Other Sectors to Australian Productivity Growth 1995-2005

Aims & objectives

Australia has experienced a longer and more sustained period of productivity growth since 1990 than almost any other OECD economy. There is concern, however, about the sustainability of this performance in the face of important structural features of the Australian economy. This includes the role of the mining and other primary producing sectors and the implications of a relative decline in manufacturing employment and output relative to service activity in the economy as a whole and its potential trade implications. The relative contribution of the services sectors to productivity growth is therefore of great policy and academic research interest. There is similar interest in the extent to which the productivity growth improvement of the Australian economy is linked to the technological intensity of various sectors. The object of this project is therefore to address these questions by analysing the sectoral composition of productivity growth in the Australian economy in the period 1995-2000, and relevant sub-periods within that. 

The analysis is designed to decompose the growth in gross value added per hour for all industries taken together into those parts accounted for by each separate industry. The contribution which each sector makes will be analysed in terms of its own productivity performance over a given period and the changing weights that the sector has in overall output and employment. Over 50 industries are considered within the services manufacturing and primary sectors.

The research is designed to produce an analysis for Australia comparable in decompositional method and level of sectoral disaggregation to that carried in other studies in recent years for the United States and other OECD economies.

Progress

A review of existing research on Australian productivity performance was carried out. A dataset was constructed at the level of a 60 sector disaggregation for Australia, consisting of hours worked and real output based on the Groningen international comparative dataset. A preliminary disaggregation of productivity growth over the period 1995-2004 was completed and a draft report was presented at a seminar at the University of Queensland attended by representatives of the ABF and other academics in September 2007. The final report was completed on schedule in November and presented at the Annual Meeting of the Australian Business Federation in Sydney in November.

Key findings

The analysis of productivity growth acceleration between 1980-1992 and 1992-2004 reveals that nearly all of the post-1992 acceleration can be attributed to the performance of just three services sectors: financial intermediation, wholesale trade and other business activities not elsewhere classified. The remaining sectoral contributions effectively cancel each other out. Mining and quarrying which had played a positive role in labour productivity growth within each of the periods, nonetheless played a negative role in terms of productivity growth acceleration between periods.

The results of this research reveal a similar pattern of contributions to productivity growth acceleration to that observed for the US in the McKinsey Global Institute reports for the periods 1995-2003, with services sectors playing a dominant role in both economies. This is particularly true in relation to wholesaling and financial intermediation. It is notable that retailing has not played a significant part in the Australian context. In relation to the overall sectoral concentration of productivity growth acceleration, the picture is more concentrated in the case of Australia than is the case for the US. In the Australian context in most periods and sub-periods three or four sectors accounted for all or more than all of the total acceleration in productivity growth. A notable feature of the Australian productivity growth performance is the role of the agricultural sector which was, however, excluded from the analysis in the US study. Our results show that agriculture made a significant contribution to the acceleration of labour productivity in the period 1992-2004, with most of this impact being generated after 1998.

Thus the study shows that services sectors have dominated the acceleration of productivity growth in the Australian economy since 1992. It also shows that there are considerable variations in the importance played by different sectors to productivity growth both within and between periods. The analysis suggests that the forces which have driven productivity growth in services sectors have been central to the overall acceleration of labour productivity growth.

The transformation of productivity in the services sectors is intimately linked to the development and application of information technologies which in turn require the effective development of a wide range of complementary investments in management and other organisational and often intangible assets. One aspect of this is the extent to which lower unemployment is leading to tightening labour markets and a higher weight being placed on raising skill levels in pursuit of further output and productivity growth. Another is the extent to which major broadband infrastructure investments will be required to underpin further ICT-based productivity gains.

Report

Hughes, A. and Grinevich, V. (2007), The Contribution of Services and other Sectors to Australian Productivity Growth 1980-2004, A report prepared by the Centre for Business Research for the Australian Business Foundation, Sydney, Australia. ISBN 978-0-9804138-1-6.

Project leader

Alan Hughes

Research fellow

Vadim Grinevich

Project dates

2007-2008