FEATURE ARTICLE: DEVELOPMENTS IN THE AUSTRALIAN WHOLESALE TRADE INDUSTRY

INTRODUCTION

The Wholesale industry contributes to the Australian economy by providing essential services to the business sector. Gross value added (GVA) of the Wholesale industry fell slightly (-0.2%) in the June quarter 2018, but has maintained moderate growth, averaging 2.6% annual growth over the past decade. This economic performance has been accompanied by considerable changes in the industry’s utilisation of labour, capital and intermediate inputs. During recent years, the Wholesale industry has responded to technological advancements throughout the economy. This has led to reduced labour intensity with the industry recording a decline in employment, hours worked and labour costs since 2011-12. This article highlights the implications of these developments within the Wholesale industry on its productivity performance.


VALUE ADDED IN THE WHOLESALE INDUSTRY

As the economy evolves with increasing globalisation and technological advancements, business activities have diversified. For example, Retailers have the opportunity to by-pass the Wholesale industry to import goods directly, which detracts from the Wholesale industry. On the other hand, technological advancements can drive stronger demand for goods. One example of this is stronger demand for new medical equipment as Australia expands the delivery of medical services through hospitals. This evolution subsequently impacts on output of the Wholesale industry.

The Wholesale GVA observed strong growth over the past decade. Figure 1 shows the six Australian and New Zealand Standard Industrial Classification, 2006 (ANZSIC06) (cat. no. 1292.0) subdivisions that comprise the industry. The GVA attributable to each of the subdivisions has remained fairly stable over the last decade. Over this period, the largest three subdivisions were Machinery and equipment wholesaling, Basic material wholesaling and Other goods wholesaling. In 2016-17, these three subdivisions accounted for 73% of the industry’s output, contributing 34.8%, 19.7% and 18.6% respectively.

Although the structure of the Wholesale industry has remained relatively unchanged, the utilisation of inputs to produce services more efficiently has experienced substantial change over time, resulting in increased productivity.


PRODUCTIVITY TRENDS

The latest productivity growth cycle peak for the Australian market sector was 2011-12, which also marked the start of strong productivity acceleration for the Wholesale industry. Over the five years to 2016-17, the industry saw strong growth in GVA averaging 3.6% per year, well above the 2.5% recorded for the market sector.

Figure 2 depicts the evolution of labour productivity, GVA based MFP and gross output (GO) based MFP indexes of Wholesale industry since 1994-95. Labour productivity is calculated by dividing an index of the volume of GVA by an index of labour input. GVA based MFP is calculated by dividing an index of the volume of GVA by a combined index of labour and capital inputs while GO based MFP is calculated by dividing an index of the volume of GO by a combined index of combined labour, capital and intermediate inputs.

Labour productivity growth was the strongest, averaging 4.5% per year over the period 1994-95 to 2016-17. The June quarter 2018 Australian National Accounts estimates give an indicative measure of labour productivity of the Wholesale industry for 2017-18. This indicative measure shows that labour productivity dipped slightly below zero (-0.3%).


Figure 2 shows that GVA based MFP growth averaged 4.0% growth per year since 2011-12. While GO based MFP and GVA based MFP are intrinsically linked, analysis of GO based MFP can shed further light on the industry growth drivers as it accounts for intermediate inputs (materials, energy and services) as well a primary inputs (capital and labour). For example, comparing GVA based MFP and GO based MFP growth indicates that over the last decade the industry has become less dependent upon intermediate inputs.


UTILISATION OF INPUTS IN THE WHOLESALE INDUSTRY

Prior to 2007-08, the industry’s use of inputs trended strongly in favour of intermediate inputs relative to primary inputs. More recently, the Wholesale industry has shifted to an increasing reliance on primary inputs (Figure 3).


Figure 3 depicts the weak growth in hours worked over the past five years, as well as the upwards trend in the capital services index in response to the adoption of new technology in the industry. Figure 3 also shows the long-term trends of GVA and GO, which have shown similar growth rates over the past two decades. The June quarter 2018 National Accounts estimates give an indicative measure of GVA for the Wholesale industry, which remained relatively subdued at 0.6% in 2017-18.

Using Experimental Estimates of Industry Level KLEMS Multifactor Productivity, 2015-16 (cat. no. 5260.0.55.004) data, gross output can be decomposed to reflect the contributions from growth in labour, capital and intermediate inputs and from GO based MFP. The contribution of each of the primary and intermediate inputs to output is weighted by their respective cost shares. Figure 4 shows that GO based MFP is the main contributor of the output growth (over 1995-96 to 2015-16). The figure also shows that labour’s contribution to output growth is declining and became negative during the last five years. While the utilisation of capital services increased in Wholesale industry over time, the contribution from capital services appears relatively small due to its low cost share. Among the intermediate inputs, the services component is the largest contributor. In cumulative growth terms, more than 80% of the growth in intermediate inputs is attributable to services, indicating the industry’s strong reliance on other industries, particularly, to carry out repair and maintenance services, hiring of heavy machinery, construction trade services, transport services, insurance, legal, and employment placement services.



SUMMARY

As the market sector evolves in response to increasing globalisation and the adoption of new technologies, the Wholesale industry will also evolve. This is evidenced by the recent trends in productivity. Since the latest productivity growth cycle peak, the utilisation of capital inputs have outgrown labour inputs and subsequently the growth in labour productivity grew at a faster rate than GVA based MFP. The GO based MFP has shown that the utilisation of intermediate inputs have plateaued since the peak, driven by growth of services inputs into the industry.

Updated estimates and analysis on the Wholesale industry’s productivity statistics for 2017-18 will be released in December 2018.