Estimates of Industry Level KLEMS Multifactor Productivity methodology

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The ABS has been producing aggregate multifactor productivity (MFP) statistics since 1985. The ABS produces annual indexes of labour productivity and MFP for the market sector, and since 2007, for each industry division within the market sector. The market sector consists of industries which predominantly produce goods and services which are sold at market prices, that is, the transaction price at which the goods and services are exchanged.

Prior to the 2010-11 edition of the Australian System of National Accounts (ASNA), the market sector definition included ANZSIC Divisions A to K and R. In 2010-11 the definition was expanded to include Divisions L, M, N and S. The expanded definition improves relevance in two key respects: it reflects the growing contribution of services industries in the economy; and improves economic coverage. However, the improved economic coverage is only available from 1994-95, due to the availability of supply-use data. To facilitate analysing productivity performance from the perspective of a longer time series, productivity estimates are available for 12 selected industries (Divisions A to K and R) back to 1973-74. For more information on the compilation of MFP statistics, see Chapter 19 of Australian System of National Accounts: Concepts, Sources and Methods.

Since 2016, the ABS has published experimental estimates of industry level KLEMS MFP (KLEMS represents the five inputs in the production process - Capital (K), Labour (L), Energy (E), Materials (M) and Services (S)) for the 16 market sector industries. Commencing in 2020, the experimental label has been removed. By explicitly identifying the role of intermediate inputs in the production process, KLEMS facilitates a more rigorous analysis of the determinants of output growth at the industry level. For more information about KLEMS, see Information Paper: Experimental Estimates of Industry Level KLEMS Multifactor Productivity.

Annual aggregate MFP statistics are released as part of the ASNA, which generally occurs around the last week of October following the end of the most recent financial year. Estimates of KLEMS MFP are released around a few weeks after the release of the ASNA. The gross-output based MFP measures (including KLEMS) are less timely than the value added based MFP measures, as gross output and intermediate input indexes are compiled using the Supply and Use tables, which are compiled and balanced up to the reference year (T-1). Estimates for current year (T) are not available.

ABS productivity statistics are heavily reliant on data from national accounts. Consequently, they share similar strengths and constraints as national accounts statistics. In the case of national accounts, it is internationally recognised that an assessment of accuracy is necessarily subjective and indirect due to the combined use of a very large number of internal and external data sources, and the transformations and aggregations used in the compilation process. For a more in-depth discussion of the accuracy of the national accounts including an analysis of revisions, please see the Information Paper: Quality Dimensions of the Australian National Accounts.

The approach taken for estimating MFP is based on the standard growth accounting framework, which is widely adopted by leading statistical agencies and recommended by the OECD. The framework relies on two main assumptions: constant returns to scale; and that the marginal products of capital and labour are equal to their respective real market prices. While these assumptions may not hold in practice, the framework is useful in identifying the relative importance of proximate sources of growth. For more information about growth accounting assumptions and associated productivity interpretation, please see OECD Manual: Measuring Productivity and Chapter 19 of Australian System of National Accounts: Concepts, Sources and Methods.

The coherence of data is an aspect of quality closely associated with accuracy. The productivity estimates (and in particular, on a KLEMS basis) benefit from the use of supply and use methodology to confront the data and balance the components of annual GDP, a major unifying feature within the ASNA. The supply and use methodology is a powerful tool to compare and contrast data from various sources and improve the coherence of the economic information system. It reconciles the supply of products within the economy within an accounting period with their use for intermediate inputs, final consumption, capital formation, and exports. The balancing process also facilitates additive growth accounts within and across industries, as well as decomposition of intermediate inputs into energy, materials and services.

Output, capital services and intermediate inputs are solely sourced from the ASNA. Labour inputs are based on total hours worked in all jobs sourced historically from the Labour Force Survey and since 2021 from the Australian Labour Account. Further information about the data source change for labour inputs is outlined in Improved estimates of the annual national accounts: Results of the 2021 historical revisions.

The interpretation of productivity indexes depends on how output and inputs are measured. For example, one can arrive at a different interpretation for MFP growth when gross output as opposed to value added is used as the output measure. While MFP growth is often attributed to technical change, it is worth noting that not all technical change (e.g. technological changes embodied in new vintages of capital) translates into MFP growth; and MFP growth may be caused by a host of factors other than technical changes (e.g. economies of scale and scope, variation in capacity utilisation, changes in weather condition).

MFP estimates are probably most useful when analysed as average growth rates between growth-cycle peaks. Growth cycles are chosen with reference to peak deviations which are determined by comparing MFP estimates with their long-term trend. The peak deviation between these two series is the primary indicator of a growth-cycle peak. In this way, most of the effects of variations in capacity utilisation and much of the random error are removed. For more information about the productivity growth cycle, please see the Feature Article: Experimental Estimates of Industry Value Added Growth Cycles in 2015-16 issue of Estimates of Industry Multifactor Productivity.

The ABS produces annual indexes of labour, capital and gross value added-based MFP for the market sector and its constituent industry divisions and KLEMS MFP for market sector industries. Access to all published productivity data is available for free on the ABS website. For more information on published productivity statistics, please see "What measures are available?" in Frequently Asked Questions.

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