Concepts

19.11    Labour productivity is defined as a ratio of some measure of output to labour input; that is, output per unit of labour. Labour productivity is usually expressed in terms of growth rate.

19.12    Labour productivity is widely used for making historical, inter-industry and inter-country growth comparisons. Furthermore, labour productivity is often regarded as an indicator of improvements in living standards as growth in labour productivity has a close long-term relationship with growth in labour earnings.

19.13    Labour productivity has a close relationship to multifactor productivity. In the growth accounting framework, growth in labour productivity can be decomposed into growth in capital deepening (the ratio of capital to labour), growth in labour quality and growth in MFP. More detail is provided in Annex 19B.

19.14    Capital productivity is defined as a ratio of some measure of output to capital input; that is, output per unit of capital. Obviously, changes in this ratio can also reflect technological changes, and changes in other factor inputs (such as labour).

19.15    The measure of capital input used by the ABS in its estimates of capital productivity is the flow of capital services coming from the stock of capital and most assets are estimated using the Perpetual Inventory Method (PIM). They are calculated by weighting chain volume measures of the productive capital stock of different asset types together using their rental prices in the weights. Rental prices can be regarded as the 'wages' of capital.

19.16    Capital deepening (or capital intensity) refers to changes in the capital to labour ratio. Increased capital deepening means that, on average, each unit of labour has more capital to work with to produce output, so is an indicator of ability to augment labour. Labour saving practices, such as automation of production, will result in increased capital deepening, which is often associated with a decline in capital productivity. Thus, growth in capital deepening is an important driver (alongside MFP) of labour productivity growth. It may not be very useful to interpret declines in capital productivity in isolation since declines in capital productivity can be more than offset by labour productivity (resulting in MFP growth).

19.17    MFP is defined as a ratio of some measure of output to a combined input of multiple factors, such as labour and capital. In empirical analyses, it is expressed in terms of growth rate; that is, growth rate of output minus the growth rate of inputs. 

19.18    At the aggregate and industry level, MFP is defined as the ratio of real value added to the combined inputs of capital and labour. At an industry level, MFP is also measured as the ratio of gross output to the combined inputs of capital, labour, and intermediate inputs.

19.19    In the productivity measurement literature, gross output based MFP is a preferred measure at a disaggregated level, as it requires less restrictive assumptions (see Jorgenson et al., 2005 and Diewert, 2008).⁷⁴ Ideally, MFP measures disembodied technical change attributable to improved use of factor inputs. In the case of gross output, this efficiency can be attributed to improvements in not only the use of primary inputs, capital and labour, but also in the use of intermediate inputs.

19.20    The KLEMS growth accounting framework is a useful tool in addressing the challenge of developing more detailed industry performance indicators for the formulation and evaluation of policies involving long–term growth, efficiency and competitiveness. It provides, through a more detailed statistical decomposition, more information on the inputs contributing to output growth, and production efficiency. This helps policy makers and economists to identify factors associated with economic growth, such as structural changes in industry’s input mix, particularly with regards to the relative contribution from the intermediate inputs. This also facilitates a more disaggregated analysis of the industry origins of aggregate productivity growth, such as changes in the relative importance of input components over time.

19.21    Within intermediate inputs, the classification into energy (E), materials (M) and services (S) is beneficial in that they have distinctively different roles in the production process. This helps in evaluating trends in the way industries interact. One key interaction is that the intermediate input components reflect renting, hiring and out-sourcing between industries. An industry’s reliance on primary inputs relative to intermediate inputs may change due to changes in leasing and hiring arrangements rather than the productive process itself. When capital is rented under an operational lease arrangement from a firm in another industry, the use of the capital is classified as an intermediate input of the lessee. For example, a construction company may lease a crane from the rental and hiring industry, which is recorded as a service component in the intermediate inputs of the lessee and as capital services by the lessor in the rental and hiring industry.

19.22    The intermediate inputs indices for energy, materials and services and their respective shares are sourced from the supply-use tables compiled by the ABS. The main advantage of deriving the indices and shares for energy, materials and services using this method is to control for heterogeneity in both the prices and volumes of the components and to recognise more explicitly that the way in which each of these components contributes to production differs. A key development in the S-U tables has been the wider application of the double deflation method; that is, real output and real intermediate inputs are derived separately for most industries. By sourcing more specific price deflators, the approach enables improved volume estimation, particularly for intermediate inputs.