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New Zealand's Productivity Performance - TPRP 08/02

Changes at the industry and sector level

The industrial composition of the workforce has changed considerably since 2000.

Average productivity levels can vary considerably by industry so changes in the composition of employment by industry or sector may have affected overall growth in labour productivity. Furthermore, overall productivity growth may have been affected by changes in productivity growth within industries or sectors. Recent years have seen strong growth in domestic demand lead to an expansion of construction and the service industries (many of which are in the non-measured sector) relative to industries such as manufacturing (where recorded productivity tends to be higher).

Industry developments

Official productivity data by industry are not yet available so the analysis in this section is suggestive. Industry output can be measured as value-added output (total value of products produced in an industry excluding the value of intermediate inputs) or gross output (total value of all products produced in an industry including intermediate inputs).[10] The analysis below uses value-added output to be consistent with the discussion above, but future work on industry productivity by SNZ may also use gross output.

As mentioned above, SNZ recommend the use of the QES measure of hours paid for the purposes of calculating labour productivity by industry and sector. This is because the hours paid data are of better quality at the industry level. However, we are unable to use the QES to fully identify how the switching of resources between industries is affecting overall productivity as industries such as agriculture and fishing are excluded from this survey.

Changes in labour productivity can be decomposed into industry-related factors:[11]

  • The degree to which the shift of labour between industries with relatively low productivity levels and industries with relatively high productivity levels contributed to changes in labour productivity.
  • The degree to which changes in within-industry labour productivity contributed to changes in labour productivity.

Table 4 sets out output growth by industry, growth in hours by industry, and labour productivity growth by industry over the seven years to March 2007. It also shows the contribution to total growth in labour productivity decomposed by industry. This contribution includes the combined impact of changing shares of labour by industry and labour productivity growth within each industry. The information is based on the Linked Employer-Employee Data (LEED) so as to give wider industry coverage. Although it uses the less preferable per worker (filled jobs) measure of labour productivity, the data are consistent and we are primarily interested in compositional changes.[12]

Table 4: Output, jobs, labour productivity and contribution to labour productivity growth by industry (seven years to March 2007)
      Labour productivity
(output per job)
Annual average growth (%) Output Jobs Total Contribution
(percentage points)
Total measured sector 3.4 3.1 0.3 0.3
Primary 1.5 2.7 -1.2 -0.1
Manufacturing 1.9 0.9 1.0 0.2
Electricity, gas & water 1.4 -0.9 2.2 0.0
Construction 4.1 7.4 -3.1 -0.2
Wholesale trade 2.4 2.6 -0.2 0.0
Retail trade 4.6 3.1 1.5 0.1
Hospitality 3.0 3.5 -0.6 0.0
Transport & storage 3.0 2.9 0.1 0.0
Communications 6.8 0.3 6.5 0.3
Finance & insurance 4.9 2.8 2.1 0.2
Business services 5.0 4.3 0.6 0.0
Culture & recreation 5.2 3.8 1.3 0.0
Personal & other 3.2 3.5 -0.3 0.0

Source: Gross Domestic Product, Linked Employer-Employee Data (December 2006 year was used for job growth as data for the March 2007 quarter were not available), Statistics New Zealand; Treasury calculations

In particular, employment growth has been very high in the construction industry, where recorded labour productivity is below average.

In terms of the decomposition set out above, the construction industry, with high employment growth but labour productivity below the average (and falling over the period), makes the largest negative impact on overall measured sector labour productivity growth at 0.2 percentage points per annum. Construction employment has expanded since 2000 as a result of factors such as high net migration inflows, previously low interest rates, declining household sizes, and infrastructure investment. The growth in construction, a labour-intensive industry, has likely had a negative influence on overall productivity growth. However, without a long span of data we are unable to test if this pattern is present in past cycles.

Other developments of note include contributions to labour productivity growth from communications services (a small industry with high productivity growth) and retail trade and finance and insurance (larger industries with robust labour productivity growth). The small negative contribution to labour productivity growth from primary industries may reflect changes within this diverse group of industries (ie, agriculture, forestry, fishing, and mining) or changes in average hours per worker.

Sector developments

The industry analysis suggests there could have been a downward influence on overall productivity growth from shifts in industry composition. We can also analyse some of these influences on a sector basis. The non-measured sector has been stable as a share of labour input over the whole 1978-2007 period. However, the time series is affected by the inclusion of business services and personal and other services from 1996, which means the new measured sector series is not strictly comparable with data prior to 1996.

Employment growth in the public sector has been similar to that in the private sector since 2000.

QES figures show that the public sector share of employment has trended down from around 28% of total non-farm employment in 1989 to around 18% in 2000 (Figure 10). The public sector in this context refers to sector of ownership (the sector of the economy that owns an organisation or business). This means the public sector will include some market activities (eg, electricity State Owned Enterprises) and will be affected by activities whose ownership has changed. Although the proportion of the workforce in the public sector has remained stable since 2000, this still means an absolute rise in public sector employment of around 50,000 jobs. Figure 11 sets out employment trends in three industries which are concentrated in the public sector.

Figure 10: Public sector employment
Figure 10: Public sector employment.
Source: The Treasury, Statistics New Zealand
Figure 11: Employment by industry (government administration and defence, education, health and community services)
Figure 11: Employment by industry (government administration and defence, education, health and community services) .
Source: The Treasury, Statistics New Zealand

Productivity of the public sector is not measured directly in New Zealand (as outputs are largely measured by inputs) even though it is included in economy-wide measures. This means growth in labour input outside the measured sector, including that in the public sector in recent years, will tend to dampen observed economy-wide labour productivity growth. In making this point, public sector employment is regarded purely in terms of its impact on observed productivity growth. This of course ignores the rationale for increased public sector employment and financing implications.

Data revisions and methodology

Revisions to data and methodological changes can have an impact on productivity figures.

Revisions to historical data, particularly related to GDP, can have a large impact on the productivity data we analyse. When looking at the figures in mid-2007, economy-wide labour productivity growth had averaged 0.2% per annum over the two years to March 2006. Following upward revisions to GDP, this average growth rate has since risen to 0.5% per annum. The fall in productivity previously recorded for the year to March 2006 became a 0.5% rise after the revision (Figure 12).

Figure 12: Labour productivity growth revisions (hours-worked basis)
Figure 12: Labour productivity growth revisions (hours-worked basis).
Source: The Treasury, Statistics New Zealand

At the measured sector level, SNZ note that data covering the final four years is provisional so could change. The estimate of labour productivity growth in the former measured sector over the March 2006 year has changed in all four productivity releases (up from 0.4% to 0.7%, down to 0.3% and now 0.2%). Methodological changes have also had an impact (eg, expanded coverage of the measured sector and greater use of LEED).

There are also difficulties in assessing trend productivity growth, with considerable uncertainty around estimates of trend and the associated length of growth cycles. The large rise in labour productivity of 6.0% over the year to March 2000 raises the average growth rate in the previous cycle and likely dampens the average growth rate in the recent period. Furthermore, the period since 2000 is not a complete cycle, and different methods of estimating trend growth can yield different results.

Economy-wide labour productivity growth rebounded in 2007.

Finally, there has been an increase in economy-wide labour productivity growth more recently to 2.6% in the year to December 2007, the highest since 2000, but this will not show up in the measured sector statistics until at least March 2009 when 2008 data are released.

Notes

  • [10]The value-added approach attributes productivity gains from the more efficient use of intermediate inputs to capital and labour. The gross output approach attributes the gains across all inputs, including intermediate inputs themselves.
  • [11]A third factor, not reported, captures contributions that cannot be decomposed into these two effects.
  • [12]However, this means labour productivity growth differs from that discussed above. Measured sector labour productivity growth in Table 4 over the period was 0.3% per annum. This is lower than the estimate in Section 3 of about 1% per annum as output growth of about 3½% per annum was associated with job growth of about 3% per annum rather than hours growth of about 2% per annum. Using the Household Labour Force Survey, average hours per worker fell over this period by over 3% at the economy-wide level.
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