An analysis of Victoria s labour productivity performance Presentation to a forum hosted by Victorian Department of Innovation, Industry and Regional Development Melbourne 14 th April Saul Eslake Program Director Productivity Growth The Grattan Institute
The three P s of economic performance GDP = Population x Labour force Population x Employment Labour force x Hours worked Employment x GDP Hours worked ( labour force participation rate ) ( 1 unemployment rate ) ( average hours worked ) ( labour productivity ) 2`
Victoria s economic growth over the past five years has been largely due to population and productivity growth Contributors to growth in real gross State product, 3-4 through 8-9 6. % pa 5. 4. 3. 2. 1.. -1. Australia Population Participation Average hours worked Labour productivity Residual Real gross State product Source: ABS State Accounts (52.) 8-9, 3`
This framework can also be used to explain differences in gross product per head of population GDP/head = Labour force Population x Employment Labour force x Hours worked Employment x GDP Hours worked ( labour force participation rate ) ( 1 unemployment rate ) ( average hours worked ) ( labour productivity ) 4`
There s a strong correlation between productivity and per capita incomes Labour productivity and per capita income, 8-9 Gross product per hour worked 8-9 8 $ NT WA 75 ACT 7 65 Vic NSW 6 Qld SA Tas $ 55 3 35 4 45 5 55 6 Household disposable income per capita, 8-9 Source: ABS State Accounts (52.) 8-9; and The Labour Force, Australia, Detailed, Quarterly (6291..55.3). 5`
Victoria s per capita gross State product was 4.2% below the national average in 8-9 Gross State product (GSP) per capita, 8-9 8 7 '$ (7-8 chain volumes) 6 5 4 3 Australia Source: ABS State Accounts (52.) 8-9, 6`
Victoria s below-average per capita GSP is the result of slightly belowaverage employment participation, hours worked and labour productivity 5 4 3 Sources of difference between per State or Territory GSP per capita and the national average, 8-9 % point contribution to difference in GSP per head from national average - - -3 Employment (as p.c. of population) Average hours worked (per person employed) Labour productivity (gross product per hour worked) Residual Source: ABS State Accounts (52.) 8-9, and Grattan Institute calculations. 7`
Victoria s labour productivity was about 1% below the national average in 8-9 Gross State product (GSP) per hour worked, 8-9 9 8 7-8 chain volume $ per hour worked 7 6 5 4 3 Australia Gross value added in industry Other components of GDP (P) Note: Gross value added in industry is the sum of GVA in each of the 19 industries in the Australia & New Zealand Standard Industrial Classification 6. Other components of GDP (P) are ownership of dwellings, indirect taxes less subsidies and the statistical discrepancy. Source: ABS State Accounts (52.) 8-9 and Grattan Institute calculations. 8`
Victoria s per capita gross value added in industry was 4.9% below the national average in 8-9 Components of the production-based measure of gross State product 8 7 '$ (7-8 chain volumes) 6 5 4 3 - Australia Gross value added in industry Ownership of dwellings Net indirect taxes Statistical discrepancy Source: ABS State Accounts (52.) 8-9, 9`
Components other than gross value added in industry have contributed a relatively large share of Victoria s GSP growth over the past five years 6 5 % pa Contributors to growth in production-based measure of gross State product 3-4 through 8-9 4 3 2 1-1 Australia Gross value added in industry Ownership of dwellings Net indirect taxes Statistical discrepancy Real gross State product Source: ABS State Accounts (52.) 8-9, `
Victoria s labour productivity growth rate has slowed over the past decade, but by less than in other States and less than the national average Labour productivity (GSP per hour worked) growth, 1993-94 to 8-9 4. % per annum 3.5 3. 2.5 2. 1.5 1..5. Australia 1993-94 to 1998-99 1998-99 to 3-4 3-4 to 8-9 Source: ABS State Accounts (52.) 8-9 and Grattan Institute calculations. 11`
But Victoria s productivity performance looks a little less impressive when expressed in terms of industry GVA (rather than GSP) per hour worked Labour productivity (GVA in industry per hour worked) growth, 1993-94 to 8-9 5. % per annum 4. 3. 2. 1.. -1. Australia 1993-94 to 1998-99 1998-99 to 3-4 3-4 to 8-9 Source: ABS State Accounts (52.) 8-9 and Grattan Institute calculations. 12`
Victorian GSP per hour worked has converged towards NSW although this seems largely due to changes in the wedge between GVA and GSP Victorian and New South Wales labour productivity as a p.c. of national average Gross State product per hour worked Gross value added in industry per hour worked 1 % of Australian average 1 % of Australian average 8 8 6 6 4 2 NSW 4 2 NSW 98 98 96 94 Victoria 96 94 Victoria 92 92 9 9 94 98 2 6 9 9 94 98 2 6 Note: Gross value added in industry is here the sum of GVA in each of the sectors shown above; it excludes GVA in ownership of dwellings as well as net indirect taxes and the statistical discrepancy, Source: ABS State Accounts (52.) 8-9 13`
Victoria has a slightly-below average share of high-productivity sectors and a slightly above-average share of low-productivity sectors Shares of gross value added in industry, ranked by Australia-wide labour productivity Gross value added per hour worked, Australia 8-9 ($) Share of gross value added in industry, 8-9 (%) Change in share of gross value added in industry, 3-4 to 8-9 (pc pts) Industry sector Australia Victoria NSW Australia Victoria NSW Mining 221. 8. 2.1 3.1.4 -.35.8 Financial & insurance services 165.3 11.7 13.8 16.4.86.65 1.55 Electricity, gas, water & waste services 112.9 2.7 3.3 2.3 -.16 -.21 -.17 Rental, hiring & real estate services 5.9 3.6 3.5 3.6 -.3 -.27 -.4 Information, media & telecommunications 86.4 3.4 4.4 4.2.9. -.27 Wholesale trade 71.3 5.3 6.8 5.3 -.2 -.25 -. All industries 55.1 Manufacturing 54.2.2 12.3 9.9-1.77-1.39-1.89 Administration & support services 54. 2.8 3.2 3.3 -.6.12 -.19 Transport, postal & warehousing services 53.8 5.9 5.1 6..26.44.27 Public administration & safety 52.8 6. 4.2 5.4.13 -..4 Professional, scientific & technical services 49.6 7. 7.8 8.2..18 -.27 Construction 43.5 8. 6.9 7.7.62.29 -. Agriculture, forestry & fishing 41.2 3.1 3.3 2.2 -.8 -.27.27 Health care & social assistance 38.8 6.6 6.7 6.7 -.26 -.15 -.19 Education & training 37.5 4.8 5.7 4.6.36.9.72 Art & recreation services 33.9 1. 1.1 1.1.8.8.13 Retail trade 3.7 5.3 5.4 5.1.26.36.4 Other services 28.1 2.2 2.1 2.2 -.26 -. -.28 Accommodation & food services 27. 2.6 2.3 2.8 -.15 -.5 -.5 Sources: ABS, Australian System of National Accounts (54.), State Accounts (52.), and The Labour Force, Australia, Detailed, Quarterly (6291..55.3; Grattan Institute calculations 14`
Victoria has a slightly-below average share of high-productivity sectors and a slightly above-average share of low-productivity sectors Labour productivity by industry - Australia, 8-9 Share of gross value added by industry, 8-9 Mining Finance & insrnce Electricity gas & water Rental, hiring & real estate Information, media & telecoms Wholesale trade All industries Manufacturing Admin & support services Transport, postal & warehousing services Public adminstration & safety Professional, scientific & technical services Construction Agriculture, forestry & fishing Health care & social assistance Education & training Art & recreation services Retail trade Accommodation and food services $ per hour 5 15 25 Mining Finance & insnce Electricity gas & water Rental, hiring & real estate Information, media & telecoms Wholesale trade Manufacturing Admin & support services Transport, etc services Public admin & safety Prof'l, scntfc & tech svces Construction Agriculture, forestry & fishing Health care & social assistance Education & training Art & recreation services Retail trade Accommodation and food services % 5 15 Australia Victoria Sources: ABS : Australian System of National Accounts (54.) and State Accounts (52.), and Grattan Institute calculations.. 15`
Changes in the structure of the Victorian economy over the past five years have marginally detracted from overall productivity growth Change in shares of gross value added in industry, 3-4 through 8-9 Victoria vs Australia Mining Finance & insurance Electricity gas & water Rental hiring & real estate IT, media & telecomms Wholesale trade NSW vs Australia Sectors with above-average labour productivity nation-wide In 8-9 Manufacturing Admin & support services Transport, postal etc Public admin & safety Prof, scientific & tech svces Construction Agriculture, forestry & fishing Health care & social assistance Education & training Art & recreation Retail trade Other services Accommodation & food Victoria Australia Sectors with below-average labour productivity nation-wide In 8-9 % pts NSW Australia % pts -2. -1.5-1. -.5..5 1. 1.5-2. -1.5-1. -.5..5 1. 1.5 2. Note: Gross value added in industry is here the sum of GVA in each of the sectors shown above; it excludes GVA in ownership of dwellings as well as net indirect taxes and the statistical discrepancy Sources: ABS : Australian System of National Accounts (54.) and State Accounts (52.), and Grattan Institute calculations.. 16`
Labour productivity is above the national average in 12 of 19 Victorian industry sectors accounting for 61% of Victorian gross value added Labour productivity in individual industry sectors Gross value added (GVA) per hour worked, 8-9 ($) GVA per hour worked as a p.c. of Australian average, 8-9 Average annual growth rate of (chain volume) GVA per hour worked, 3-4 to 8-9 (% pa) Industry sector Australia Victoria NSW Victoria NSW Australia Victoria NSW Mining 221. 229.5 148.2 3.8 67.1-6.5-7.9-8.2 Financial & insurance services 165.3 189.6 166.1 114.7.5 2. 1.3 2.4 Electricity, gas, water & waste services 112.9 134.1 7.1 118.7 94.9-5.2-6.9-1.2 Rental, hiring & real estate services 5.9 117.6 117. 111. 1.5.4 -.4 3.1 Information, media & telecommunications 86.4 92.4 87. 7..7 3.1 2.6 3.9 Wholesale trade 71.3 72.9 69.9 2.3 98. 2.1-2.4 2.5 Manufacturing 54.2 52.5 56. 96.9 3.4.5 1.7.1 Administration & support services 54. 58.4 61.4 8.1 113.7 3.5 4.1 2.8 Transport, postal & warehousing services 53.8 47.3 52.9 88. 98.2.4 -.1 1.1 Public administration & safety 52.8 47. 49.9 89. 94.4.3-1.1.6 Professional, scientific & technical services 49.6 49.6 53.1. 7.1-1.1-1.4 -.6 Construction 43.5 4.5 43.9 93.1.8. -.2.2 Agriculture, forestry & fishing 41.2 46.1 38.8 111.9 94.2 2.5 -.5 5.5 Health care & social assistance 38.8 38.7 39.5 99.8 1.7.1 1.8 1.4 Education & training 37.5 4.8 39. 8.8 3.9.2.1 1.8 Art & recreation services 33.9 29.5 39.2 87.1 115.6-1.1-1.2-4.2 Retail trade 3.7 32.3 29.3 5.3 95.4 2.3 2.9 1.4 Other services 28.1 28.6 27.6 1.7 98.4..5.1 Accommodation & food services 27. 24.6 27. 91.1 99.9 1.6 2.5 2.9 All industries 55.1 54.1 55.3 98.2.4.8.5 1.3 Sources: ABS, Australian System of National Accounts (54.), State Accounts (52.), and The Labour Force, Australia, Detailed, Quarterly (6291..55.3; Grattan Institute calculations 17`
Labour productivity is above the national average in 12 of 19 Victorian industry sectors accounting for 61% of Victorian gross value added Victorian labour productivity by industry as a proportion of national industry average, 8-9 Electricity, gas, water & waste svces Financial & insurance services Agriculture, forestry & fishing Rental, hiring & real estate services Education & training Administration & support services Info, media & telecommunications Retail trade Mining Wholesale trade Other services Professional, scientific & technical services Health care & social assistance Manufacturing Construction Accommodation & food services Public administration & safety Transport, postal & warehousing services Art & recreation services % of national average 4 6 8 1 14 Sources: ABS : Australian System of National Accounts (54.) and State Accounts (52.), and Grattan Institute calculations. 18`
Better-than-average productivity in specific Victorian industries roughly offsets the effect of unfavourable industry mix Contributions of industry-mix and industry-specific productivity performance to difference between overall Victorian and Australian labour productivity Contribution of share of hours worked in Victoria compared to national average 2 1-1 -2-3 -4 % pts Public admin. & safety Transport etc. Health care etc. Hospitality Mnfg Arts & recreation Prof & tech services Construction Wholesaling Other services Mining Retailing IT Agriculture etc. Electricty gas & water Education & training Rental, hiring & real estate Admin support services Finance & insurance -5 % pts -1. -.5..5 1. 1.5 2. Contribution of output per hour worked in Victoria compared to national average Sources: ABS : Australian System of National Accounts (54.) and State Accounts (52.), and Grattan Institute calculations. 19`
Victoria has had relatively few sectors in which labour productivity growth exceeded the corresponding national average over the past five years Labour productivity growth by industry, 3-4 through 8-9 Victoria vs Australia Admin & support services IT, media & telecomms Agriculture, forestry & fishing Retail trade Wholesale trade Finance & insurance Accommodation & food services NSW vs Australia Sectors with above-average labour productivity growth nation-wide, 3-4 through 8-9 Manufacturing Rental hiring & real estate Transport, postal etc Public admin & safety Education & training Health care & social assistance Other services Construction Prof, scientific & tech svces Art & recreation Electricity gas & water Mining Victoria Australia % pa Sectors with below-average labour productivity growth nation-wide, 3-4 through 8-9 NSW Australia % pa - -8-6 -4-2 2 4 6 - -8-6 -4-2 2 4 6 Note: Gross value added in industry is here the sum of GVA in each of the sectors shown above; it excludes GVA in ownership of dwellings as well as net indirect taxes and the statistical discrepancy Sources: ABS : Australian System of National Accounts (54.) and State Accounts (52.), and Grattan Institute calculations.. `
Industry mix and industry-specific productivity performance affect relative overall productivity of States & Territories in different ways Proportion of total gross value added derived from high productivity industries Proportion of total gross value added derived from industries where productivity exceeds the national average for that industry 5 45 % of total industry gross value added 9 % of total industry gross value added 4 35 National average 8 7 3 6 25 5 4 15 3 5 Sources: ABS State Accounts (52.) 8-9; and The Labour Force, Australia, Detailed, Quarterly (6291..55.3); and Grattan Institute calculations. High productivity industries are mining, finance & insurance, electricity gas & water, rental hiring & real estate services, information media & telecommunications services, and wholesale trade. 21`
Victoria s above- and below-average productivity sectors aren t too far away from the national averages Labour productivity of sectors in which productivity was above the corresponding national average in 8-9 Labour productivity of sectors in which productivity was below the corresponding national average in 8-9 17 16 % of corresponding national average % of total industry gross value added 15 95 14 9 13 1 85 1 8 9 75 8 7 Sources: ABS State Accounts (52.) 8-9; and The Labour Force, Australia, Detailed, Quarterly (6291..55.3); and Grattan Institute calculations. High productivity industries are mining, finance & insurance, electricity gas & water, rental hiring & real estate services, information media & telecommunications services, and wholesale trade. 22`
Productivity growth comes from three major sources Investment in physical and intangible capital plant and equipment, buildings and structures software, intellectual property Investment in human capital skills and education of the workforce formal (institution-based) and on-the-job learning Innovation new products new ways of producing existing products new ways of organizing and managing existing processes 23`
Relatively high levels of fixed capital investment tend to be associated, over time, with high levels of labour productivity Non-residential investment and labour productivity by State and Territory Gross product per hour worked 8-9 8 75 7 65 6 55 5 $ NSW SA Tas Vic ACT 16 18 22 24 26 28 3 Business and public fixed capital expenditure as a p.c. of gross State product 4-5 through 8-9 Qld WA NT % Source: ABS State Accounts (52.) 8-9; and Grattan Institute calculations. 24`
Victoria invests a relatively large share of its income considering that its mining sector is so small Fixed capital investment as a pc of gross product, 8-9 Business investment as a pc of gross product, 1994-95 to 8-9 3 % of GSP % 25 Public Business 18 Australia 16 14 Victoria 15 12 8 5 6 4 95 96 97 98 99 1 2 3 4 5 6 7 8 9 Source: ABS State Accounts (52.) 8-9 25`
There s a strong correlation between levels of educational attainment in the work force and labour productivity Labour productivity and educational attainment, 8-9 Gross product per hour worked 8-9 8 75 7 65 6 55 5 $ Tas SA WA Qld NT Vic NSW 5 55 6 65 7 75 P.c. of persons aged 25-64 with post- or non-school qualifications 8 ACT % Source: ABS State Accounts (52.) 8-9; Survey of Education and Work (6227.) May 9. 26`
A relatively high proportion of Victorians (though fewer than in NSW) have a post-secondary qualification Proportion of persons aged 25-64 with post-school qualifications By State and Territory, 8 Victoria and Australia, 1998-8 8 % 65 % 7 6 Advanced diploma/ Diploma or below Bachelors degree or higher 6 Australia Victoria 5 55 4 3 5 45 4 98 99 1 2 3 4 5 6 7 8 Source: ABS Social Trends (42.). 27`
More Victorians complete secondary education up to Year 12 than anywhere else except the ACT Apparent school retention rates, Years 7/8 to Year 12 By State and Territory, 8 Victoria and Australia, 1998-8 9 % 84 % 85 82 8 75 National average 8 78 Victoria 7 65 76 6 74 Australia 55 72 5 7 98 99 1 2 3 4 5 6 7 8 Source: ABS Social Trends (42.). 28`
Victorian schools do better than schools in most other States in achieving or exceeding minimum standards 45 4 35 3 25 15 5 5 4 3 % at or below national minimum standard National average Numeracy % at or below national minimum standard National average % of Year 9 students at or below minimum NAPLAN standards, 9 Reading 6 5 4 3 6 5 4 3 % at or below national minimum standard National average Writing % at or below national minimum standard National average Spelling 6 5 4 3 % at or below national minimum standard National average Grammar & punctuation Note: These charts show the proportion of school children achieving at or below the national minimum benchmark for each domain ; hence, crudely, the lower the figure the better. Source: National Assessment Program, NAPLAN Summary Report 9. 29`
An above-average proportion of Victorians are employed in high-skill occupations, and a roughly average proportion in low-skill ones Pc of workforce employed in highest-skill occupations, 8-9 Pc of workforce employed in lowest-skill occupations, 8-9 45 % 22 % 4 National average 35 18 3 National average 16 25 14 12 15 Source: ABS, Labour Force, Australia, Detailed, Quarterly (6291..55.3) 3`
Immigration is boosting Victoria s skill base Skilled immigrants as a p.c. of total settler arrivals By State and Territory, 8 Victoria and Australia, 1998-8 7 65 % 5 % Victoria 6 45 55 Australia 5 45 National average 4 4 35 35 3 3 25 25 98 99 1 2 3 4 5 6 7 8 Source: Department of Immigration and Multicultural Affairs, Settler Arrivals. 31`
Victorian businesses appear to have been a little less likely to engage in innovation than businesses in most other States and Territories 3 25 15 5 % of all businesses National average Business innovation, by State and Territory 6-7 New goods or services New operational processes 3 25 15 5 % of all businesses National average New organizational or managerial processes New marketing methods 25 15 5 % of all businesses National average 18 16 14 12 8 6 4 2 % of all businesses National average Source: ABS, Innovation in Australian Business (8158.) 6-7. 32`
although Victorian business spending on R&D is well above the national average Business spending on R&D, by State and Territory 7-8 1.8 % of gross State product 1.6 1.4 Mining Other sectors 1.2 1..8.6.4.2. Australia Sources: ABS, Research and Experimental Development (catalogue no. 84.), 7-8, Grattan Institute. 33`
Four insights from a recent McKinsey study Productivity of individual sectors matters more than sector mix the strongest-performing sectors vary from region to region what above regions have in common is that their largest sectors (whatever they are) maintain strong growth Services sector productivity and competitiveness is critical services sectors have accounted for almost all net jobs growth in high-income countries over the past two decades Government policies can strongly influence productivity and competitiveness in sectors not directly exposed to international trade or global competition regulation that facilitates business entry tends to increase competition and productivity flexible hiring laws and part-time employment arrangements correlate with higher employment and more rapid adjustment to change Competitiveness in new innovative sectors is not enough to boost economywide employment and growth these sectors are too small to make a difference to economy-wide growth access to talent and favourable demand conditions are more important than tax incentives or direct government involvement Source: McKinsey Global Institute, How to Compete and Grow: A Sector Guide to Policy (March ) 34`
Conclusions Victorian labour productivity is slightly below the national average, and (in particular) lower than in New South Wales This productivity gap is largely due to Victoria s economic structure Victoria has a below-average share of a number of high-productivity sectors (especially mining) and an above-average share of low-productivity sectors However this structural effect is partly offset by higher sector-specific labour productivity in sectors accounting for a majority of Victoria s economy The productivity gap between Victoria and the national average (and NSW) has narrowed over the past decade although the reasons for this narrowing are (unfortunately) difficult to identify from industry-level data, and instead reflect differences in the contributions of dwelling ownership, net indirect taxes and the statistical discrepancy to GSP growth There s not a lot that Victoria can pro-actively do about its industry structure Rather, policy should strive to enhance the productivity performance of the sectors which it has which will almost certainly require different approaches in different sectors and to improve further the economy-wide enablers of productivity growth education and training, the investment climate, the scope for competition, and the regulatory environment 35`