Download GDP per capita and labour utilisation in Australia

GDP per capita and labour
utilisation in Australia
Emily Pye
Department of Industry, Innovation, Science,
Research and Tertiary Education
Working Paper 03-12
December 2012
Economic Conditions Section
Industry Policy and Economic Branch
Industry Innovation Division
Department of Industry, Innovation, Science, Research and Tertiary Education
Canberra
The author thanks the Economics Conditions Section and Richard Snabel for their
comments and support. The views expressed in this paper are the author’s and do
not necessarily reflect those of DIISRTE or the Australian Government.
Abstract
Gross domestic product (GDP) per capita is often used as a measure of wealth and
wellbeing in a country. Comparable to the combined growth of labour utilisation and
of labour productivity, the growth rate of GDP per capita can be used to compare
economic performance across countries and has been examined by many studies.
These measures vary between countries to indicate varying standards of living,
varying levels of technology, varying access to capital and cultural differences.
This paper attempts to establish how growth in labour utilisation and labour
productivity can affect growth in GDP per capita. This paper focuses on Australian
data for the period 1980 to 2011 and uses a number of labour market and
productivity indicators to establish a relationship between labour utilisation, labour
productivity and GDP per capita at the aggregate level and by industry.
ii
Contents
GDP per capita and labour utilisation in Australia........................................................................................................... i
Abstract ...................................................................................................................................................................... ii
Contents..................................................................................................................................................................... iii
GDP per capita and labour utilisation in Australia.......................................................................................................... 1
Introduction ................................................................................................................................................................ 1
Australian GDP per capita ...................................................................................................................................... 1
What is driving growth in GDP per capita? ............................................................................................................. 2
Labour utilisation ........................................................................................................................................................ 5
Australian labour utilisation..................................................................................................................................... 5
Trends in full time and part time work ..................................................................................................................... 7
Unemployment and underemployment................................................................................................................... 8
Participation rate and ratio of persons of working age............................................................................................ 9
Labour utilisation across industries ...................................................................................................................... 10
Labour utilisation and an aging population ........................................................................................................... 11
Labour productivity................................................................................................................................................... 12
Australian labour productivity ............................................................................................................................... 12
Labour productivity growth ................................................................................................................................... 12
Labour productivity by industry ............................................................................................................................. 15
Conclusion ................................................................................................................................................................. 1
References................................................................................................................................................................. 2
iii
GDP per capita and labour
utilisation in Australia
Emily Pye
Introduction
Gross domestic product (GDP) per capita is frequently used as a measure of wealth
and wellbeing in a country. Often described as a combination of growth in labour
utilisation and labour productivity, growth in GDP per capita can be used to compare
economic performance across countries and has been examined by many studies.
These measures vary between countries to indicate varying standards of living,
varying levels of technology, varying access to capital and cultural differences.
This paper attempts to examine how labour utilisation and labour productivity have
grown in Australia over the past three decades and establish how these factors have
affected Australia’s GDP per capita.
GDP per capita
GDP per capita is a measure of the total market value of goods and services
produced by an economy, on a per person basis. It is the traditional measure of
wellbeing and is used as a proxy measure of living standards. It is not a perfect
measure, however, as wellbeing includes more than material living standards.
The Australian Bureau of statistics defines GDP per capita as the ratio of the chain
1
volume estimate of GDP to an estimate of the resident Australian population .
GDP per capita is only one measure of economic prosperity in a country. There are
many other measures, both at the aggregate level and at more focused levels. Some
examples of indices created to explain the disparities between countries include
gross national income, the unemployment rate, social expenditure, and for
international comparison, the United Nations Human Development Index and the
World Economic Forum Global Gender Gap Index.
An OECD working paper suggests ‘low levels of output per head may indicate
opportunities for catch up, and the breakdown into proximate causes may give hints
2
as to the underlying factors behind below-average performance’ .
Australian GDP per capita
The Treasury projects Australian real GDP per capita growth for the next 40 years to
2050 to slow to 1.5 per cent per annum, from 1.9 per cent per annum over the
3
previous 40 years to 2010 . An aging population is cited as the major driving factor
causing this decline. An aging population will reduce the proportion of the population
of working age, thus reducing the labour force participation rate.
The World Bank Global Economic Prospects publication expects GDP per capita in
Australia to grow by 2.6 per cent and 3.2 per cent in 2011 and 2012 respectively.
These rates are above the aggregate growth rate expected for the world and the
expected growth rate of high income countries, yet are not as high as the growth
rates expected for developing countries.
Chart 1 illustrates the growth of Australian GDP per capita over the past 40 years.
1 ABS Cat No. 5206.0.
2
3
Scarpetta et al, 2000.
Treasury, 2010.
Chart 1: Australian GDP per capita
Source: ABS Cat. No. 5206.0 Australian National Accounts.
The chart shows volatile growth in GDP per capita during the 1980s with growth
averaging slightly less than 2 per cent. There was then a significant fall in growth in
the early 1990s, which is consistent with the global downturn and stock market
crashes. Growth recovered for the rest of the decade, averaging over 2 per cent, and
for much of the 2000s was consistently around 1.6 per cent. Another fall in growth
can be seen in the late 2000s, coinciding with the global downturn following on from
the global financial crisis.
What is driving growth in GDP per capita?
Growth in GDP per capita is often used as the measure of economic progress of a
country, indicating the rate at which living standards are changing. Growth of GDP
per capita can be described as a combination of the growth of labour utilisation and
the growth of labour productivity. This explanation suggests that economic growth is
the result of increasing hours worked by increasing employment and/or individuals
working more hours and that these hours are more productive.
Labour productivity also reflects the impact of increased capital investment as well as
the impacts of skills, technology and management practices and the firm level and
the impacts of transport and infrastructure at the aggregate level. Labour productivity
is a residual measure with captures other productivity drivers in addition to actual
labour productivity. The impact of these factors also shows the effect of innovation on
growth. Innovation can be defined as the implementation of a significantly improved
product or process within a firm to generate economic value. The Productivity
Commission and the OECD both note that innovation is key to enhanced productivity
growth.
In the 2010 Intergenerational Report, economic growth is described as the
combination of three factors, population, participation and productivity. The following
diagram shows more detail behind the three factors.
2
Figure 1: Growing the economy from Treasury’s
Intergenerational Report 2010
Source: Australian Treasury’s Intergenerational Report 2010.
The OECD paper Economic Growth in the OECD Area: Recent Trends at the
4
Aggregate and Sectoral Level explains that growth in GDP per capita is driven by 5
factors:
-
Changes in the ratio working age persons to the total population
-
Changes in the labour force participation rate
-
Changes in the employment rate
-
Changes in the number of hours worked per person employed
-
Changes in labour productivity, measured as GDP per hour worked.
Van Ark and McGuckin (1999) also use the same decomposition of GDP per capita
growth in their paper International comparisons of labour productivity and per capita
income to explain the differences in per capita income between countries.
Kacker and Ianchovichina (2005) note that ‘there are some notable differences
across developing countries and regions’. The neoclassical model used in this World
Bank paper asserts that a country’s initial level of per capita income, or GDP per
capita, is not correlated to its growth rate. That is, based on this model, developing
countries will not necessarily have higher growth rates compared to developed
nations. Furthermore, countries have different growth rates as they move towards
their own long run equilibrium that is constructed from their specific rates of capital,
population and technology.
The World Bank’s Global Economic Prospects 2012 includes forecasts of real GDP
growth for 2012, 2013 and 2014. These forecasts show the difference GDP per
capita growth expectations in developing countries than developed or high income
countries.
4
Scarpetta et al, 2000.
3
Table 1: World Bank forecasts of real GDP growth
(2005 PPP weights, percentage growth)
Area
World
High income
+
Australia
Developing countries
+
2011
2.7
1.6
2.9
6.1
2012
2.5
1.4
3.5
5.3
2013
3.0
1.9
4.0
5.9
2014
3.3
2.3
n/a
3.0
Australian data is from the June 2011 release.
Source: Global Economic Prospects: Managing growth in a volatile world, The World Bank,
June 2012.
The forecasted GDP per capita growth for Australia shows it to be slightly higher than
the weighted average of the high income countries and the world average but not
nearly as high as the expected growth rates for developing countries.
4
Labour utilisation
Growth in labour utilisation can indicate a move towards more labour intensive work
practices, or growth in a sector that is particularly labour intensive. Labour utilisation
can also be affected by trends developing towards part-time and casual work as firms
become more flexible towards working arrangements. Work/life balance is often
citied as reason for lower labour utilisation in developed countries where leisure time
is highly valued. The ABS notes ‘Rising living standards depend not only on
productivity growth but also on the average hours worked by each member of
5
society’ . Labour utilisation in an economy can be estimated by the number of hours
worked at the per capita or aggregate level.
The ABS provides a number of measures of labour utilisation in the Australian
economy, including aggregate monthly hours worked by employment status and sex,
and by state. In addition, the ABS quarterly detailed labour force publication reports
the number of actual hours worked with breakdowns including, industry, occupation,
status in employment and sex. This paper uses aggregate monthly hours worked to
construct aggregate hours worked per year and subsequently the annual percentage
growth in labour utilisation.
Australian labour utilisation
The early industrial history of Australia and comparatively low working hours of the
6
time illustrated Australia as a ‘workers paradise’ . This is cited as the result of a
‘highly unusual system of labour regulation’ compared to other developed
economies. The combination of an influential labour movement with social and
industrial regulation led to higher wages and limitations on long hours of work.
Campbell (2005) notes that ‘in contrast to the past, the working-time profile in
Australia today is noteworthy for relatively long working hours’. This observation is
based primarily on official labour force data and sees growth in unpaid overtime as
the main factor behind the increase in the proportion of full-time employees working
longer hours.
In addition, Chesters (2010) asserts that there was little if any change in usual hours
worked in Australia during the global financial crisis in her paper The Global Financial
Crisis in Australia. Those who were self employed in the period 2006 to 2008 did
record a slight decrease in usual hours worked while employees reported working
more hours during this period than previously.
7
The ABS publishes data on usual hours worked in its Labour Force Survey which
can be used to approximate the working hours of Australians. Chart 2 indicates the
average monthly and yearly hours worked by an employed person.
5
OECD 2004.
6
Campbell, 2005.
7
ABS Cat No.s 6202.0, 6291.0.55.001 and 6291.0.55.003.
5
Chart 2: Monthly and yearly hours worked per employed
person
Source: Based on ABS Cat. No. 6202.0 Labour Force.
The chart shows that in 1979, at the start of the series, employed persons worked
around 153 hours per month. In 2010, this number has fallen to 141 hours per month
for all employed persons. The overall trend visible in both the monthly and yearly
series is that of a general decline in working hours.
This data includes both full time and part time employed persons, the effect of part
time workers on labour utilisation is discussed further in this paper.
The following chart indicates the year-on-year percentage change of annual hours
worked by employed persons. It shows that there are several periods of sharp
decline in labour utilisation.
Chart 3: Year on year growth of annual hours worked per
employed person
Source: Based on ABS Cat. No. 6202.0 Labour Force.
The early 1980s, early 1990s and early 2000s all show marked declines in labour
utilisation. These periods align with periods of downturn in the Australian and world
economies. They also align with periods of slower growth in GDP per capita. This
6
may be the result of employers offering full time workers fewer hours rather than
making them redundant in times of economic downturn.
8
The IMF notes that Australia’s strong performance in the 1990s was ‘attributable to
both faster growth in hours worked and to a pickup in labour productivity, capital
productivity and total factor productivity growth’. Further analysis by the IMF also
found that structural reforms at this time did have a significant positive effect on
productivity growth in the long run.
Trends in full time and part time work
Australia is seeing an increase in the proportion of part time workers in the labour
force. Jefferson and Preston 2010 acknowledge that continued shift to part time
employment has remained as a long term trend through the short term fluctuations in
Australia’s economic performance.
Chart 4: Australian employment—total, full time, part time
Source: ABS Cat. No. 6202.0 Labour Force.
There could be many explanations for the marked increase in the proportion of
employed persons who work part time. It could be the result of more women entering
the workforce and wishing to work part time to manage their family duties, or the
availability of more part time jobs in the labour market, changes to workplace laws or
an overall change of preference of workers. The reason behind the trend is not of as
much interest to this paper as the effect on labour utilisation across the economy and
by extension, the effect on growth of GDP per capita.
8
IMF 1999.
7
Chart 5: Proportion of full time and part time persons in
Australian employment
Source: ABS Cat. No. 6202.0 Labour Force.
When considering labour utilisation, an increase in part time workers who were
previously unemployed will increase the overall number of hours worked at the
aggregate level and thus increase output. This must be taken into account when
looking at hours worked per employed person, as the part time hours will appear to
drag down labour utilisation. In addition, workers who were previously employed on a
full time basis moving to part time work will cause labour utilisation to decrease.
Unemployment and underemployment
The ABS defines underemployment as ‘part-time workers who want, and are
available for more hours of work than they currently have, and full-time workers who
worked part-time hours, during the reference week for economic reasons (such as
9
being stood down or insufficient work being available)’ . The ABS notes that
underemployed workers in an economy are an important component of underutilised
labour resources.
Over three quarters of a million part time workers were underemployed in September
2011, according to the ABS. An underemployment rate of 7 per cent was reported in
September 2011, indicating that 7 per cent of the labour force was working fewer
hours per week than they would like to.
There is the potential to increase the aggregate hours worked in the economy if there
was work for these underemployed workers. An increase in aggregate hours worked
in the economy could in turn increase GDP per capita, if productivity remains
constant.
9
ABS Cat No. 6265.0.
8
Chart 6: Unemployment and underemployment rates
Source: ABS Cat. No. 6202.0 Labour Force.
It is evident from Chart 6 that the unemployment rate has been trending downwards
while the underemployment rate has been trending upwards. This shows that more
people are employed but that an increasing number of employed persons are
working fewer hours than they would like. This could be due to a change in the type
of jobs available in the economy, changes in workplace laws or a change in the
preferences of workers.
Chart 6 also reveals an interesting change in the behaviour of the unemployment rate
and the underemployment rate around 2000. Prior to 2000, the unemployment rate
has been greater than the underemployment rate. However, post 2000, the
unemployment rate is lower, reflecting structural change in the labour market, in
particular the shift from full time to part time work.
Jefferson and Preston (2010) observe that after the global financial crisis there were
ongoing “relatively high rates of labour utilisation” . They identify uneven
development or ongoing structural change in the labour market towards less secure
forms of employment as contributing factors to high rates of labour utilisation and the
shift towards part time employment.
Participation rate and ratio of persons of working age
10
The aforementioned OECD paper also notes the effect of the participation rate on
growth of GDP per capita, including it as one of the five components listed earlier in
this paper that contribute to GDP per capita growth.
The Australian participation rate indicates that there is a high proportion of the
population engaged in the labour force, whether they are currently fully employed or
not. The participation rate has shown slow, and sometimes mixed growth over the
past three decades as seen in Chart 7. The 2010 Intergenerational Report notes that
the labour force participation rate for people aged 15 and over is projected to fall over
the next 40 years to 2050.
10
Scaroetti et al, 2000.
9
Chart 7: Participation rates in Australia by age group
Source: Based on ABS Cat. No. 3101.0 Australian Demographic Statistics and 6202.0 Labour
Force.
Labour utilisation across industries
A comparison of hours worked per employed person and value added by industry
shows that labour utilisation varies across industries. As seen in Chart 8, some
industries have much lower labour utilisation, such as accommodation and food
services, and retail trade, compared to other industries which have much higher
labour utilisation, such as mining and agriculture. This could be explained by the
different capital and labour ratios between industries. Labour utilisation typically has
an inverse relationship with capital intensity—the proportion of capital used in
production.
10
Chart 8: Labour utilisation and industry value added by
industry in 2011
Source: ABS Cat. No.s 5206.0 National Accounts and 6202.0 Labour Force.
These discrepancies could be caused by higher numbers of part time workers in
some industries. The mining industry has work schedules that are very different to a
9 to 5 office work environment more common to subsectors of the services industry.
Labour utilisation and an aging population
It is widely recognised that Australia, like most developed nations, is facing the
problem of an aging population. The 2010 Intergenerational Report notes that ‘steps
to improve Australia’s participation rate will minimise the impact of an ageing
population’ and that ‘a growing population assists in managing the pressures of an
ageing population and provides the skills needed for continued economic growth’.
Forecasts from the Productivity Commission’s Economic Implications of an Ageing
Australia indicate that both participation rates and average weekly hours worked per
employed are set to decline. The report shows that aggregate participation rates in
Australia are expected be approximately 56 per cent by 2044–45, around 7
percentage points lower that current levels. The decline in average weekly hours
worked per employee is cited as due to the ‘rising incidence of part-time workers
generally and the increasing labour market share of older workers, who have a
greater tendency to work part-time than others’. Although there are positive effects
on the unemployment rate with an ageing population, the Productivity Commission
believes that these will be far outweighed by the negative effects on participation and
average hours worked.
11
Labour productivity
Labour productivity is the most commonly used measure of productivity, showing the
relationship between changes in output and changes in labour inputs. Growth in
labour productivity can indicate a shift towards greater use of capital intensive
methods and/or a decrease in the employment of low-productivity workers. Pilat
(1996) asserts in his paper on labour productivity in OECD countries that ‘labour
11
productivity is the most important determinant of a country’s income level’ .
Economic growth theory suggests that in the long term, productivity is what
determines living standards. As previously discussed, growth in GDP per hour
worked, or labour productivity growth, in conjunction with labour utilisation growth,
drive growth in GDP per capita.
Australian labour productivity
Labour productivity in Australia has experienced strong growth since the 1980s. The
2010 Intergenerational Report notes that labour productivity over the past four
decades has accounted for most of the growth in real GDP per capita.
As shown in Chart 9, there is a notable decline in growth in the mid 1980s and flatter
growth for most of the 2000s. Productivity also appears to be tapering off in recent
years.
Chart 9: Australian labour productivity 1980–2011
Source: Based on ABS Cat. No.s 5206.0 National Accounts and 6202.0 Labour Force.
Labour productivity growth
Rahman et al (2009) note in their paper on trends in Australian productivity that ‘trend
productivity grew markedly during the 1990s — particularly, it was much stronger
during the late 1990s than was the case earlier. Further, trend productivity growth
appears to have weakened since the beginning of this decade’. Based on cyclical
fluctuations and productivity growth cycles, in this paper 1.75 per cent is considered
a benchmark for the growth rate of productivity. The trend of labour productivity
growth around this benchmark can be seen in Chart 10.
11
Pilat, 1996.
12
Chart 10: Growth in labour productivity
Source: ABS Cat. No.s 5206.0 National Accounts; 6202.0 Labour Force; and Rahman, Stephan
and Tunny (2009).
There are periods of lower productivity growth than the benchmark and also lower
than the surrounding years. In particular, the mid 1980s and the 2000s show lower,
and sometimes negative, productivity growth compared to other years.
Equally, there are periods that show particularly high productivity growth, such as the
early 1980s and late 1990s to early 2000s. These surges could be the result of
recovery from economic downturns. Rahman et al (2009) note ‘a number of
conjectures have been made about Australia’s recent productivity experiences,’ and
lists opening to international trade, adoptions of information and communication
technologies and increased research and development activity in the 1990s, as the
drivers of productivity during that time.
Equally, there are differences in the average annual growth rates for the past five
productivity cycles, as shown in Chart 11. The productivity cycles used in this paper
reflect those used by the ABS and the Productivity Commission. Productivity data is
inherently volatile and cyclical and so the ABS has calculated productivity cycles to
reflect the peaks and troughs in productivity growth. It can be expected that
calculating annual average growth rates across productivity cycles would smooth any
volatility experienced during the cycle but also risks removing some of the activity
during the period. Also, the paper assumes that the periods of the productivity cycles
are consistent across industries which may not be the case.
13
Chart 11: Average annual growth rates of labour
productivity, by productivity cycle
Source: ABS Cat. No.s 5206.0 National Accounts; 6202.0 Labour Force; and author
calculations.
Average annual growth rates do show that there was an elevated productivity growth
in the productivity cycles 1989–94, 1994–99 and 1999–2004.The most recent three
productivity cycles shown in the chart suggest slowly falling productivity, measured
as GDP per hour worked. Although the growth rate seen in the 2004–08 productivity
cycle is lower than that of the three previous, it is higher than the average growth rate
of the 1985–89 productivity cycle.
Ewing et al (2007) note that while long term productivity drivers can be challenging,
‘understanding short term changes is particularly difficult’. Ewing et al also note that
‘after growing rapidly during the 1990s, trend productivity growth slowed in the
current decade’. Their analysis goes on to separate the market and non-market
sectors to examine the growth in labour productivity in separate parts of the
economy. It is found that these different sectors have experienced varying labour
productivity growth. The different contributions of sectors is replicated and discussed
further in the labour productivity by industry section of this paper.
Valadkhani conducted a study in 2003 to examine the sources of aggregate labour
productivity growth in the period 1970 to 2001. Based on empirical estimates, this
study found that policies aimed at promoting investment, trade openness,
international competitiveness and wage negotiations will improve labour productivity
in the long term. In the short term, most of these factors were also found to make
contributions to labour productivity, with the exception of labour reforms which were
found to require more time to have an impact. Valadkhani (2003) also goes further to
suggest that for productivity growth to remain strong in the future ‘the economy
should invest more in human capital, physical and information and
telecommunications technology’.
In a speech to the Committee for Economic Development of Australia in 2001, David
Gruen makes note of the much suggested explanation for productivity growth—that
improved performance of productivity growth is the result of microeconomic reforms
implemented since the 1970s. He goes on to dispute this explanation, noting that
productivity numbers are volatile and that microeconomic reform should enhance
productivity growth yet we do not know for how long. Also, Gruen mentions a number
of factors that could also have enhanced productivity growth over this period, namely,
a fall of barriers to international trade and growth in the technology sector.
14
This view is echoed by Quiggin (2001) who takes a sceptical view on the effects of
structural reforms on labour productivity growth. Quiggin examines empirical
evidence behind reforms such as labour market reform, financial sector reform and
trade reform, and finds that there is no empirical evidence to support the claim that
microeconomic reform was responsible for improvements in productivity.
In the 2010 Intergenerational Report, productivity growth is expected to be consistent
with the average annual growth rate of the previous 30 years, that is 1.6 per cent per
annum. It is noted that it is particularly difficult to estimate productivity growth over
the long term due to historical variation and difficulties in measuring productivity itself.
It is a widely discussed assertion that with an aging population in Australia and
consequently falling participation rates, productivity growth will be the key to driving
future growth in the Australian economy.
Labour productivity by industry
As would be expected, different industries have different levels of labour productivity.
Ewing et al (2007) observe that there are different rates of productivity growth for the
market and non-market sectors of the economy. In particular, they note ‘much of the
slowdown in productivity in recent years is due to low productivity growth overall in
2004–05, and low productivity growth in the non-market sector…in 2005–06’.
As illustrated in Chart 11, the different sectors of the economy have experienced
different rates of growth in labour productivity over the past 25 years. there are
measurement problems associated with productivity in the services industry. It is
difficult to measure the output of non-market subsectors of services industry that do
not have tangible output, such as education and health. It follows then, that labour
productivity in these subsectors is very difficult to estimate given it is based on output
per hour worked. This will result in underestimating labour productivity growth in
these subsectors.
Chart 12: Average decade growth rates of labour
productivity by industry
Source: ABS Cat. No.s 5206.0 National Accounts; 6202.0 Labour Force; and author
calculations.
Disaggregating the sectors of the economy further, in Chart 13, there are two sectors
in particular that can be described as outliers. Mining and financial and insurance
services, both with high levels of industry value added, show much higher levels of
labour productivity than any other sector. This result highlights a problem with
measures of labour productivity. Typically, labour productivity does not take into
consideration the level of capital intensity, that is the relative weight of labour and
capital inputs. It is likely that the mining and financial and insurance services sectors’
15
high capital intensity is the explanation for the higher levels of labour productivity
shown in chart 12.
Chart 13: IVA and labour productivity by industry in 2011
Source: ABS Cat. No.s 5206.0 National Accounts and 6202.0 Labour Force.
16
Conclusion
It is widely recognised that growth in GDP per capita is driven by growth in labour
utilisation and growth in labour productivity. It follows that to increase the growth in
GDP per capita, a commonly used measure of wellbeing, growth in either labour
utilisation or labour productivity is required. This approach could have unintended
policy implications, such as lowering productivity as less productive workers are
employed, or increasing wage costs leading to capital substitution. This paper serves
as a starting point for further research into the drivers of GDP per capita growth, the
implications of changes in these drivers, and the suitability of this type of analysis for
various industry sectors.
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