097/05
18 August 2005

Productivity growth in service industries

Information Technology is driving productivity growth, particularly in service industries according to an economic paper released today by the Minister for Communications, Information Technology and the Arts, Senator Helen Coonan.

The report deals with productivity growth between 1984–85 and 2001–02 across nine service industries and covers wholesale and retail trade, construction, electricity, water, transport, finance, hotels, restaurants and cultural/recreational services.

It shows that between 59 and 78 per cent of productivity growth can be attributed to technological factors and between 22 and 41 per cent to institutional reform.

“It is very important that government, business and community leaders understand that the use of information and communication technologies are a cornerstone of ongoing economic prosperity,” Senator Coonan said.

“While it is generally acknowledged that ICT has played some part in Australia’s recent good productivity growth performance, previous research leaves much of Australia’s recent productivity growth unexplained.

“Results published in this report confirm that the growth has been driven mainly by rapid advances in ICT,” Senator Coonan said.

Over the 17 years covered in this study, aggregate labour productivity of the service industries examined increased by 45 per cent.

“Because of its potential to meet some of the challenges associated with demographic change, further work will be undertaken to improve understanding of the long-term influence of ICT on the economy and society,” Senator Coonan said.

The report builds on the findings of a previous study, Productivity Growth in Australian Manufacturing, published by the National Office for the Information Economy in 2004.

More information is available online at: www.dcita.gov.au/ie

PRODUCTIVITY GROWTH IN SERVICE INDUSTRIES

This paper deals with productivity growth between 1984–85 and 2001–02 in market-oriented service industries. It covers wholesale and retail trade, construction, electricity, water, transport, finance, hotels, restaurants and cultural/recreational services. It excludes productivity growth in non-market oriented sectors such as education, health care and government services where Australian Bureau of Statistics (ABS) productivity estimates are not available. This report follows a similar publication by the National Office for the Information Economy in 2004 on Productivity Growth in Australian Manufacturing.

The report reflects the extensive interest in the economic literature and in policy circles in the drivers of productivity growth and in particular on the specific role of ICT in raising productivity. While it is generally acknowledged that ICT has played some part in Australia’s recent good productivity growth performance, previous research (based on growth accounting methods) leaves much of Australia’s recent productivity growth unexplained.

A major objective of this report and the earlier one on manufacturing is to show that much of this previously unexplained growth was driven by the rapid advances in ICT. Both reports indicate that ICT has had a much more significant direct influence on productivity growth than previously reported. According to the econometric estimates presented, after discounting for the effect of increased capital spending per worker, between 59 and 78 per cent of productivity growth can be attributed to technological factors and between 22 and 41 per cent to institutional-economic changes.

While the effects of microeconomic reforms and rising education standards were important, they were apparently less so than technological progress. The study found that microeconomic reforms had a particularly significant impact in infrastructure sectors that were subject to industry-specific competition reform measures. These include communications, electricity and water supply as well as rail, sea and air transport. In terms of net output, these infrastructure industries cover
21.8 per cent of the service industries examined.

Over the 17 years covered in this study, aggregate labour productivity of the service industries examined increased by 45 per cent. The study found wide disparities in productivity growth rates between sectors. The general pattern is that ICT intensive sectors (specifically communications, finance, electricity, water, wholesale trade, air and rail transport) recorded much higher labour productivity growth rates than less ICT intensive sectors (such as construction, retail trade, road transport, hotels and restaurants). Based on econometric inferences this pattern suggests that ICT was the main driver of productivity growth. Competition reforms might have stimulated investment and the adoption of new ICT and other technologies, but the study was unable to estimate separately the size of these indirect effects.