Productivity in manufacturing: measurement and interpretation

Industries Manufacturing Australia
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This paper examines recent productivity performance in Manufacturing, with particular focus on the causes of its decline. In particular, this paper:

  • analyses Multifactor productivity (MFP) change and its proximate causes (value added, labour and capital inputs) for Manufacturing as a whole
  • estimates MFP change and its components at the subsector level within Manufacturing
  • examines factors influencing the productivity performance of Manufacturing and three of its largest constituent subsectors (as they have contributed most to recent trends in aggregate performance).

Authored by Paula Barnes, Leo Soames, Cindy Li and Marcelo Munoz.

Key points:

  • Multifactor productivity (MFP) growth in Manufacturing was negative over the most recent complete productivity cycle (2003-04 to 2007-08), in contrast to the positive growth in the previous cycle. This large decline was atypical for Manufacturing, and since then MFP has continued to decline (although more slowly).
    • Manufacturing's MFP decline was a major contributor to flat market sector MFP.
  • There is no overarching systemic reason for the large decline. Rather, various subsector-specific factors, such as lags between investment and output; unmeasured increases in quality; and lower capacity utilisation all contributed. Some factors reflect temporary responses to changing competitive conditions.
    • Faster rates of input growth (capital and hours worked) and slower output (value added) growth were the 'proximate causes' of this Manufacturing MFP decline.
    • Petroleum, coal, chemical and rubber products (PCCR), Food, beverage and tobacco products (FBT), and Metal products (MP) collectively accounted for two-thirds of the decline between cycles. Influences on each subsector were diverse.
  • PCCR output declined in absolute terms over the most recent cycle (after growing over the previous cycle), and yet there was a large increase in capital investment.
    • Petroleum refineries invested to meet new environmental standards, but the improved fuel quality is not fully reflected in the output measure, and thus in MFP. Value added per unit of output also declined, as greater volumes of feedstock and refined fuel were imported in response to reduced output from domestic oilfields.
    • For plastic products, increased production by overseas firms with lower input costs and the appreciation of the Australian dollar led to strong import competition. Domestic production declined, leading to underutilised capacity. Higher demand for fertilisers and explosives led to very large investments to expand chemical production, but there was a lag before output increased.
  • Food and beverages output growth slowed, yet hours worked increased significantly.
    • Slower output growth was associated with a decline in exports and a loss of domestic market share for some products — reflecting input cost pressures, appreciation of the Australian dollar, and, in cases such as wine, drought.
    • Consumer preferences also drove changes in the composition of output that increased the input intensity of production — for example, there was growth in smaller scale, more labour intensive, non-factory bakeries.
    • But the decline in MFP in FBT may have been overstated due to challenges in measuring improved output quality and reductions in the capital stock.
  • Metal products was different, with faster output growth and even faster input growth.
    • Fabricated metals output grew strongly to meet increased demand from the Construction and Mining sectors.
    • Metal products was responsible for most of the capital growth in Manufacturing, largely to expand alumina refining capacity. However, the inevitable lag between investment and ensuing output led to lower measured productivity.
  • The MFP decline in Manufacturing has slowed in the current incomplete cycle. MFP growth in PCCR and FBT remains negative and it is marginally positive in MP.
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