The analysis of labour productivity in the Irish economy is extended in this chapter by decomposing labour productivity growth into the contributions from capital deepening and Multifactor Productivity (MFP). Capital Deepening is the growth in capital services per hour worked, where capital services are a measure of the flow of productive services from capital assets such as Factories, Machinery and Equipment and Intangible Assets. MFP attempts to measure the combined efficiency with which labour and capital are used, while also capturing all other effects not measured by labour hours or capital services, such as changes in organisational behaviour like increased remote working.
Capital services in the Irish economy are highly influenced by intangible assets such as intellectual property products (IPP), particularly in the foreign-dominated sectors of ICT and Manufacturing: Foreign. As such, the contribution of capital deepening to labour productivity growth is decomposed into its Tangible[1] and Intangible components. These indicators enhance the basic measure of labour productivity presented in the previous chapter. To give further insight, Table 3.1 is included, showing the relationship between the different inputs of labour productivity, tangible and intangible capital deepening and MFP for the ten-year period.
[1] Tangible includes the asset categories: Cultivated assets, Machinery and Equipment, Transport, Other Buildings and Structures and Dwellings.
| X-axis label | Multifactor Productivity | Tangible Capital Deepening | Intangible Capital Deepening | Labour Productivity |
|---|---|---|---|---|
| Foreign Sector | 11.8 | 0.2 | 6.2 | 18.2 |
| Total Economy | 3.8 | 2.8 | 7.5 | 14.1 |
| Domestic and Other Sector | -4.5 | 4.3 | 0.9 | 0.7 |
Source publication: National Income and Expenditure 2020
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Figure 3.1 decomposes labour productivity growth across the Foreign and Domestic and Other sectors in the economy as well as the total economy in 2020. Labour productivity in the Foreign sector grew by 18.2% and was largely explained by MFP growth of 11.8% and an intangible capital deepening contribution of 6%. In the Domestic and Other sector, labour productivity grew by just 0.7% in 2020. In stark contrast to the Foreign sector, this was largely explained by tangible capital deepening (4.3%), while MFP fell by 4.5%. As explained in Chapter 2, the strong labour productivity growth of 14.1% for the total economy was largely driven by the highly productive foreign sectors rather than the domestic-facing sectors.
| X-axis label | Multifactor Productivity | Tangible Capital Deepening | Intangible Capital Deepening | Labour Productivity |
|---|---|---|---|---|
| Mining & Quarrying (B) | 65.4 | 3 | 1 | 69.4 |
| Arts, Entertainment & Recreation (R) | 0.7 | 14.5 | 9.2 | 24.4 |
| Manufacturing:Foreign | 23.7 | 0.3 | -2.1 | 21.9 |
| Electricity, Gas & Steam (D) | 2.7 | 8.4 | 2 | 13 |
| Construction (F) | 1.2 | 10.1 | 0.2 | 11.5 |
| Information and Communications (J) | -11.5 | 0.1 | 22 | 10.6 |
| Human Health & Social Work (Q) | 3.5 | 0.5 | 0.2 | 4.3 |
| Agriculture, Forestry & Fishing (A) | 0.9 | 2.4 | 0 | 3.3 |
| Education (P) | 1.6 | 0.2 | 0.3 | 2.1 |
| Public Administration & Defence (O) | 1.7 | -0.5 | 0.1 | 1.4 |
| Other Service Activities (S) | -0.7 | 1.9 | 0 | 1.2 |
| Professional, Scientific & Techical Activities (M) | 6 | 0.3 | -5.9 | 0.3 |
| Wholesale & Retail (G) | -8.3 | 1.2 | 6.6 | -0.5 |
| Administrative & Support Service Activities (N) | -12.9 | 6.8 | -0.3 | -6.4 |
| Manufacturing: Domestic & Other Sectors | -7.1 | 2 | -2.1 | -7.2 |
| Accommodation & Food Service Activities (I) | -20.5 | 11.2 | 0.2 | -9 |
| Water Supply, Sewerage & Waste Management (E) | -10.7 | -1.6 | -0.1 | -12.3 |
| Real Estate Activities (L) | -4.2 | -9.4 | 0 | -13.6 |
| Financial & Insurance Activities (K) | -15.3 | -2 | -0.4 | -17.7 |
| Transportation & Storage (H) | -57.1 | -0.1 | 1.1 | -56 |
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Labour productivity growth for most sectors in the economy in 2020 was driven by changes in MFP rather than the contributions of tangible and intangible capital deepening. The largest increases in MFP were seen in Mining & Quarrying (65.4%) and Manufacturing Foreign (23.7%), while there was a large reduction in MFP in Transport (-57.1%). Intangible capital deepening made significant contributions to labour productivity growth in ICT (22%), Arts (9.2%), Wholesale & Retail (6.6%) and Professional, Scientific & Technical Activities (-5.9%). Tangible capital deepening was only significant in explaining labour productivity growth for domestic sectors such as Arts (14.5%), Accommodation & Food (11.2%), Construction (10.1%) and Real Estate (-9.4%).
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Figure 3.3 illustrates the differences in the sources of labour productivity between the foreign-dominated and domestic sectors in the economy in 2020. The graph shows capital services on the x-axis, hours worked on the y-axis and labour productivity by the size of the bubbles. A typical feature of the Irish economy is that the most productive sectors tend to be extremely capital-intensive, with high capital services and relatively low hours worked (bottom right of the graph). These sectors are Manufacturing: Foreign (C_F) and ICT (J). The less productive sectors tend to be domestic sectors with higher hours worked and fewer capital services (top left of graph).
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Removing the foreign-dominated sectors from the previous graph highlights that the domestic economy also had significant variability in hours worked and capital services. This reveals several distinct groupings of sectors with similar labour productivity results. For example, the more productive Manufacturing: Domestic, Finance and Professional & Scientific sectors all had relatively similar hours worked and capital services.
| Timeperiod | Tangible Capital Deepening | Intangible Capital Deepening | Multifactor Productivity | Labour Productivity |
|---|---|---|---|---|
| 2011 | 1.27256439404442 | 0.675796715083508 | 0.138091367753817 | 2.08645247688174 |
| 2012 | 0.85027548854528 | 1.55511928073258 | -4.07219658411751 | -1.66680181483965 |
| 2013 | 0.282105789739528 | 0.0298544750241708 | -2.12594799680226 | -1.81398773203856 |
| 2014 | 1.24298002589967 | 0.83092434818669 | 1.81857949216118 | 3.89248386624754 |
| 2015 | -0.159722280495531 | 47.3019274474179 | -28.6803498313326 | 18.4618553355898 |
| 2016 | 0.311559263731163 | 5.46722566140608 | -7.71589050063602 | -1.93710557549878 |
| 2017 | 0.0290791807137374 | 2.83836160276219 | 0.0707863203268898 | 2.93822710380282 |
| 2018 | 1.12686788985799 | -2.18777197965189 | 7.18485179131458 | 6.12394770152069 |
| 2019 | 0.856958421747459 | 9.02647786750237 | -6.96054417739384 | 2.92289211185598 |
| 2020 | 2.765156030244 | 7.5140608273061 | 3.80782010324732 | 14.0870369607974 |
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Changes in intangible capital deepening were the major drivers of labour productivity growth in the total economy over the period 2011-2020. In 2020, the largest component contributing to the labour productivity growth of 14.1% was the intangible capital deepening contribution of 7.5%. This result was almost entirely due to the ICT sector as seen in Figure 3.2. The number of large and highly productive companies in these sectors are responsible for the disproportionate share of intangible capital deepening in the economy.
| X-axis label | Tangible Capital Deepening | Intangible Capital Deepening | Multifactor Productivity | Labour Productivity |
|---|---|---|---|---|
| 2000-2010 | 1.9 | 1.4 | -0.5 | 2.8 |
| 2011-2020 | 0.9 | 7.3 | -3.7 | 4.5 |
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Figure 3.6 compares the average annual labour productivity growth rate for the period 2000-2010 to the average annual growth rate from 2011-2020, decomposed into the contributions from capital deepening and MFP growth. Comparing average growth in the two periods, labour productivity grew by 4.5% per year between 2011 and 2020 and by 2.8% per year between 2000-2010. Multifactor productivity decreased in both periods, falling by 0.5% per year between 2000-2010 and a much larger 3.7% per year for the period 2011-2020.
While intangible capital deepening was the significant driver of labour productivity growth for the period 2011-2020, this was not the case for the previous ten years. Between 2011-2020, the average contribution of intangible capital deepening was 7.3%, compared to 1.4% for 2000-2010. The stronger growth in the more recent period was due to imports of intellectual property, particularly since 2015. At the same time, the average contribution of tangible capital deepening fell from 1.9% to 0.9%, illustrating the huge changes in the structure of the Irish economy between the two periods.
| X-axis label | Multifactor Productivity | Tangible Capital Deepening | Intangible Capital Deepening | Labour Productivity |
|---|---|---|---|---|
| Manufacturing:Foreign | -7.3 | 0.7 | 17 | 10.3 |
| Information and Communications (J) | -4.7 | 0.6 | 13 | 9 |
| Agriculture, Forestry & Fishing (A) | 5.3 | 0.6 | 0 | 5.9 |
| Arts, Entertainment & Recreation (R) | 1.8 | 1.6 | 1.5 | 4.8 |
| Administrative & Support Service Activities (N) | -2.9 | 6.3 | 0.3 | 3.8 |
| Electricity, Gas & Steam (D) | 1.5 | 1.1 | 0.5 | 3.1 |
| Professional, Scientific & Techical Activities (M) | -2.8 | -0.1 | 5.5 | 2.7 |
| Wholesale & Retail (G) | 0 | 0.2 | 1.6 | 1.8 |
| Mining & Quarrying (B) | 5.9 | -0.5 | -4 | 1.3 |
| Manufacturing: Domestic & Other Sectors | 0.8 | 0.9 | -0.5 | 1.2 |
| Human Health & Social Work (Q) | 0.4 | 0.1 | 0.1 | 0.5 |
| Water Supply, Sewerage & Waste Management € | 0.9 | -0.4 | 0 | 0.5 |
| Real Estate Activities (L) | 0.3 | -0.2 | 0 | 0.2 |
| Public Administration & Defence (O) | 0.3 | -0.3 | -0.1 | -0.1 |
| Construction (F) | -0.3 | 0 | 0 | -0.2 |
| Education (P) | -0.1 | -0.1 | -0.2 | -0.4 |
| Other Service Activities (S) | -0.3 | -0.2 | 0 | -0.5 |
| Accommodation & Food Service Activities (I) | -1.7 | 1.1 | 0 | -0.6 |
| Transportation & Storage (H) | -3.5 | -0.9 | 0.2 | -4.1 |
| Financial & Insurance Activities (K) | -8.1 | 0.7 | 0.4 | -7 |
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Looking at the sources of labour productivity growth over the period 2011-2020, the contribution of intangible capital deepening and MFP growth explained most of the changes in labour productivity. The average intangible capital deepening contributions for Manufacturing: Foreign (17%) and ICT (13%) were both extremely high compared to the rest of the economy. These sectors are dominated by many multinational companies and experienced substantial additions to capital from increases in intellectual property imports since 2015. The average contribution of tangible capital deepening was more significant in domestic sectors such as Administrative & Support Services (6.3%), Accommodation & Food (1.1%) and Electricity, Gas & Steam (1.1%). In the case of Administrative & Support Services, much of the tangible capital deepening is associated with aircraft-leasing activities.
For MFP, average growth for the total economy was negative (-3.7%). This was largely driven by developments in the Foreign sector of the economy, which reported negative MFP growth of 7.6% over the ten-year period. Ireland: Domestic and Other recorded negative MFP growth of 1%.
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