Information and Communications Technology: A Value Chain Analysis 2019

Productivity analysis measures how efficiently key inputs of labour and capital are combined in the production process. This chapter provides an analysis of productivity in the ICT sector in 2019. The sector stands out as one of the most productive in the Irish economy and is characterised by very high labour productivity, and an extremely low labour share. However, two different stories emerge when we look at firms by size class. For the large MNEs and the overall ICT value chain, labour productivity (and labour productivity growth) is largely explained by the extremely high concentration of intangible assets when compared to other sectors in the economy. For smaller firms in the sector, which are typically domestic, labour productivity is much closer to the total economy average.

Labour productivity measures the output per worker of a particular sector, where output is measured as Gross Value Added (GVA) in constant prices (that is, adjusted for inflation). Higher labour productivity for a sector implies that its labour force is being used more efficiently than sectors with lower labour productivity, as each worker in that sector is producing relatively more output (GVA). Other than Real Estate Activities*, the ICT subsector Software and Other Media (58-60) was by far the most productive sector in the Irish economy in 2019, with labour productivity of €1.1m per employee. The other two ICT subsectors were also among the most productive in the overall economy: IT and Other Information Services (62-63) was the fourth most productive and Telecommunications Services (61) followed closely after.

*Gross Value Added for Real Estate Activities is largely made up of imputed rents, so its labour productivity is not comparable to other sectors in the economy, but is included for completeness.

The chapter on Labour showed that the ICT sector was one of the most highly educated sectors in the economy, so it is unsurprising that the sector is generally more productive than the rest of the economy. However, much of the GVA in the ICT sector can be attributed to large imports of intellectual property (IP) products more than its high-quality workforce, so the labour productivity figures need to be considered in this context.

In productivity analysis, output (measured in GVA) is attributed to either labour or capital. The labour share of a sector measures the proportion of output that is attributable to labour, either paid as wages (Compensation of Employees) or self-employed income (Gross Mixed Income). The ICT sector in the Irish economy has a much lower labour share compared to other sectors on average (for example, the EU average was 53% in 2019), meaning  that most of the output in the sector is attributable to capital, paid as profits (Gross Operating Surplus). The most productive ICT subsector, Software and Other Media had an extremely low labour share of just 8% in 2019. IT and Other Information Services had a labour share of 28%, while Telecommunications) had a similarly low labour share of 30%. Less than a quarter of the GVA in the ICT sector was explained by wages, which indicates its use of capital assets, particularly IP, was the major factor driving productivity in the sector.

Capital services are a measure of the flow of productive services from capital such as buildings, factories, machinery and equipment and importantly for this sector, intangible assets. Capital intensity measures capital services per employee. Higher capital intensity implies that a sector has a higher level of capital relative to labour.

Figure 4.4 shows capital intensity across the Irish economy in 2019. For confidentiality purposes, Manufacturing (C) and Administrative and Support Services (N) cannot be shown. The ICT subsectors were among the most capital-intensive sectors in the economy in 2019, with Software and Other Media having the second largest capital intensity of €1m per worker far surpassing all sectors in the economy other than Real Estate. Similarly, IT and Other Information Services and Telecommunications Services used more capital services per employee than all the remaining sectors in the economy. By far the most significant asset class in the ICT sector in 2019 was intangible assets (85% of capital stocks). This means that not only was the ICT sector one of the most capital-intensive in the economy in 2019, but also that most of its capital services were attributable to IP.

The above graph compares the three indicators presented in this chapter, labour productivity, capital services and the number of workers in each sector. It shows the significant difference between the sources of productivity in the ICT sector and the rest of the economy in 2019. For confidentiality, the Manufacturing and Administrative and Support Services sectors are not shown. The vertical axis shows the number of workers, and the horizontal axis shows capital services (in billions). The size of the bubbles indicates labour productivity. Sectors with a higher number of workers are to the top of the graph and sectors that use more capital services are to the right.

While all of the ICT subsectors were highly productive relative to the overall economy in 2019, none of the three subsectors had a particularly high number of workers. For example, IT and Other Information Services had fewer workers than many of the A21 sectors in the economy. Importantly, the ICT subsectors of Software and Other Media and IT and Other Information Services (lower-right of graph) were significantly different than most sectors as they were extremely capital-intensive, with far higher capital assets use than almost all other sectors.

The above graph shows a few large bubbles (high labour productivity) and many smaller ones. The larger bubbles are all to the right of the graph. This indicates that the more productive sectors in the economy, including the ICT subsectors, had a much higher level of capital services use than the less productive sectors. The more productive sectors also accounted for a relatively smaller proportion of total employment than the less productive sectors.

Overall, the ICT sector was extremely productive when compared to almost every other sector in the economy in 2019. While its highly educated workforce was certainly a large factor in this, it was not the most important component at the sectoral level. It was the sector's significant use of capital assets, predominantly intangible assets such as patents and software, which made it so highly productive. However, when we look at productivity in the sector by size class, a different picture emerges of small and medium firms which are more reliant on labour than capital. Although these firms only generate a fraction of the value added of the large MNEs, they account for almost half of employment in the sector.