Construction Industry Productivity in Australia
In 1992 and 2003 I contributed to the research published on construction industry productivity by two government inquiries. The first was the Royal Commission into Productivity in the Building Industry in NSW (1991-1992), and the second was the Royal Commission into the Building and Construction Industry for the Commonwealth Government (2001-03). These posts have the relevant parts of those publications, which are reviews of the then current data and research.
The first post is from a paper that covered the 1980s was originally published as Productivity and the Australian Construction Industry by the Royal Commission into Productivity in the Building Industry in NSW.
This second post covers the 1990s and was an Appendix in a Discussion Paper from the Royal Commission into the Building and Construction Industry for the Commonwealth Government.
A third paper in this series is a conference paper of mine from 1999 called Recalculation of Australian Construction Productivity which looked at changes in output per person in the special trades. The document can be downloaded from a Dropbox file here.
A3.1 Measures of productivity
Productivity refers to the relationship between the quantity of goods and services produced and the quantity of resources employed in producing those goods and services. The economic definition of productivity is the ratio of output over input, and in very general terms can be described as the efficiency of production. This definition focuses on the quantification of inputs and output.
In Australia, the ABS provides indexes of output per hour worked and per person employed by industry for the market sector. The average increase in labour productivity in the market sector of the Australian economy between 1991-92 and 1999-2000 was 2% a year. Over the same period labour productivity in the construction industry increased by 1% a year, with wide variation in the year-on-year rate. As can be seen over the longer period 1986 to 2000 the construction industry managed to lift productivity by only 3%. These indexes are very sensitive to differences in the rate of change between output (measured as industry gross value added) and input (hours worked). This difference explains the drop in construction labour productivity in 2000-2001, where the growth in hours worked was greater than growth in output. The public sector (administration, defence and education) and property and business services have no estimates of output independent of inputs and productivity therefore cannot be estimated for these industries. The rest of the economy is known as the market sector.
While the ABS does not produce industry level productivity indexes, the Productivity Commission has produced estimates using ABS data on output, hours worked and capital input by industry. In a Productivity Commission research report on employment and productivity, Barnes et al. (1999) found that MFP growth for construction between 1978-79 and 1995-96 was negative, at -0.2% a year, compared to market sector MFP growth of 1.2% a year. The Productivity Commission released revised MFP estimates for the market sector of the economy in December 1999.The new release made significant revisions to estimates for earlier years, due to a new ABS methodology for estimating productivity based on an improved and more complex methodology for deriving capital inputs. For the construction industry the revision lifted productivity growth from negative to positive, at 0.3% a year. This was still well below the level of the market sector as a whole, at 1.0% a year growth.
The Productivity Commission also recalculated the capital-labour ratio in producing these estimates, and found that construction had a ratio of 2.1 (two units of capital to each worker) compared to a ratio of 3.5 for the market sector as a whole. Other industries with low capital intensity (ratio under 2) were agriculture and transport. The high capital intensity industries (ratio over 5) were mining, manufacturing, utilities and retailing.
Recent data at the industry level for the United States is similar to Australia. Gullickson and Harper (1999) give estimates of MFP by industry for the US. The table shows the estimates of multi-factor productivity growth rates for the industries in the US private business sector. The two sets of multi-factor productivity estimates are based on industry output series from the BEA and from the BLS. These trends differ by more than 0.5% for only one industry (utilities). There are negative multi-factor productivity trends for construction and for oil and gas.
International Comparison of Productivity
Despite the difficulties in the measurement of productivity in general, and for the construction industry in particular, some studies have found that the level of productivity in the Australian construction industry compares well with overseas industries. Significantly, both these studies are for periods (1990 and 1995-96) when residential building was at a low point in the cycle. Because residential building is the most labour intensive part of the industry, this lifts the overall level of productivity by improving the output to hours worked ratio. An OECD study by Pilat (1996) found that Australian construction labour productivity (output per person based on National Accounts data converted with 1990 purchasing power parities) is above that of the US, Japan and all European nations, only Canada had higher construction output per person.
The McKinsey study of Australian construction was also positive in its conclusions (Lewis et al 1996).The study found the Australian construction industry had made a number of positive changes since the 1980s, including the development of more harmonious working relationships and the introduction of multi-skilling. The effect had been dramatic: average productivity is now close to the world’s best, and employment performance has been just as impressive. Labour productivity, at 95% of best practice, was only just behind the United States, and on a par with Germany’s. In addition, construction costs were low, slightly less than those of the United States and France and far below those of Germany, Sweden, and Japan. The main drivers of Australia’s high productivity were intense competition in the industry, which encouraged the widespread transfer of innovative production processes, and improved industrial relations that increased labour flexibility and minimized time lost through industrial disputes. Despite that, many more firms need to adopt international best practices in construction techniques and processes. McKinsey found Australia owed its success to greater demand for housing and infrastructure and lower prices. To raise productivity further and stimulate growth, McKinsey recommended the industry maintain or increase the rate at which it develops and transfers innovations, and continue to explore opportunities to expand into overseas markets.
McKinsey concluded construction firms should seek collaborations with their large customers, especially industrial firms, to reduce capital expenditure and improve project economics in such fields as mining and new factory development. Close working relationships of this kind have the potential to boost both capital productivity and profitability.