Economics: As Ireland turns from manufacturing and agriculture, we may follow trends towards slower output growth.
Along with employment, productivity drives economic growth. Ireland has recorded impressive productivity growth so far, but this trend may ease off as services begin to account for a greater share of our economy - unless we start putting in the extra hours.
Work-wise, in Ireland we are somewhere mid-way among developed economies - with an average of about 1,600 hours a year, according to the OECD. The Japanese are diligent, toiling 1,800 hours in a year, and Americans spent only 10 fewer hours working in 2003. There is much angst in Europe about labour market reforms and the diminution of the welfare state: the French have yet to discard their 35-hour week, though progress has been made in Germany since the so-called Hartz reforms. Yet workers in both Germany and France spent 170 fewer hours at the office than us in 2003: the equivalent of 20 to 25 extra working days, or four to five working weeks a year.
There is no consensus on how to measure productivity in Ireland. Internationally, GDP (or output) per worker is the standard. But GNP (or income) per worker is a better barometer here because of the distortions caused by multinationals.
In multinational industry located in Ireland, output per worker averaged 13 per cent annual growth between 1995 and 2004. Certain sectors were quite "productive" in that time. For example, in a small subset of the chemicals sector employing 6,000 people, output per person employed came to €2.15 million in 2002. In software production in the same year, each worker added €440,000 of value. Outside those two areas, industrial output per worker was a more reasonable €101,000.
Foreign-owned chemicals and software between them account for 25 per cent of GDP but only 25 per cent of employment. Transfer pricing boosts the "productivity growth" of multinational workers and the profits accruing to non-Irish residents, as multinational companies book profits to their Irish subsidiaries to avail of our low corporation tax rate. As a result, the change in GNP per worker - the income of Irish residents - is the most meaningful way to quantify productivity growth here.
Thus measured, annual average productivity growth in Ireland was 2.2 per cent, double the euro area average between 1994 and 2004. Even more impressive was the rate of growth of hourly productivity. Contrary to popular perception, we are working shorter hours than a decade ago. Figures for last year are still unavailable but between 1994 and 2003, the number of hours worked by Irish residents dropped 12 per cent. Hours worked in the euro area fell too, but not by as much. Taking into account the 1.4 per cent average annual decline in hours worked, Ireland's rate of hourly productivity growth was stellar: more than 3.5 per cent per annum.
The strong performance of the US economy over the last decade has been regularly highlighted. The salient reason why the US outpaced the euro area was the rebound in productivity. Productivity growth was lifted from an annual average of 1.4 per cent in 1984-1994 to 2 per cent in 1994-2004. It is often overlooked that Americans work much longer hours, which accounts for much of the difference in productivity growth between the two regions.
Global productivity was boosted in the 1990s due to increased investment in information technology. IT investment also kept Ireland's rate of productivity growth above 2 per cent in 1994-2004. Another important factor here may have been improved skill levels throughout the workforce.
However, the secular trend is for slower productivity growth. That tends to happen as the influence of services grows and reliance on agriculture and manufacturing diminishes. In the US and UK, where there has always been a higher proportion employed in services, annual productivity growth since 1970 was much lower than in Ireland. The Irish economy has been moving towards services for 20 years. In 1984-1994, services employment rose at almost 2 per cent each year on average, while employment elsewhere in the economy was contracting.
Over the last 10 years, services employment expanded at an annual average of more than 5 per cent, although this time employment growth in the rest of the economy was positive at 2.5 per cent.
Quantifying productivity in services is very difficult. In industry, construction or agriculture respectively, you can calculate how many units of a certain type of good are produced, houses built or crops harvested in one year. It is not as easy to gauge the volume of work done in administration or distribution. Information technology has helped to make services less labour-intensive. But technological progress over centuries has ensured that industry, construction and agriculture require fewer workers for a given level of output. What evidence is available in Ireland suggests productivity growth in services is weaker than in industry, construction or agriculture.
Based on the Central Statistics Office's (CSO) volume estimates of output in services, average annual productivity growth in services was less than 1 per cent in 1994-2004. Other data hints that productivity growth is lower in services than elsewhere. We can calculate the rate of productivity growth in indigenous industry from industrial production and employment data: it was 3.5 per cent per annum over the last decade. In agriculture, productivity growth was also 3.5 per cent per annum. Unfortunately, we can not do a similar calculation for construction.
Wage growth also reflects the extent to which workers are becoming more productive. Since 1998, wage growth in private services averaged 5.7 per cent annualised, well below the average in industry of 6.4 per cent and 7.6 per cent in construction. Arguably, public-sector wage growth has not accurately reflected underlying productivity changes but, even still, it grew at 6.3 per cent, slower than the rate of increase in industry or construction.
Ireland experienced an employment miracle rather than a productivity miracle over the last 10 years. Two-thirds of economic growth resulted from increased employment.
Clearly, there is a link between the two: as workers become more productive they become attractive to hire. However, employment growth is set to be lower in 2006-2016. The CSO's baseline projection is for annual labour force growth, and hence potential employment growth, of 1.8 per cent. In that context, future productivity growth is important. If employment growth is increasingly dependent on services, trend productivity growth may slip again to below 2 per cent over the next decade. That means potential GNP growth may be closer to 4 per cent than the 5 per cent that many commentators estimate.There is something that can be done. Irish people could work longer hours to boost productivity growth. The trade-off between wealth and quality of life may soon be here.
Rossa White is an economist with Davy Stockbrokers.
