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The chart above depicts Gross Output in the Wholesale & Retail Sector broken down by its contribution from the KLEMS inputs. It is compared with its GVA counterpart below.

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The main difference between the KLEMS and GVA models of productivity is the inclusion of intermediate inputs in a more detailed series that estimates MFP based on gross output rather than on GVA in any given industry. The two charts above compare the KLEMS and GVA models of productivity for Wholesale & Retail. The KLEMS model offers a more detailed analysis in terms of what is driving growth and productivity in the industry. In addition to capital, energy, materials and services are also driving economic activity in this sector in the KLEMS model. This is not apparent in the GVA model of Wholesale & Retail and it has a relatively large MFP. In the GVA model, MFP is simply the difference between changes in GVA and changes in the primary factors of production. In fact, MFP measures the unobservable drivers of productivity and is sometimes known as the Solow residual. The KLEMS model minimises the MFP estimate where MFP = Output – Capital – Labour – Intermediate Inputs whereas the GVA model excludes these intermediate inputs and, in many instances, results in larger MFP. In theory, the inclusion of the additional intermediate consumption units in the KLEMS model should yield a more accurate MFP estimate as it minimises the Solow residual by including more explanatory variables. In practice, the inclusion of intermediate inputs makes the KLEMS model more prone to data quality issues and for this reason the KLEMS MFP estimates are considered experimental. The gross output series in the KLEMS model is much more volatile than the GVA model by nature, as the KLEMS series uses a gross measure for output while the GVA is a net measure.

In terms of the data sources, both KLEMS and GVA extract their capital services estimates from the CSO’s Capital Stock estimates and Labour estimates from the Labour Force Survey (LFS). The addition of intermediate consumption estimates from the Supply & Use Tables (SUT) was necessary for estimating MFP on a gross output basis in the KLEMS model. The Supply and Use tables are not intentionally designed for productivity analysis in National Accounts and incorporating these into the KLEMS analysis may have also contributed to volatility and certainly highlighted several data gaps that necessitated further estimation and additional adjustments. These issues emphasise that the GVA estimates are the more robust and consistent estimates for productivity analysis and the KLEMS is considered experimental.

Data Sources

In relation to data sources, as indicated above Capital and Labour inputs are sourced from the CSO’s Capital Stock publication and Labour Force Survey (LFS) which are also used throughout the publication in all productivity presentations. The intermediate inputs are obtained from the Supply & Use tables and used together with Capital and Labour inputs to estimate productivity on a Gross Output basis. The Supply and Use Tables provide a detailed picture of the transactions in goods and services by industries and consumers across the Irish economy in a single year. They highlight the inter-industry flows that lie behind the National Accounts main aggregates. The supply table contains estimates of the supply of goods and services (products) by domestic industries as well as imports of goods and services while the use table contains estimates of the use of products by domestic industry and by the final demand sectors (Final Demand comprises consumption by households, government, non-profit organisations serving households (NPISH), gross fixed capital formation (GFCF) and exports). The Supply & Use tables are broken down by NACE Rev. 2.0 into an A21 sector economy.  The incorporating of these inputs with Capital and Labour generated a series of issues ranging from data source issues to methodological issues that impacted the KLEMS estimates. 

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The above chart shows Gross Output in the Electricity, Gas & Steam sector broken out by the KLEMS inputs. The chart shows that the trend in this sector is mostly explained by changes in energy inputs, MFP and changes in Services. Gross Output is quite stable between 2000 and 2004 where growth remains below 20%. The trend shows growth until 2007 where it sharply decreases by 23% coming into the recessionary period. It is important to note that Gross Output increases by 36% in 2008 at the start of the economic downturn which is largely driven by an increase in Energy Inputs of 44%, despite a negative MFP of 14%. This may suggest an increase in demand for electricity or energy inputs during a financial shock however it is important to consider factors that affect the intermediate costs of producing electricity, which are in turn reflected in our analysis using the KLEMS model.

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Using an annual dataset from the Federal Reserve of Economic Data (FRED) on Brent Crude Oil prices, it was found that there were high positive correlations of 79% and 77% respectively between Energy inputs in Transport & Storage and Electricity, Gas & Steam and Oil Prices ($ per barrel) during the period the years of 2000-2018. The chart above presents growth in energy input in Electricity, Gas & Steam and Transport & Storage against oil prices (on the secondary axis). Oil Prices increased by 13% in 2008 and this may be what is driving the large change in Energy inputs in 2008 in both sectors, as oil or products indexed to oil prices such as gas, are key inputs or materials used in electricity generation and is also an important energy resource for transport in Ireland. Oil prices are also used as an index for electricity prices. Oil was a costly resource for intermediate consumption during 2008 and this may be what is contributing to the increase in intermediate consumption in 2008 for both sectors. Gross Output growth in Electricity, Gas & Steam then peaked at 50% in 2017 which is largely driven by increases in Energy inputs and Services inputs. The estimates for 2018 suggest that the decline in output of 20% is largely down to decreases in energy inputs and services inputs.

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The above chart shows Gross Output in the Transport & Storage sector broken out by the KLEMS inputs. Changes in Gross Output growth are explained mostly by changes in Services Input as well as Energy input and MFP. Gross Output declines between 2000 and 2003 and remains below 20% until 2009 where it declined by 12% only to grow by 5% in 2010 and sharply decline again by 26% in 2011. The spike in Gross Output in 2012 of 27% and decline of 9% in 2013 brought about the end of the post-recession period of volatility in this industry between 2008 and 2013. The recovery period brought about significant changes in fiscal decisions that may have created volatility in intermediate consumption because of changes in public expenditure and policy reform in transport development in Ireland. The latter years of 2014 -2017 experienced a steady decline in Gross Output caused by a decline in Energy Input and MFP with Gross Output returning to a positive growth rate of 9% in 2018.

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The chart above shows Gross Output in the Professional, Scientific, Admin & Support Services sector broken out into the KLEMS inputs between 2000 and 2018. This sector covers 13 NACE activities and the largest areas within this broad genre of services include Research & Development, Architecture & Engineering Activities and Legal & Accounting Services. As expected, changes in Gross Output in this sector are largely explained by changes in Services Input as well as changes in MFP and Materials Input.  The decline in Gross Output between 2000 and 2003 was associated with the collapse of the dotcom bubble in 2003 when Gross Output declined by 2%. Gross Output grows to 4% in 2004 however it again declines between then and 2006 where it takes a sharp decline of 12%. The large positive Gross Output growth rate of 34% and 26% in 2007 and 2008 respectively are followed by a gradual declining trend and a decrease of 26% is recorded in 2011. This decline was likely caused by the economic recession period as high skilled industries are likely to witness a gradual decline in output rather than a sudden drop which was seen in industries like Construction and Accommodation & Food. Gross Output growth recovers after 2011 and peaks at 19% in 2016. This recovery in Gross Output is largely explained by increases in Materials input and Capital input.

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The above chart shows Gross Output in the Financial & Insurance Activities sector broken out by the KLEMS inputs. The changes in Gross Output growth between 2000 and 2018 can largely be explained by changes in Services Input as well as MFP. The volatility in Gross Output between 2000 and 2018 is largely associated with fluctuations in Services Input as well as changes in MFP. The volatility in Gross Output between 2000 and 2003 can be attributed to the collapse of the dotcom bubble and this leads into a period of increasing Gross Output up until the collapse of the sector in 2007. This was largely down to a decrease in Services Input as well as MFP. Gross Output was slow to recover in the Financial Services and Insurance sector as this period was characterised by what was termed a Balance Sheet recession where a period of asset inflation was followed by a crash in these same asset values. Many bubbles were present in the market as many assets were overpriced and price increases were not driven by fundamentals leading to the collapse of many financial instruments as bubbles burst in 2008.  The recovery period saw drastic changes in financial regulation as the Central Bank moved towards adopting and implementing macroprudential policies and this may be responsible for the slow and steady recovery in gross output in Financial Services & Insurance. The period between 2011 and 2018 is associated with volatility in Gross Output as the industry recovered from the decline in Gross Output during the recessionary period after 2007.

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 The chart above depicts Gross Output in the Accommodation & Food Services sector decomposed by the KLEMS inputs. Growth in Gross Output and productivity in this sector are largely associated with changes in Materials consumed in the production process. The series depicts an increasing trend in Gross Output between 2006 and 2008 which is largely driven by changes in Materials and Labour. The industry experienced a sharp decline in Gross Output after the economic crisis in 2008.  The following years of 2009-2011 saw a continued decline in Gross Output which was largely driven by decreases in materials input and labour. This period also saw lower levels of overall activity and discretionary consumption as many household budgets were impacted by the events of 2008. This may have resulted in lower levels of demand for Accommodation & Food services. The recovery period resulted in volatility in this industry, which is seen in the alternating increases and decreases in Gross Output between 2012 and 2016, which is caused by volatility in materials consumed in the production process. The industry’s return to steady growth in 2016 was largely down to a steady increase in labour input as the industry experienced an increase in demand due to improving household and corporate budgets.

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The chart above decomposes Gross Output in the Information & Communications sector into its KLEMS inputs. Gross Output in this industry is quite volatile which is a consequence of extreme fluctuations in consumption of services in the production process. The dot-com bubble collapse in 2003 is followed by an increase of output up until 2005. The fluctuations between 2007 and 2013 where Gross Output fluctuates between positive and negative changes in growth is a result of fluctuations in services.   A change in the fluctuating trend in gross output occurs between 2016 and 2018 where gross output increases steadily in 2017 and 2018, possibly suggesting a return to a steady and predictable trend in economic activity in this industry.