Productivity in Ireland 2020

Source publication:  National Income and Expenditure 2020

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Figure 2.1 shows labour productivity^[2] by sector and illustrates that a small number of sectors in the economy were far more productive when compared to the rest of the economy. Labour productivity for the total economy was €96 per hour in 2020.

Although the highest result reported was in the Real Estate sector at €817 per hour, this is not particularly significant in productivity analysis, as output in this sector is largely composed of imputed rent. The two most productive sectors in the Irish economy in 2020 were the MNE-dominated Manufacturing: Foreign (€631 per hour) and Information and Communications (€322 per hour) sectors. Both of these sectors were considerably more productive than the rest of the economy, with more than double the labour productivity of almost all the Domestic sectors.

Among the Domestic sectors, the highest labour productivity result was in the Electricity, Gas & Steam sector (€178 per hour). Due to prolonged lockdowns and restrictions on opening hours associated with the COVID-19 pandemic, the Transport (€20 per hour) and Accommodation & Food (€17 per hour) sectors were among the least productive in 2020.

[2]Labour productivity is output/hours worked and is expressed in Euros per hour, while growth in Labour productivity is expressed as a percentage change in output/hours worked between two periods.

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Labour productivity for the total economy grew by 14.1% in 2020, by far the largest increase since 2015. This large positive result was due to the most productive sectors in the economy becoming even more productive and large reductions in hours worked and output for many of the less productive sectors. The foreign sectors became proportionately larger in the economy in terms of GVA and hours worked and this drove up labour productivity growth in 2020.

The Domestic sectors were particularly impacted by the COVID-19 pandemic, with the largest falls in labour productivity occurring in Transport (-56%), Finance (-18%) and Accommodation & Food (-9%). Labour productivity growth was extremely strong for the MNE-dominated Manufacturing: Foreign (22%) and ICT (11%) sectors despite the influence of the pandemic throughout the year.

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The 14.1% labour productivity growth rate for the total economy in 2020 can be decomposed into the contributions of each sector as shown in Figure 2.3. The largest sectors that contribute to the overall result of 14.1% are Manufacturing: Foreign (7.8%) and ICT (4.4%). These sectors, dominated by large ICT and pharma companies, experienced a strong demand for their products during the pandemic. Many of these pharma companies were involved in the production of vaccines for the Coronavirus and as a result GVA grew by 24% in Manufacturing: Foreign.

The largest positive contributions to labour productivity growth from the Domestic sector came from Real Estate activities (1%), followed by Human Health (0.6%), and Professional, Scientific and Technical Activities. The largest negative contributions to labour productivity growth came from the Domestic sectors of Transport (-0.5%) and Accommodation & Food (-0.7%). With the onset of the pandemic, these sectors experienced a near shut down as consumers remained at home.

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The sectoral contributions to the 14.1% labour productivity growth rate for the total economy can be further decomposed into two components, as shown in Figure 2.4. A sector can make a positive contribution to total labour productivity growth by increasing its own labour productivity (Productivity Effect), but it can also make a positive contribution by becoming relatively smaller or larger in the overall economy (Reallocation Effect). For example, if a less productive sector becomes relatively smaller from one year to the next, this has the effect of increasing labour productivity for the total economy.

Given the extraordinary circumstances of the COVID-19 pandemic throughout most of 2020, there were large reallocation effects seen across the economy. At the same time, productivity effects had much less of an impact for most sectors and almost every sector in the economy had a positive reallocation effect. This was almost entirely due to the considerable reductions in hours worked for some of the least productive sectors in the economy, such as Wholesale & Retail and Transport. There was also relatively small growth in hours worked for the most productive sectors in the economy, namely Manufacturing: Foreign and ICT. As a result, the more productive sectors accounted for a higher proportion of total hours worked than in 2019, leading to positive reallocation effects and driving up labour productivity growth.

The largest productivity effect was seen in the contribution of Manufacturing: Foreign (6.8%) due to significant GVA growth of 24.6% in 2020. The ICT contribution had the largest reallocation effect (2.8%) as it accounted for a larger proportion of hours worked than in 2019 and was already one of the most productive sectors in the economy.

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Looking at the Irish economy from the aggregate foreign and domestic perspective highlights the two-speed nature of labour productivity in the Irish economy. Figure 2.5 shows labour productivity in the Foreign and Domestic sectors as well as the total economy over the period 2011-2020. The Foreign sector had labour productivity of €485 per hour in 2020, almost ten times that of the Domestic and Other sector (€51 per hour). Over the last ten years, the productivity gap between the two sides of the Irish economy has widened significantly, increasing sharply in 2020.

Labour productivity for the total economy was €96 per hour, far closer to the Domestic result, due to the distribution of hours worked across the economy. While both the Foreign and Domestic and Other sectors accounted for similar amounts of GVA in 2020 (€177bn and €173bn respectively), the Domestic and Other sector had 3,315m hours worked in 2020, compared to just 384m hours worked in the Foreign sector. This meant that while the hours worked in the Foreign sector were very productive compared to the rest of the economy, they only accounted for 10% of hours worked overall, while the less productive hours in the Domestic and Other sector drove down the total economy average.

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Labour productivity for the Domestic Sector grew by 0.7% in 2020. Despite the growth in labour productivity, both GVA (-9.1%) and hours worked (-9.8%) fell considerably, as the domestic side of the economy was particularly exposed to the effects of the COVID-19 pandemic, with sectors such as Transport, Accommodation & Food and Arts being adversely impacted. Over the previous three years, labour productivity growth was positive, with both hours worked and GVA increasing over the period.

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Figure 2.7 compares labour productivity growth in 2020 with the average annual growth in the Domestic sectors of the economy for the period 2011-2020. With very few exceptions, labour productivity growth in 2020 was far more pronounced than the 10-year average growth rate for each sector. There was strong productivity growth for the Mining and Quarrying (69.4%), Arts (24.4%), Electricity Gas & Steam (13%) and Construction (11.5%) sectors in 2020, all far above their 10-year average growth rates. In 2020, Transport and Storage (-56%) experienced the largest decline in labour productivity, followed by Finance (-17.7%), both below their 10-year average growth rates. The substantial fall in the Transport sector was due to the reductions in the use of public transport and the collapse of the aviation sector during the pandemic.

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As is evident from the labour productivity results presented earlier in this chapter, the influence of foreign multinational enterprises (MNEs) in Ireland inflates overall labour productivity in the economy. Figure 2.8 compares labour productivity using GVA or modified Gross National Income (GNI*) as the measure of output for labour productivity for the period 2011-2020. Using GNI* as the measure of output considerably reduces labour productivity based on GVA from €95.77 per hour in 2020 to €56.27 per hour for the GNI* measure. As the GNI* measure removes the depreciation on aircraft leasing and intellectual property products,as well as all cross border profits and the income of redomiciled PLC’s, it results in a labour productivity indicator that is closer to the domestic growth rate of 0.7%. Nevertheless, a shortcoming of this GNI* based calculation is that it excludes earnings abroad by companies in the Domestic Sectors as well as the Foreign ones. Accordingly, in this publication the two-sector model which seems to produce the most meaningful results at the level of GVA is used to address the measurement challenges associated with globalisation in Ireland.

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Labour productivity for the Foreign sector grew by 18.2% in 2020. This was due to large increases in GVA for both the MNE-dominated sectors of Manufacturing: Foreign and ICT, while hours worked slightly increased in both sectors. Labour productivity in the Foreign sector is almost entirely driven by swings in GVA, particularly since 2015, while hours worked have grown more steadily.

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In stark contrast to the Domestic and Other sectors, the Foreign sectors experienced large increases in labour productivity over the last ten years, particularly in 2020. Figure 2.10 compares labour productivity growth in 2020 with the average annual growth in the Foreign sectors of the economy for the period 2011-2020. Labour productivity in Manufacturing: Foreign grew by 22% in 2020, partly due to increased output in the pharmaceutical industry, while the labour productivity in the ICT sector grew by 10.6%. Average labour productivity growth was also extremely high for both sectors, increasing by 10.3% for Manufacturing: Foreign and 9% for ICT. 

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Figure 2.11 compares the average annual labour productivity growth of Ireland, Ireland-Foreign and Ireland-Domestic to EU countries for the period 2011-2020. Average labour productivity growth stood at 9.4% for Ireland-Foreign. This result was far above all other EU countries and the EU-27 and EU-19 aggregates. The Domestic sector of the Irish economy’s performance was below the EU average and more in line with Spain, Portugal and Belgium, with a result of 0.7%.