Productivity in Ireland 2022 - 2023

The following chapter provides a KLEMS (Capital, Labour, Energy, Materials and Services) analysis of Gross Output growth in the economy. While the previous chapters have looked at the economy from a Gross Value Added (GVA) approach, this chapter additionally considers the intermediate inputs consumed in the production process. The KLEMS methodology decomposes intermediate consumption into three categories of Energy, Materials and Services to provide greater insight into the sources of growth in a given sector. The data used to categorise the intermediate consumption is taken from the Supply and Use Tables, which give a detailed breakdown of intermediate consumption of products and services by economic sector.

It should be noted that since the KLEMS approach uses Gross Output as the measure of output for a sector, the Multifactor Productivity (MFP) growth rate associated with that sector is generally minimised when compared to the MFP growth rate estimated when using GVA as the measure of output. This is due to the additional explanatory variables of Energy, Materials and Services. Gross Output in this chapter excludes inter-industry deliveries of intermediate inputs to avoid overstating the output of each sector.  To avoid confusion with the MFP results seen elsewhere in the publication, the term KLEMS MFP will be used instead of MFP.

Table 8.1 shows a KLEMS decomposition of Gross Output growth for 2023 at the sector level. There were very large swings in Gross Output for many sectors across the economy, mostly driven by the contributions of intermediate inputs rather than capital and labour. In general, these contributions were mostly negative, indicating that there was a reduction in the use of intermediate inputs throughout the year. Looking at Gross Output, there was positive growth for the Foreign-dominated sectors of ICT (16.3%) and Manufacturing - Foreign (16.7%). At the other extreme, there were extreme falls in Gross Output for the service-based sectors of Transportation & Storage (-44.9%) and Accommodation & Food (-27.1%) due to the COVID-19 pandemic. These reductions in output came after even more significant falls in 2020. There were also significant changes to KLEMS MFP for most sectors, with particularly large results for sectors that saw large changes to Gross Output

Figure 8.1 illustrates a KLEMS decomposition of Gross Output growth for sectors in the economy over the period 2013-2023. Gross Output increased for all sectors shown over the period. Growth in gross output was highest for Information & Communication at 11.9%. This was driven primarily by a combination of contributions from services (6.1%) and capital (4.5%). Construction also saw strong growth in gross output (10.3%), with this driven largely by the positive contributions from services (4.0%) and materials (4.1%). 

Gross Output is the sum of Gross Value Added (GVA) and Intermediate Consumption, which can be further decomposed into Labour and Capital (for GVA) and Energy, Materials and Services (for Intermediate Consumption). Figure 8.2 illustrates this decomposition for sectors in the economy in 2023, highlighting the differences in the sources of Gross Output for these sectors.

Labour accounted for the largest share of Gross Output for many domestic sectors such as Education (72.8%), Human Health & Social Work (54.1%) and Accommodation & Food Service Activities (48.8%). Capital was most significant for Real Estate (69.4%), Manufacturing (63.0%), and Administration & Support activities (45.9%). Services accounted for at least 20% of Gross Output for most sectors, while Materials were generally more important for domestic sectors such as Construction (39.2%), Agriculture (35.3%), Human Health & Social Work (21.9%). Energy generally accounted for the lowest proportion of Gross Output for most sectors, although it was extremely influential for Electricity, Gas, Steam & Air Conditioning Supply (26.2%) and Transportation & Storage (23.2%). 

Gross Output in the Construction sector fell by 4.9% in 2023, as shown by Figure 8.3. Services (-1.7%) and Materials (-2.7%) provided the largest negative contributions to growth in the sector in 2023, with more modest contributions from Labour (-0.7%), KLEMS MFP (-0.4%) and Capital (0.2%). In general, gross output growth in the Construction sector is largely explained by changes in the use of materials and services, with contributions from both of these categories negative for the first time since before the Covid-19 pandemic in Ireland.

Figure 8.4 shows the gross output shares for the Construction sector in 2023. Materials (39.2%) and Services (25.5%) accounted for the largest shares in Gross Output for the Construction sector in 2023. Labour (21.5%) and Capital (11.7%) were also important in the sector.

The materials used as intermediate consumption in the sector were predominantly Non-Metallic Mineral Products and Metal Products. The most significant Services consumed were Rental & Leasing, Wholesale Trade and Architecture & Engineering.

Figure 8.5 shows a decomposition of gross output growth for the Accommodation & Food Service Activities, one of the sectors most affected by COVID-19 pandemic. In 2023, Accommodation & Food saw gross output grow by 10.3%. This indicates a potential return to pre-pandemic trends, after the sector rebounded strongly in 2022 with very high gross output growth of 34.9%, the fastest growth observed over the period 2013-2023. The contribution of labour and KLEMs multifactor productivity have been the most important in explaining changes in gross output for this sector. In 2023, the 10% growth in gross output was mainly driven by Labour (1.7%) and KLEMs MFP (5.3%). 

Figure 8.6 shows that gross output in the Accommodation & Food sector in 2023 was largely attributable to Labour (48.8%), while Capital (17.2%) and Services (18.5%) were the other most significant components.

The most important materials used for intermediate consumption were food Products and beverages which accounted for most materials used by the sector. The most common services used were Financial & Insurance and Legal & Accounting.

Figure 8.7 presents the decomposition of gross output growth for Electricity, Gas, Steam & Air Conditioning, the sector which saw the strongest growth in gross output for the 2013-2023 period. The fastest annual growth was observed in 2023 at 48.3%. This was driven primarily by the contribution of services (20.9%). 

The gross output shares for Electricity, Gas, Steam & Air Conditioning Supply for 2013-2023 are shown in Figure 8.8. The labour share for this sector was 4.7% in 2023, representing the continuation of a general downward trajectory since 2017 when it stood at 11.3%. The capital share has exhibited a similar trend, falling from 28.3% in 2017 to 13.7% in 2023. The share of services was important to this sector in 2023 at 37.4%. Looking back, the services share has fluctuated markedly over time, peaking in 2018 at 45.1%, and falling to 16.6% in 2021 during the Covid-19 pandemic.