Changes in labour productivity reflect changes in the overall efficiency of the labour force. Labour productivity growth is most easily explained as the difference between Gross Value Added (GVA) growth and the growth in hours worked. Labour productivity growth can also be explained by changes in the level of capital in the economy (capital deepening), as well as changes in Multifactor Productivity (MFP).
Ireland is often described as having a ‘two-speed’ economy, in which the growth in output for foreign-owned multinational enterprises (MNEs) often outpaces that of the domestic economy. Figure 3.1 shows growth in labour productivity for the Domestic and Foreign sides of the economy, as well as total labour productivity growth over the period 2013- 2023. This highlights the dominant influence of the Foreign sector in determining Total Economy labour productivity growth rates. In 2023, labour productivity growth for the Foreign sector was -15.9%, while Domestic sector labour productivity grew by 3.8%. This resulted in labour productivity growth for the Total Economy -7.5%. There are two main reasons for the significant influence of the Foreign sector on total labour productivity growth. Firstly, the Foreign sector has historically been far more productive than the Domestic sector, with labour productivity of €388.9 per hour compared to €61.1 per hour for the Domestic sector in 2023. At the same time, labour productivity growth rates generally tend to be greater for the Foreign sector, with average compound annual labour productivity growth of 6.6% per year from 2013 to 2023 compared to 1.5% for the Domestic sector.
Figure 3.2 sheds light on the underlying components of Labour Productivity by displaying growth rates in GVA and hours worked for the Total Economy, from 2013 to 2023. After a period of sustained growth, 2020 saw a sharp decline in labour hours worked by 9.9% while GVA continued to steadily grow (7.6%). This reflects Ireland's experience of the COVID-19 pandemic. The rapid decreases in hours worked in 2020 led to a temporary ‘spike’ in labour productivity growth that year (17.4%). In 2021 and 2022, hours worked rebounded, exhibiting growth rates of 7.3% and 8.6% respectively, constituting by far the fastest growth rates in labour hours worked of the period 2013-2023. Hours worked grew notably more slowly in 2023 at a rate of 1.7%. While GVA showed substantial growth in 2021 (15.1%), it lessened in 2022 (9.3%). In 2023, GVA contracted, with a growth rate of -5.8%. In 2023, labour productivity growth was negative at a rate of -7.5%, indicating that GVA contracted at a faster rate than hours worked.
In Figure 3.3, annual growth rates in labour productivity, GVA and hours worked are shown for the Domestic sector of the Economy. There were large increases in hours worked following the initial impact of the COVID-19 pandemic in 2020, with increases in 2021 and 2022 of 6.6% and 9.1% respectively for the Domestic sector. Negative labour productivity growth for the Domestic sector was recorded in 2022 as hours worked grew faster than GVA. In 2023, GVA exhibited steady growth in the Domestic sector at a rate of 5.8%, while hours worked growth was more marginal at 2.0%. This resulted in growth in labour productivity for the Domestic sector at a rate of 3.8% in 2023, while labour productivity for the Total Economy declined by 7.5%.
Figure 3.4 shows the contribution of each sector to the 3.8% growth in Domestic labour productivity for 2023. Wholesale & Retail Trade made the largest negative contribution (-0.8%). The largest positive contribution was from Financial & Insurance Activities (2.2%).
The contributions are further decomposed into a productivity effect and a composition effect. The composition effect can be described as the productivity impact when a sector becomes relatively smaller or larger compared to other sectors and the overall economy. 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 Domestic sector. The productivity effect on the other hand can be explained by changes in labour productivity for the individual sectors.
The 3.8% growth in labour productivity for the Domestic sector in 2023 was driven by the productivity effect (5.5%) rather than the composition effect (-1.7%). The negative composition effect was driven by sectors such as Real Estate (-2.2%), Electricity, Gas, Steam and Air Conditioning Supply (-1.4%) and Agriculture, Forestry & Fishing (-1.0%). Some sectors saw large increases in labour productivity (positive productivity effects) such as Real Estate (3.6%), Electricity, Gas, Steam and Air Conditioning Supply (1.4%), Manufacturing (1.1%) while others contributed negatively such as Wholesale & Retail Trade (-1.7%).
| Description | Productivity Effect | Composition Effect | Contribution |
|---|---|---|---|
| Wholesale and Retail Trade (G) | -1.7 | 0.9 | -0.8 |
| Agriculture, Forestry and Fishing (A) | 0.4 | -1 | -0.7 |
| Construction (F) | 0 | -0.2 | -0.1 |
| Professional, Scientific and Technical Activities (M) | -1 | 0.9 | -0.1 |
| Other service activities (S) | 0 | -0.1 | -0.1 |
| Mining and Quarrying (B) | 0 | 0 | 0 |
| Electricity, Gas, Steam and air conditioning supply (D) | 1.4 | -1.4 | 0 |
| Water Supply, Sewerage & Waste Management (E) | 0.2 | -0.2 | 0 |
| Information and communication (J) | 0 | 0 | 0 |
| Public Administration and Defence (O) | 0.1 | -0.1 | 0 |
| Arts, Entertainment and Recreation (R) | -0.2 | 0.2 | 0 |
| Administrative and Support Service Activities (N) | -0.2 | 0.2 | 0.1 |
| Education (P) | -0.1 | 0.2 | 0.1 |
| Transportation and Storage (H) | 0.3 | -0.1 | 0.3 |
| Accommodation & Food Service Activities (I) | 0.2 | 0.2 | 0.4 |
| Domestic Manufacturing (NACE 10-17,19,22-25,28-30,33) | 1.1 | -0.7 | 0.5 |
| Human Health and Social Work Activities (Q) | 0.2 | 0.4 | 0.6 |
| Real estate activities (L) | 3.6 | -2.2 | 1.4 |
| Financial and insurance activities (K) | 0.9 | 1.3 | 2.2 |
| Domestic Sector | 5.5 | -1.7 | 3.8 |
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Labour productivity growth can also be explained by changes in capital per hour worked (capital deepening) and multifactor productivity (MFP) growth. Intangibles are the most significant type of capital used in the Irish economy, which includes patents and intellectual property products (IPP). Capital deepening is split into tangible and intangible asset contributions to provide a better picture of capital deepening across the economy.
Capital deepening is measured as the growth in capital services per hour worked, where capital services are a measure of the flow of productive services from capital assets such as Factories, Machinery and Equipment and Intangible Assets. MFP is a residual measure and is calculated by subtracting labour and capital from GVA growth. As a result, MFP attempts to capture all other effects such as changes in organisational behaviour or shifts to remote working, which are not explained by the changes in labour or capital.
Table 3.1 below explains the relationship between the different inputs in the Domestic sector. For example, Labour Productivity Growth (C) is the sum of total Capital Deepening (Column E) and MFP Growth (Column D).
Figure 3.5 presents labour productivity growth for the Total Economy, decomposed into capital deepening and multifactor productivity (MFP). In 2023, for the total economy, the main source of the decrease in labour productivity was intangible capital deepening (-5.6%). In general, over the period, tangible capital deepening has not been a predominant driver of growth in labour productivity for the Total Economy.
Figure 3.6 presents growth in Labour Productivity, decomposed into capital deepening and multifactor productivity growth for the Domestic sector. MFP growth as well as capital deepening have played a role in explaining labour productivity growth fluctuations over the period 2013-2023. In 2023, the 3.8% growth in Domestic sector labour productivity was almost wholly driven by growth in multifactor productivity (4.0%), offset slightly by negative capital deepening (-0.2%).
A sectoral analysis of Labour Productivity growth for 2023 is shown in Figure 3.7 for some key Domestic sectors. Labour productivity in Electricity, Gas, Steam & Air Conditioning Supply exhibited the largest annual growth rate at 61.5%. This increase was driven mainly by the large contribution of multifactor productivity growth (57.9%). These results for Electricity, Gas & Steam are mainly explained by upward price trends in wholesale energy markets. Labour productivity in Arts, Entertainment & Recreation showed the greatest contraction with a growth rate of -10.4%, with both negative capital deepening (-5.3%) and a decline in multifactor productivity (-5.1%) playing a role here.
| Description | Capital Deepening Contribution to Labour Productivity Growth | Multifactor Productivity Growth | Labour Productivity Growth |
|---|---|---|---|
| Arts, Entertainment and Recreation (R) | -5.3 | -5.1 | -10.4 |
| Wholesale and Retail Trade (G) | -0.7 | -7.9 | -8.6 |
| Professional, Scientific and Technical Activities (M) | -0.1 | -6.3 | -6.4 |
| Education (P) | -0.7 | -1.6 | -2.3 |
| Construction (F) | 1.8 | -1.3 | 0.4 |
| Human Health and Social Work Activities (Q) | -0.6 | 2.7 | 2 |
| Public Administration and Defence (O) | -0.1 | 2.7 | 2.5 |
| Administrative and Support Service Activities (N) | -0.5 | 3.8 | 3.2 |
| Domestic Sector | -0.2 | 4 | 3.8 |
| Other service activities (S) | -0.1 | 4.9 | 4.8 |
| Information and communication (J) | -6.6 | 11.6 | 5 |
| Accommodation & Food Service Activities (I) | -1.2 | 7.8 | 6.6 |
| Transportation and Storage (H) | -1.1 | 9.9 | 8.8 |
| Mining and Quarrying (B) | -0.8 | 10.6 | 9.8 |
| Financial and insurance activities (K) | -2.6 | 13.6 | 11 |
| Agriculture, Forestry and Fishing (A) | -0.1 | 13.7 | 13.7 |
| Domestic Manufacturing (NACE 10-17,19,22-25,28-30,33) | 4.2 | 10.6 | 14.7 |
| Water Supply, Sewerage & Waste Management (E) | 5.8 | 15 | 20.8 |
| Real estate activities (L) | 18 | 9.4 | 27.4 |
| Electricity, Gas, Steam and air conditioning supply (D) | 3.7 | 57.9 | 61.5 |
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Figure 3.8 presents labour productivity growth for the Foreign sector over the period 2013-2023, decomposed into capital deepening and multifactor productivity growth. Labour productivity for the Foreign sector overall fell by 15.9% in 2023. Capital deepening contributed -8.1% towards this decline, while multifactor productivity accounted for -7.7%. Foreign sector labour productivity growth had been consistently positive from 2018 and 2022, making 2023 the first decline in five years.
Figure 3.9 shows labour productivity growth for Ireland's Domestic Manufacturing sector over the period 2013-2023, decomposed into capital deepening and multifactor productivity growth. Labour productivity for the Domestic Manufacturing sector grew by 14.7% in 2023. Capital deepening contributed 4.2% towards this growth, while multifactor productivity contributed 10.6%. Labour productivity in the Domestic Manufacturing sector has been growing consistently since 2017.
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