No room to be smug about productivity

The release of official national income estimates for 1999 affords an opportunity to assess the 1990s in perspective. In doing so, it is timely to draw attention to a feature of the boom that has received too little attention to date, namely the extraordinary growth of employment and the relatively modest rate of increase of output per worker. Over the period 1990-99, real Gross National Product (GNP) increased at an annual average rate of 6.5 per cent. (GNP excludes the profits of multinational national companies remitted abroad and may understate the growth rate, but Gross Domestic Product (GDP) overstates it due to the effects of transfer pricing.) The growth rate climbed to over 8 per cent a year in the second half of the 1990s.

In 1999 the volume of national production was 70 per cent higher than it had been in 1990. This record has no parallel in other countries. In keeping with the tendency of Irish commentators to focus on the growth of total output, these figures are not adjusted for the increase in the number of people at work.

Between 1990 and 1999, the numbers at work grew at an annual average rate of 3.3 per cent and by more than 5 per cent since 1994. There were 34 per cent more people at work in 1999 than at the start of the decade.

These are truly amazing growth rates, more than twice those recorded in the US, which is often cited as an exemplary "jobs machine". Failure to take account of the growth in employment risks misunderstanding the essence of the current boom. From many perspectives, the growth of GNP per capita or per employed person is a more meaningful indicator than the growth of GNP. A simple measure of the rate of growth of labour productivity is obtained by adjusting the growth rate of output for the rate of employment growth. (A more refined measure would allow for changes in hours worked, but this is not a major consideration because the proportion of part-time jobs has not increased dramatically.)

When account is taken of the remarkable growth of employment, we see that the rate of growth of GNP per person employed averaged 2.7 per cent over the 1990s; by the end of the decade it had fallen to about half this.

Even if GDP is used to measure output, the annual average growth rate over the 1990s only rises to 3.3 per cent. These rates are respectable but not exceptional by international standards. They are higher than the rate of productivity growth achieved in the larger EU economies in recent years, but significantly below that currently reported in the US. Even more surprising is that the rate of growth of productivity in Ireland during the 1990s does not markedly outshine the average recorded between 1960 and 1990. In short, the "Celtic Tiger" is difficult to discern in the productivity figures. An even more sober picture can be painted using the employment data from the Labour Force and Quarterly National Household Surveys based on International Labour Organisation labour force definitions. These sources reveal an even higher employment growth rate than is shown in the table and imply that the rate of growth of output per worker was only 2.4 per cent over the period 1990-99, falling to less than 1.5 per cent over the last three years.

Thus more than half of the growth of GNP in the 1990s has been due to the growth of employment, and in recent years this proportion has risen to over three-quarters. The conclusion seems inescapable. To the extent that there is a "Celtic Tiger" or an Irish economic "miracle", it has taken the form of an astonishing growth in the numbers at work rather than a surge in labour productivity. These trends have far-reaching implications. In the first place, the continued growth of living standards depends on improvements in productivity rather than on rapid growth in the labour force. Living standards in Ireland enjoyed an extra boost during the 1990s due to the rising employment/ population ratio but this is a once-off phenomenon reflecting rising labour force participation rates and the changing age structure of the population. The underlying trends imply that that much more modest rates of improvement in living standards will be achieved in the long run.

Secondly, the level of employment is most unlikely to continue to grow at the rates recorded in recent years. A rate of employment growth of about 1.5 per cent would seem the highest sustainable over the medium term. Combining this with the current rate of growth of labour productivity implies that the rate of growth of GNP will fall to the region of 4 per cent a year. The relatively unimpressive rate of growth of labour productivity revealed in the GNP data contrasts with the spectacular productivity gains being recorded in many industrial sectors. But it is easy to lose sight of the fact that these sectors account for a relatively small and declining proportion of the Irish labour force.

In the longer run, the rate of growth in living standards will increasingly depend on improvements in the efficiency of the rest of the economy, especially in the dominant service sectors. This challenge deserves to receive much more attention than it has to date. While we have every reason to feel proud of the extraordinary rates of growth of output and employment that have been recorded during the 1990s, our relatively modest record on the productivity front should serve as a warning against complacency regarding the longer run prospects for the trend in living standards.

Professor Brendan Walsh is head of UCD's economics department