NCC Productivity Statement 2018

Productivity growth is a key determinant of national competitiveness, enabling firms to compete successfully in international markets by facilitating output to be produced more efficiently. It is, arguably, the most important factor determining long-term economic growth, sustainable wage rates and funding for public services. Labour productivity (output per hour worked) and total factor productivity (the efficiency by which labour and capital are used together) are the two measures of productivity most commonly used. Ireland’s labour productivity has been catching up with the other developed countries since the mid-1990s, with GDP per hour worked above the OECD average and advanced economies. However, this aggregate measure of productivity masks a number of underlying issues. On a Gross National Income (GNI*) basis, Ireland’s labour productivity is below some selected frontier economies (e.g. Germany and the US), although slightly above the UK, Japan and the OECD average. When the contribution from the 7 per cent rise in the capital intensity of firms is deducted from labour productivity growth, Ireland’s total factor productivity stagnated over the period 2006-2014. At sectoral level, there is considerable heterogeneity with Ireland’s productivity performance built upon a narrow base of highly-productive (mainly foreign-dominated) sectors such as Pharmaceuticals and ICT. In turn, within those sectors, Ireland’s performance is greatly affected by the influence of a small cohort of large, highly-productive enterprises (‘frontier firms’). The narrow base of enterprises in high value-added sectors, and within sectors, disguises many underperforming firms where productivity growth is stagnant or falling. This divergence is not uncommon in OECD countries but is more severe in Ireland; the OECD recently published firm-level research showing that the labour productivity gap between frontier (mostly foreign-owned) and lagging (mostly domestically-owned) firms is widening over time, which indicates the difficulties the majority of firms face in order to catch up with rapidly-expanding global firms. These findings also reflect the highly-concentrated nature of Ireland’s economy showing that the top 10 per cent of firms (in terms of sales) account for 87 per cent of valued-added in manufacturing and 94 per cent in services. Policy to enhance Irish enterprise productivity should be comprehensive and tackle multiple aspects within firms (e.g. innovation and KBC), between firms (e.g. spillovers) and across industries (e.g. diversification) to ensure an effective, broad and sustained impact on Ireland’s competitive base.