1. Ireland’s Productivity Performance
FEPS-TASC Annual Conference, June 22, 2018
Professor Peter Clinch
Chair, National Competitiveness Council

2. ABOUT THE NATIONAL COMPETITIVENESS COUNCIL
Established by Government in 1997
Reports to the Taoiseach and the Government, through the Minister for Business, Enterprise and Innovation
In March 2018 the NCC became Ireland’s National Productivity Board
Independent Critical Voice championing competitiveness, which aims to be
Unbiased
Evidence-based (through research)
Cooperative with government/policy system
Effective in its Communications (dialogue and advocacy)

3. KERNEL OF THE NCC MESSAGE
Ireland’s ability to compete in international trade and sell our goods and services abroad is a key determinant of our wages, living standards and our ability to finance social services like health, education and social protection.
It also allows our economy to be a successful member of the eurozone and withstand the shocks that are beyond our control.
Competitiveness is part of the DNA of sustainable jobs: If we want to create good, well- paid jobs for our citizens and ensure that these are sustainable, maintaining our competitive edge is crucial.
In the medium term, productivity improvement must be primary driver of Irish competitiveness and is the key determinant of sustainable employment, wages, living standards, social services.
Irish economic growth figures mask a rising threat of a competitiveness loss. A yawning productivity gap threatens the sustainability of the Irish economic model. 3

4. DEFINING COMPETITIVENESS
A nation or region is competitive to the extent that firms operating there are able to compete successfully in the regional and global economy while maintaining or improving wages and living standards for the average citizen
Competitiveness depends on the long-run productivity of a location as a place to do business
The productivity of existing firms and workers
The ability to achieve high participation of citizens in the workforce
Competitiveness is not:
Low wages
A weak currency
Source: Michael Porter, Harvard Business School 4

5. NCC Evidenced-Based Competitiveness Framework
Unless where noted, Copyright Peter Clinch/NCC. For single use only. It is forbidden to circulate this beyond Participants of DBEI Introduction to Economics Course 2018

6. COMPETITIVENESS Competitiveness Labor Utilisation Productivity
Labour productivity
Capital productivity
Total factor productivity
Workforce participation rate– Population age profile
Unemployment rate
Working hours
Source: Michael Porter, Harvard Business School 6

7. The Crucial Importance of Productivity
Krugman: "Productivity isn't everything but, in the long run, it is almost everything. A country's ability to improve its standard of living depends almost entirely on its ability to raise its output per worker. World War II veterans came home to an economy that doubled its productivity over the next 25 years; as a result, they found themselves achieving living standards their parents had never imagined. Vietnam veterans came home to an economy that raised its productivity less than 10 percent in 15 years; as a result, they found themselves living no better - and in many cases worse - than their parents". Baumol: "Over long periods of time, small differences in rates of productivity growth compound, like interest in a bank account, and can make an enormous difference to a society's prosperity. Nothing contributes more to reduction of poverty, to increases in leisure, and to the country's ability to finance education, public health, environment and the arts".
Multi Factor Productivity Performance
Productivity levels and growth rates

8. PRODUCTIVITY PERFORMANCE
Productivity is a key driver of national competitiveness. Improving levels of labour and capital productivity enables enterprises to improve their efficiency and profitability, and enhances the ability of countries to maintain international competitive advantage and sustainably improve living standards.
Economic growth may be increased by increasing the supply of labour and capital but, in advanced/mature economies, there is limited potential gain from such measures as labour supply suffers from demographic constraints and capital suffers from diminishing returns.

9. Labour productivity growth 2006-2016
Over the last decade productivity growth has slowed in most OECD member states. The decline in labour productivity growth was underway prior to the crisis, in both manufacturing and business sector services and growth remains subdued.
This chart uses OECD data to shows the trend in GDP per hour worked, in index form. The chart illustrates the stagnant growth in productivity in the US and UK which is in stark contrast to the Irish trend. Irish labour productivity growth has been above that in competitor countries since 2010.
The economic cycle and more generally trends in the composition of value added and employment –have a significant effect on measured productivity levels in Ireland. Labour productivity growth was low immediately prior to the recession with economic growth concentrated in the Domestic and Other sectors, reflecting the importance of Construction over the period. Economic growth considerably weakened to an average annual growth rate of around 2 percent for the period 2009 to Over the course of the recession ( ) as output and employment growth collapsed, labour productivity growth increased at a stronger rate. The period 2015 and 2016 has seen a significant increase in industrial sector productivity due to the relocation of large multinational companies to Ireland. corporate restructuring, including the relocation of firms with significant IP assets and aircraft leasing, led to noteworthy increases in labour productivity, particularly in 2015.Growth in Gross Value Added (GVA) substantially exceeded labour growth in 2014 and 2016, which explains increased labour productivity.
Source: OECD 9

10. Labour productivity levels and growth RATEs
GDP per hour worked is a measure of labour productivity. It measures how efficiently labour input is combined with other factors of production and used in the production process. The first chart indicates the level of output per hour across OECD member states in 2006, 2011 and This indicator is measured in USD (constant prices 2010 and PPPs). It shows Ireland had the highest output per hour worked among OECD member states in Output per hour was $83.1 in 2016 in GDP terms, compared to $51.6 in the UK and $47.1 in the OECD. The chart shows the marked increase in Irish levels compared to other OECD Member States. Ireland’s output per hour increased by approximately 60% between In contrast, output per hour across the OECD increased by only 9%.
The Chart in the right shows the annual growth in labour productivity across the OECD. Clear disparities exist among OECD Member States in terms of productivity growth rates. In 2017 Ireland’s growth was 5.8 % which significantly exceeds the UK (0.8%) and the OECD total. On average over the period , Ireland’s growth rate (4.6%) has been well above most Member States and the OECD (0.9%). Reflecting significant changes in the economic cycle the pattern of Irish productivity growth shows significant volatility. Median total productivity growth over the period was 4.7% peaking at 22% in 2015 with a low of -1.1% in Significant volatility is seen in Manufacturing, Construction, Agriculture and Finance sectors.
Source: OECD 10

11. Irish Labour productivity, by Economic Sector, 2006-2016
Aggregate productivity statistics hide underlying drivers. It is instructive to look at the contribution of different economic sectors level.
There is considerable heterogeneity between sectors in terms of productivity growth. There are many possible factors which can influence diverging growth patterns. These can include the intensity of competition and regulation in the market, the degree of skilled labour and capital in production, propensity to innovate and export degree of standardisation, economies of scale, and participation in global value chains. Productivity growth across economic sectors has tended to be higher in Ireland compared to the UK and Euro area. The differential between Ireland and the UK and Euro area is highest in manufacturing and ICT. Average labour productivity of large manufacturing firms is significantly higher in Ireland, reflecting in large part the high intellectual property content of output, typically provided by multinational firms.
This chart uses recently published CSO data to show the considerable heterogeneity in labour productivity across economic sectors. Over the last decade Industry and ICT have seen significant rises in labour productivity over this period, increasing by a factor of 2.7 and 2.4. A large proportion of the growth in Industry occurred between 2014 and 2016, driven by the globalization events in Distribution, Transport, Retail and Construction has seen relatively little change in productivity over the period.
OECD data (not in chart) shows that the Wholesale retail, accommodation food services, transportation and storage is the only sector where Irish growth (1%) is close to the UK (0.6%) and Euro area averages (0.5%). Reflecting significant changes in the economic cycle, the pattern of Irish productivity growth shows significant volatility. Median total productivity growth over the period was 4.7% peaking at 22% in 2015 with a low of -1.1% in The spike in manufacturing in 2015 (87%) is due to activities of multinationals. Significant volatility is seen in Construction, Agriculture and Finance sectors.
Ireland’s performance is significantly affected by globalization activities which are reflected in the national accounts and productivity data. Corporate restructuring, including the relocation of firms with significant IP assets and aircraft leasing, led to noteworthy increases in labour productivity, particularly in Ireland’s growing base of multinationals in high value-added, capital intense, sectors (particularly a small cohort of manufacturing and ICT firms) disguises to a degree underperforming sectors and boosts Ireland’s productivity levels.
Source: CSO 11

12. Concentration in Irish productivity performance
Ireland’s productivity performance is built upon a narrow base of mainly foreign owned dominated sectors, (ICT and pharma-chem manufacturing).
In 2018 the Department of Finance conducted firm level analysis of productivity growth in Ireland. The Department’s analysis is based on the OECD Multiprod model
Firm Level productivity in Ireland. It uses confidential firm-level data to generate non-confidential aggregate statistics.
The Department’s research shows that in some high value-added sectors, a small group of firms are the dominant source of productivity growth. The variation in productivity across manufacturing and market services is driven by variation in firm level productivity within individual sectors, for instance pharmaceuticals and chemicals in manufacturing, rather than productivity differences between sectors. This reflects a high degree of firm heterogeneity amongst firms within given sectors.
The chart is taken from the recent Department of Finance research shows the contribution of the most productive firms to aggregate productivity in both manufacturing and services.
 Top performing firms in manufacturing (defined as those located between the 90th and 100th percentiles of the labour productivity distribution) account for by 70 percent (on average) of aggregate productivity over the period , with a high point of almost 90 percent in 2010 and a low point of about 60 percent in 2013.
In services, however, the impact of the most productive firms on aggregate productivity is markedly lower than in manufacturing. The top 10 percent most productive firms only account for by 40 percent (on average) of aggregate productivity over the period, showing a growing trend after the crisis from 30 percent in 2008 to over 50 percent in 2014.
Overall, the Department of Finance research illustrates the impact that a small number of firms are having on aggregate statistics including industry level output, value added, and ultimately productivity.
Manufacturing: top 10% most productive firms account for 70% (on average) of aggregate productivity over the period
Services: top 10% most productive firms account for 40% (on average) of aggregate productivity over the period
Source: Department of Finance 11

13. Summary of Key Findings
Over the last decade, productivity growth slowed in most OECD countries.
Ireland’s productivity performance exceptionally strong.
Labour productivity growth assisted by collapse in ‘lower-productivity’ sectors during crisis
Ireland’s productivity performance is built upon a narrow base of sectors (ICT, Chemicals, Pharma), driven by a small cohort of firms.
Performance weaker amongst domestically-focused companies & sectors, particularly in large employment sectors such as accommodation , food, retail, agriculture, & construction.
Many of these firms most prone to Brexit and rising costs.
Substantial economic threat from the productivity gap - top 10% of firms account for 87% of value added in manufacturing and 94 per cent in services.
Ireland’s performance is significantly affected by globalization activities which are reflected in the national accounts and productivity data. Corporate restructuring, including the relocation of firms with significant IP assets and aircraft leasing, led to noteworthy increases in labour productivity, particularly in 2015.
Ireland’s growing base of multinationals in high value-added, capital intense, sectors (particularly a small cohort of manufacturing and ICT firms) disguises to a degree underperforming sectors and boosts Ireland’s productivity levels.
Recent research by the Department of Finance shows most businesses have experienced a decline in productivity in recent years. The research suggests that the top 10 per cent of firms account for 87 per cent of value added in manufacturing and 94 per cent in services. This highlights Ireland’s exposure to firm specific shocks. While Ireland’s productivity growth is relatively strong, there is a need to increase productivity across many sectors and occupations. Supporting an uplift in productivity performance at firm level across all sectors remains a significant competitiveness challenge across a range of policy spheres.
Productivity levels and growth rates in Ireland have been strong in recent years but overall performance in Ireland is heavily influenced by the performance of the Manufacturing and ICT sectors and the performance of a small cohort of Foreign Direct Investment (FDI) enterprises in these sectors. Bridging the productivity gap that exists between the most productive firms and laggard firms is a major challenge to sustainable growth prospects. 12

14. THE PRODUCTIVITY GAP FDI Effect – ‘diffusion problems’
Uncompetitive non-traded sectors; rising costs
Sectoral ‘narrowness’ of export recovery
Entrepreneurship – fiscal pressures and incentives
Access to talent, generally, and management talent
In-company training
Innovation
SMEs access to capital in aftermath of financial crisis
Do we face the same future as (even) more developed countries? 13

15. ACTIONS TO ENHANCE PRODUCTIVITY
Capital investment - ensure coordinated delivery and evidence based monitoring of NPF and NDP
Skilled labour - strong higher education; apprenticeships, in-company training, management training.
Innovation - facilitate investment in productivity enhancing talent and capital with administrative and regulatory framework. R&D investment lagging competitors.
Developing a cadre of firms of sufficient scale and capability to succeed in international markets:
Extending global connectedness, via trade, FDI linkages, increasing indigenous export levels
Fostering innovative indigenous start-ups, scaling and improving survival rates.
Developing management capacity and employee skills, deepening investment and innovation activity (processes, marketing, organization, R&D), particularly in SMEs and Ireland’s non-exporting sectors.
Productivity is a key driver of national competitiveness. Improving levels of labour and capital productivity enables enterprises to improve their efficiency and profitability, and enhances the ability of countries to maintain international competitive advantage and sustainably improve living standards.
Many of the resources that enterprises draw on to maximise productive capability come from the surrounding environment, including for example, a sound macroeconomic environment, the education and skills base of the labour force, transport and communications networks, science and technology, capital investment, competition and regulation policies, access to finance etc. In the first instance, recognising the importance that productivity plays as the key driver of longer term competitiveness and prosperity in industrial and enterprise policy is essential.
Enhancing productivity performance requires action across a range of policy spheres. 1-6 above 14

16. PRODUCTIVITY IS MUCH MORE THAN HOURS WORKED
Quality of Life is critical
The resources that enterprises draw on to maximise productive capability are multi-dimensional:
competitiveness environment
education and skills
leadership and management
technology and communications
housing and transport
health
leisure
While the economy and labour market is in its strongest place since the onset of the recession, we must now plan to increase participation in the workforce, and to increase skill levels and productivity across the economy. We live in uncertain economic and political times. Massive technological disruption, and the urgent need to address issues such as climate change, adds to the challenges for small open economies like Ireland. To remain competitive, we need to focus on what will be required to grow the economy both today and in the future. This must involve a relentless focus on innovation, diversification, cutting costs and seeking new markets. While our competitiveness performance in recent years has been positive, we cannot be complacent. Brexit brings into sharp focus the need for Irish based enterprise to step-up their productivity and innovation performance and for Ireland's policy system to be agile in responding to the competitiveness challenges.
A focus on improving the drivers of productivity performance is urgently required. Increasing productivity across all sectors remains a significant challenge in ensuring growth is sustainable in the long run. Ireland can take advantage of a sizeable competitiveness opportunity if we can avoid the ‘productivity trap’ being experienced by many developed economies.
Marginal gains matter…
Source: bbc.co.uk 17

17. MARGINAL GAINS MATTER
Sir Chris Hoy, Team GB Cycling: "There's fitness and conditioning, of course, but there are other things that might seem on the periphery, like sleeping in the right position, having the same pillow when you are away and training in different places ….. Do you really know how to clean your hands … without leaving the bits between your fingers? If you do things like that properly, you will get ill a little bit less.” "They're tiny things but if you clump them together it makes a big difference."
While the economy and labour market is in its strongest place since the onset of the recession, we must now plan to increase participation in the workforce, and to increase skill levels and productivity across the economy. We live in uncertain economic and political times. Massive technological disruption, and the urgent need to address issues such as climate change, adds to the challenges for small open economies like Ireland. To remain competitive, we need to focus on what will be required to grow the economy both today and in the future. This must involve a relentless focus on innovation, diversification, cutting costs and seeking new markets. While our competitiveness performance in recent years has been positive, we cannot be complacent. Brexit brings into sharp focus the need for Irish based enterprise to step-up their productivity and innovation performance and for Ireland's policy system to be agile in responding to the competitiveness challenges.
A focus on improving the drivers of productivity performance is urgently required. Increasing productivity across all sectors remains a significant challenge in ensuring growth is sustainable in the long run. Ireland can take advantage of a sizeable competitiveness opportunity if we can avoid the ‘productivity trap’ being experienced by many developed economies.
Marginal gains matter…
Source: bbc.co.uk 17

18. National Competitiveness Council Dublin, Ireland
FURTHER INFORMATION
National Competitiveness Council Dublin, Ireland