Productivity distribution and drivers of productivity growth in the construction sector

This study draws on firm-level data from the Longitudinal Business Database to examine productivity in the New Zealand construction industry. It finds that over the period 2001–2012, on average labour productivity in this industry grew by 1.7 percent annually and multi-factor productivity by 0.5 percent annually, compared with 0.5 and 0.1 percent annually respectively for firms in the overall measured sector. Within the construction industry, productivity growth rates vary markedly by sub-industry and other firm characteristics. Labour productivity is more widely dispersed across the construction industry than is multi-factor productivity. High-productivity firms tend to be younger, more likely to be a new start-up, to belong to a business group, and to locate in Auckland than low-productivity firms. Working-proprietor-only firms are slightly less productive on average than employing firms, and also exhibit much greater productivity variation. Overall, however, productivity variation or dispersion is no greater in construction than in other industries. We decompose productivity changes over time into that due to changes at continuing firms, to reallocation of output from low- to high-productivity firms, and to entry and exit. In the ‘Building construction’ and ‘Heavy and civil engineering and construction’ industries, productivity was enhanced by net entry and reallocation, but reduced by an overall decline in the productivity of continuing firms. In the ‘Construction services’ industry, net entry, reallocation, and productivity improvement of continuing firms all contributed to positive productivity growth.