Productivity ‘sluggish’ — but it could be worse

By David Donaldson

June 4, 2019

woman working with computer in modern office, selective hands hold notebook paper.

Productivity growth remains “weak” and “well below” the long-run average, according to data released by the Productivity Commission on Tuesday.

In 2017-18, labour and multifactor productivity growth in the private sector were “sluggish” at 0.4% and 0.5%, respectively — well below the market sector’s long-run trend rate of 2.2% per year from 1974 onwards. Across the whole economy, it was just 0.2%.

The headline numbers also obscure great variation between industries. While labour productivity in agriculture fell by 12% — due to the drought — administrative and support services rose by 8.2%. In public administration and safety, it increased by 3.5%.

Productivity is one of the main drivers of national prosperity, reflecting our ability to produce more per hour worked.

While the economy grew at the much faster rate of 2.8%, this is largely because the population is increasing and more people are working into old age rather than because we are “doing things better”, says Productivity Commission Chair Michael Brennan.

Things have been slow since the end of the mining investment boom, but productivity in the private sector — which is easiest to reliably measure because it is priced — “has deteriorated further from the previous two years”, Brennan writes in the most recent Productivity Bulletin.

A big driver of the general slowdown is that businesses are not investing — not a good sign for the future of the economy.

“This is troubling because investment typically embodies new technologies, which complement people’s skill development and innovation. This is especially so for investment in research and development, where capital stocks are now falling,” says the PC.

This bad news has been partially offset by the growth in the proportion of the population with a job, which “has many positive social and economic benefits for households beyond its effects on economic growth”. The participation rate grew from 64.7% to 65.4% over the year, driven by the continued strong growth in women and older people at work.

And while wage growth has been the slowest Australia has seen since the 1980s, disposable income — “the single best measure of prosperity” — has been growing in the past couple of years, thanks to changes to Australia’s trade position. Disposable income is now back to where it was at its peak in 2011.

So the productivity picture isn’t great, but it could be worse. In particular, Australia is doing better than many other countries. Australia’s average productivity growth since 2001 has been higher than most developed countries, and lags only slightly behind the United States.

“Notwithstanding recent mediocre productivity growth, Australia has a high level of productivity compared with many economies and, as a result, a high standard of living by international standards,” says the PC.

Australia’s labour productivity growth since 2001 compares well with most developed countries. Source: Productivity Commission.
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