It’s a term that keeps popping up.
The financial press and economists have become obsessed with it and every time Reserve Bank governor Michele Bullock holds a press conference, there’s inevitably a question on it.
There’s even an entire federal government entity devoted entirely to it.
We’re talking about productivity.
And while everyone is in furious agreement that there’s a problem and something needs to be done about it, no-one is ever able to come up with a simple solution.
When the RBA governor fronts the post-decision press conference today, with an explanation as to why rates have been kept on hold, you can lay bets on how soon she points the finger at productivity.
The on-hold call will come despite stalling economic growth, a serious decline in household disposable income and living standards and an inflation rate that continues to moderate.
In fact, productivity will be a key factor behind the decision to sit on rates until some time next year. Wage rises, she’ll argue, while moderating, aren’t being supported by gains in labour productivity, which is pressuring inflation.
Like many other developed countries, our productivity growth has gone down the shoot.
In many ways, ours has been even worse.
Back in 2003, Australian labour productivity was averaging around growth at about 1.8 per cent a year and remained that way until about 2015.
By the time the pandemic rolled around, it had dropped to 1.2 per cent. Now, it’s tracking at an anaemic 0.8 per cent.
Which raises the question: Have we become a bunch of lazy no-hopers who refuse to go the extra mile?
Or perhaps, as is more likely the case, there are other, more complex, issues at play over which we have little control.
Improving productivity sounds simple enough in theory, but is challenging in practice. (ABC News: John Gunn)
Why we have the wooden spoon
Productivity is a simple measure of how much you produce from the same amount of input over time.
While our labour productivity is growing, meaning we are continuing to produce more than we did previously, the growth is slowing.
That’s not the case in the US, most of the Euro area and Norway. But, like Australia, Canada’s labour productivity has dropped off a cliff.
Like Australia, Canada has relied upon rapid population growth to maintain economic growth while the US, in particular, has relied upon productivity.
The concept might be simple but there are no simple answers to explain our problem and certainly no simple solutions.
Our economy may be producing more than it did previously, but the growth rate is waning. (ABC News: Keana Naughton)
It’s traditional for almost everyone to blame government for a lack of reform. Many in the business community continually trot out the same old line: remove red tape, make the workforce more flexible and — the solution for every problem — cut corporate taxes.
But the issues run much deeper than that.
When it comes to the workforce, increasing flexibility, which is often a euphemism for cutting wages and conditions, tends to have the opposite effect. Workers tend to be less committed when their conditions are crimped.
As an illustration of the complexity, the Productivity Commission delivered a massive report last year on how to fix the issues. It ran to nine volumes and 964 pages.
“There’s no shortage of ideas,” former RBA governor Philip Lowe used to say.
And no succinct ones, either.
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When the rot sets in
University of Technology professor Roy Green reckons many of our productivity problems stem from the resources boom following the global financial crisis.
“A high Australian dollar made our trade-exposed industries less competitive,” he argues.
“This particularly affected manufacturing, which historically had been the major source of increasing productivity. Manufacturing was only just finding its feet in global markets after the tariff reductions of the late 1980s and 90s.”
Why would that have an impact?
For a start, measuring productivity is easier in some industries than others. And manufacturing happens to be one of those.
You can easily measure how much you churn out of a factory, along with the number of people you employ and the hours worked. If you want to improve your output, there’s a fairly easy solution; you invest in new machinery that lifts volumes and hence productivity.
Instead, our economy was hollowed out by the commodities boom. In 1990, manufacturing accounted for about 11 per cent of Australia’s economic output. Now, it’s dropped to around 5.3 per cent.
This was the period when all three major car manufacturers shut up shop and left for home and when a legion of smaller manufacturers simply couldn’t cope with cheaper imports and either went offshore or closed up.
Since then, our economy has become far more reliant on service industries. In many service industries, like aged care, health, tourism, hospitality and education, it’s difficult to measure productivity, let alone improve it.
Is healthcare productivity improved if the number of doctors and nurses are cut? You could argue it becomes worse.
Is a teacher twice as productive if class sizes are doubled? Probably not. That’s important given tertiary education has become our third-biggest export.
Measuring productivity in the education sector is hard enough, yet alone improving it. (ABC News: Lucas Hill)
Not just governments to blame
That hollowing out of the economy has made us heavily reliant on just a couple of exports, mostly to just one country. The upshot is that we are one of the least complex economies in the world.
According to a study by Harvard University, Australia ranks 102 on a list of 144 countries when it comes to complexity. We sit behind Senegal and just ahead of Yemen. And we’re slipping further down the ranks each year.
That over-reliance on exporting raw materials has made us rich but it has limited our ability to lift productivity.
Mining firms, which muscled out many of our manufacturers, are hugely capital-intensive. They don’t employ many people. In fact, much of the work in the Pilbara in the north-west of Western Australia is conducted from Perth. Even the trains that shunt all that red dirt to the coast are automated.
Essentially, there is little scope for improved labour productivity when it comes to our biggest exporters.
“It can be argued, Australia’s reliance on unprocessed raw materials is part of the problem,” Roy Green asserts.
“While fuelling consumption at the height of the commodity boom, they reduced our capacity to grow globally competitive, knowledge-intensive industries. We therefore have a less complex, less diverse export mix than any other advanced economy.”
That’s one reason the federal government formulated its Future Made in Australia policy at the last federal budget.
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The global shift to new forms of energy generation technology could help reinvigorate some of our manufacturing capabilities.
But Australian business needs to shoulder some of the blame. Businesses have been reluctant to invest in new technology for quite some time. Improved management systems can also help.
America has lifted productivity by actively creating new industries, developing new technology and engaging in new management processes.
Instead, Australian businesses have been happy to just sit back and watch the dollars flow in, expanding production using existing facilities and techniques as the population has grown.
