Over the 60 years to 2019-20, labour productivity (production per hour worked) grew at an average of 1.8% per year, which sounds small but compounds each year.
In the most recent of those decades, the decade to 2020, growth fell to just 1.1% – a drop of one-third.
If it remains that low we will be much worse off in decades to come than we would be if we could get back to the kind of growth we had.
That’s one of the reasons I was excited to work on the Productivity Commission’s second five-yearly productivity report, released today by Treasurer Jim Chalmers.
Victims of our own success
In some ways, Australia has been a victim of its success. It has a robust and highly productive economy, especially in mining and agriculture where it is among the world’s leaders.
But, as productivity growth in mining and agriculture has made us wealthier, we have demanded more services, such as holidays, housecleaning, childcare and after-school care, gyms and home-delivered food.
Now employing 90% of our workers and accounting for 80% of our economy, services are harder to make more productive, and as our population ages they are likely to account for an even greater share of what we do.
In government-funded non-market services such as health, education and public administration, measured labour productivity growth has been close to zero since the turn of the century.
If we want to continue to improve our standard of living, we are going to have to tackle productivity in services as well as in goods, including in human services that are usually provided off market by the government.
How to improve
Our report tackles the problem over nine volumes and 964 pages, coming up with 29 “reform directives” and 71 specific recommendations.
It focuses on five key themes:
- building a skilled and adaptable workforce
- harnessing data and digital technology and diffusing new ideas
- creating a more dynamic economy
- lifting productivity in the non-market sector
- securing net zero carbon emissions at least cost
I’ll give you a taste of our recommendations across three of these themes.
The uptake of telehealth and video conferencing during the pandemic shows how technology can improve productivity and increase access to services. We will need to better leverage these digital technologies, particularly in non-market services such as education and public administration.
In health, better connections can save lives. We need to fill the gaps using the mix of technology that will best allow all Australians to benefit from the digital connectivity revolution.
Data is also crucial. We need better linking of data to improve government-funded services and better rules around cybersecurity to protect that data.
Focus on outcomes rather than inputs
Too often, government funding rules for health, education, public housing and other services focus on inputs (the funding delivered) rather than outcomes (the service delivered).
These rules limit innovations in service delivery that would boost productivity and benefit consumers. The rules need to be more flexible to allow increased innovation, working out what works and spreading best practice to all providers, while ensuring consumer safety.
A more productive economy will increasingly need a more adaptable and better-trained workforce. Most of the new jobs created in the next five years will require tertiary qualifications, particularly university qualifications.
To meet this demand we will need to both better “educate our own” and target our migration system to fill skills gaps.
A road map for reform
This is the Productivity Commission’s second five-yearly productivity report.
The first made explicit that productivity was not about extracting more sweat from the brow of an already hard-working Australian, but was instead about
- promoting better investment in workplaces
- supporting the research and trialling of new ideas
- removing outmoded regulations that prevent consumers and businesses obtaining better services
This report builds on the first to provide a road map, focusing first on the high-impact low-cost reforms. Some are quick and others will take time and planning.
All will face opposition. Vested interests benefit by exploiting economic inefficiencies for their own gain. Without reform, we will all be poorer.
Extracts follow from a response to the above from Ross Gittins, Economics Editor of the Sydney Morning Herald – his headline was ‘Productivity Commission wants wage bargaining shifted further in favour of employers’
If you accept the Productivity Commission’s assumption that getting richer – “advancing prosperity” – is pretty much the only thing that matters, then the five priority areas it nominates in its five-yearly review of our productivity performance make a lot of sense.
But when you examine the things it says we should do to fix those five areas, you find too much of it is its same old preference for neoclassical ideology over empirical evidence.
And you find no acknowledgement that part of our claimed failure to improve the productivity of the “government-funded non-market services sector” has occurred because, over recent decades, governments have acted on the commission’s advice to keep the public sector small and taxes low by outsourcing the provision of human services to profit-motivated businesses.
Which, if anything, has made matters worse rather than better. As witness: the mess we’ve made of aged care and vocational education and training, and the ever-growing cost of the National Disability Insurance Scheme.
The report is quick to explain that improving productivity does not mean getting people to work harder. Perfectly true. It’s supposed to mean making workers more productive by giving them better training and better machines to work with.
Except that when you see the commission recommending a move to “modern, fit-for-purpose labour market regulation” – including, no doubt, getting rid of weekend penalty pay rates – you realise the Commission has learnt nothing from the failure of John Howard’s Work Choices, nor from the failure of the reduction in Sunday penalty payments to lead to any increase in weekend employment, as had been confidently predicted.
So, what the commission is really advocating is that the balance of power in wage bargaining be shifted further in favour of employers and away from workers and their unions. Which probably would lead to people working harder for little or no increase in pay.
What the commission should have said, but didn’t, is that workers would be more co-operative with bosses’ efforts to improve the productivity of their firms if they were more confident they’d get their fair share of the benefits. (N.B. In the UK, FTSE 100 CEO’s pay is now over 150 times the average salary paid to their troops – a fact never mentioned when wondering why we lag most other G7 nations in the productivity stakes)
At present, they have good reason to doubt that they would.
What’s conspicuously absent from all the bemoaning of the slowdown in our rate of productivity improvement, is any acknowledgement that there’s also been a huge fall in the rate of the flow-through to real wages of what improvement we are achieving. But the commission long ago stopped pointing this out
Until the capitalist system goes back to keeping its promise that the workers will get their fair share of the benefits of capitalism – Australia’s households have no rational reason to give a stuff about what’s happening to productivity.
Our industries have become more oligopolised – allowed by our permissive takeover laws – and, not surprisingly, their profit margins (“markups,” in econospeak) have been creeping up.
No official will admit it, but it seems pretty clear that the reason the Reserve Bank has been raising interest rates so far and so fast – despite falling real wages – is the part that oligopolistic pricing power is playing in our high inflation rate.
And now further Treasury research has confirmed that our high degree of industry concentration (markets dominated by a few huge firms) has given employers greater power to limit the rise in wages.
All this makes it unsurprising that our rate of productivity improvement has weakened. It also helps explain why, over the past decade, virtually none of what improvement in the productivity of labour we have achieved has been passed on to real wages.