Australia’s productivity problem may be impossible to measure

Australia’s productivity debate overlooks a fundamental flaw: across much of the economy, productivity simply cannot be reliably measured. Stephen Koukoulas writes.

IT IS PARTICULARLY noteworthy that the Reserve Bank of Australia (RBA) and Productivity Commission (PC) appear to have never produced any estimate of the productivity changes of their own institutions.

It is clear why this is the case.

Productivity in these institutions and a huge proportion of the economy cannot be measured. It is that simple.

Productivity is defined quite simply as the amount of output produced per hour worked.

For some sectors, including manufacturing and agriculture, for example, productivity is easy to measure: how many widgets are made per hour worked, how many tonnes of wheat are grown per hour worked.

Be it the improving skills of the workers, the use of new, more efficient machinery or better quality grains and fertilisers, productivity increases as output per worker in these sectors increases.

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Here is what the PC states:

‘Numerous measurement issues [of productivity]... may explain some of the poor performance as there are possible quality changes not currently captured by productivity statistics.’

The ABS acknowledges the problem with measuring productivity, noting that it does not even bother to measure productivity for public administration and safety, education and training, and health care and social assistance.

While the ABS calculates the output, hours worked and therefore productivity for other services, the reliability of those estimates is highly questionable. How is the productivity of cleaners, air traffic controllers, academics, firefighters or garbage collectors, plus a myriad of other workers, measured?

More planes landing per hour at the airports? More fires for firefighters to deal with, or is the greater use of smoke detectors making firefighters less productive because of fewer fires per firefighter who now sit around waiting for the next alarm to go off?

As the services sector continues to become a more important part of the economy, it makes up 80% of Australian GDP; the productivity measures are increasingly misguided. A harsh assessment would be that they are largely irrelevant.

All of which goes to show how misguided much of the anxiety and stress over Australia’s productivity “problem” is.

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Do you believe the ABS?

The ABS has published some experimental estimates of productivity for some services. The results were so startling as to be unbelievable.

The ABS calculated that productivity in education fell a staggering 6.3% between 2011-12 and 2023-24, an extraordinary outcome when technology is being used more widely in the classroom and at home by the students. That is a fall in productivity of 0.5% per annum. For over a decade.

Try telling teachers that.

The abysmal productivity could be linked to the trend toward smaller class sizes over that time. It is widely considered that smaller class sizes deliver better educational outcomes for students, who each get a bit more of the teacher’s time in a smaller class.

But here’s the rub: smaller classes mean that the output per teacher is falling — “only” 24 children going through the grade per teacher per year versus 26 a decade or so earlier.

Statistically, larger class sizes would boost productivity. But it is far from clear whether the quality of teaching per student would be enhanced if the class sizes rose by one or two students per class per year, the type of number needed to boost productivity.

In many other service businesses, the hours worked by all staff are usually the easy part to measure. The problem is measuring their output in current dollar terms and then turning that result into a constant price or real estimate.

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Back to the loudest voices in the debate

How could the real output of the PC and RBA be measured?

More reports? More speeches from senior officials? More interest rate decisions per year?

It is fanciful to contemplate where such a discussion may go.

Extend this measurement impossibility to many other services and the productivity issue and the misreading of the issue is clear.

The final word

This does not mean policymakers should relax when it comes to broader economic policy.

A skilled, educated workforce is essential for growth. Rules and regulations for businesses should be streamlined. Tax policy should always be pitched at a level that supports business investment, expansion, entrepreneurial spirit and jobs.

Progressive policy formation in these areas will, in theory, boost productivity; it's just that in many places it cannot be measured.

Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk and on Bluesky @thekouk.bsky.social.