Politics Analysis

Australia's productivity not as bad as you've been told

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The mainstream media has been reporting a significant slump in productivity within our country (Image via robertcarlson | Pxhere)

What if there is no productivity crisis in Australia and all of the concerns about the “dismal” level of productivity are misguided and even wrong?

Year after year, a range of businesses, academics, think tanks, public sector entities and other assorted commentators bemoan Australia’s productivity performance. 

The bemoaning has intensified in recent times with current estimates of productivity unambiguously weak. This productivity problem is one of the key reasons why the Reserve Bank of Australia (RBA) is holding interest rates at oppressive levels. 

Productivity is best and most simply defined as:

‘...the amount of real production (GDP) per labour hour worked.’

It is a simple enough concept.

If a worker can churn out more output for a given level of hours worked, the economy grows in a non-inflationary, sustainable way. This is a good thing because it feeds into workers' wages and business profit growth as well as helping the budget as tax receipts rise in a strongly growing economy. Productivity can be boosted through the uptake of machinery and technology, having workers with better skills, or a streamlining of the production process.

It makes economic sense to strive for advances in productivity. It is a good thing.

Pick and shovel versus truck and diggers

Think of an example of ten people each with a pick, shovel and a wheelbarrow. Their task is to mine iron ore ready for the export market. 

The output per worker would likely be very low.

Think now of the same ten people, but this time with big digging machines, trucks and transport infrastructure to get the iron ore to port.

It is remarkably obvious that the output (production) of iron ore per person would be massively larger in the second example than in the first.

That is the easy part, easy to measure and easy to understand part of the productivity issue.

There is, importantly, more complexity when trying to measure productivity in other professions, jobs and tasks and it is noteworthy that these are a large and growing part of the economy.

Some jobs and an increasing proportion of the workforce have jobs where productivity is frankly impossible – yes, impossible – to measure.

Take a firefighter. How does their productivity rise? Fighting more or fewer fires? Do better hoses, pumps and fire alarms undermine productivity because of few and less severe fires?

What now of a professional sportsperson? How can the productivity of Collingwood’s Nick Daicos; Penrith’s Nathan Cleary; Australian cricketer Ellyse Perry or swimmer Ariarne Titmus be measured or indeed increase? More kicks, passes or runs? Faster times?

Now think of a teacher. Under the current definition and measurements of productivity, how can a teacher be more productive? Filling out more forms for the Department of Education? Having bigger classes, although surely the quality of teachers would deteriorate with a class of 50 children versus a class of 25. How else can it be measured?

What about people working at the Reserve Bank? How is their productivity measured? More economic reports? Success in hitting the inflation and full employment targets? More speeches? Longer research reports? Fewer speeches and research reports?

It is a similar experience for anyone working in the services sector. Think journalists, nurses, waiters, actors, accountants, lawyers and many other workers. The list of occupations and jobs is a very long one where productivity is not being measured in any way meaningful for analysis of inflation and economic policy risks.

Structural changes in the labour market

Australia’s labour market is flexible. That means when a person loses their job, they can and do quickly find a new means of employment, even if economic conditions are problematic.

The boom in casual work – Uber drivers, for example – is skewing employment higher, even as aggregate economic output falters. It means that measured employment is holding up even as measured output growth is weaker.

Labour market flexibility is generally a good thing but it is another factor complicating the measurement of productivity.

Striving for productivity growth

All of this does not mean that measures to boost productivity in areas where we know it works are misguided.

On the contrary.

Building infrastructure, investing in skills and education, and boosting investment in capital equipment and technology that allows tasks to be done quickly, safely and efficiently, are all sure things when it comes to productivity. So, too, should we celebrate skills and educational attainment, for both the person in question and from the perspective of economic growth.

Strength in these areas will boost productivity, it is just that it may not be captured effectively in the way it is currently measured.

Stephen Koukoulas is an IA columnist and one of Australia’s leading economic visionaries, past chief economist of Citibank and Senior economic advisor to the Prime Minister. You can follow him on Twitter/X @TheKouk.

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