Confronting Australia’s productivity crisis: are we still a clever country?

 

John Somerville, National Managing Partner, Advisory
John Somerville, National Managing Partner, Advisory

Here’s a confronting reality. In the world’s advanced countries productivity growth has slowed to such an extent over the last decade and a half that genuine fears are being held that the developed world has entered an era of long-term economic stagnation.

The ageing of these countries’ populations and the absence of breakthrough innovations of the magnitude experienced since the Industrial Revolution – such as sewerage, railways, highways, airlines and electrification – could be consigning them to slow growth in incomes for the foreseeable future.

Australia may be facing the same economic disease.

The best measure of productivity – multifactor productivity – which reflects the skill and cleverness with which inputs of capital and labour are combined to produce a given amount of output, is lower now than it was more than 10 years ago.

So it’s difficult to escape the conclusion that, as a nation, we are not as clever as we were a decade ago.

For a decade, (2004-2013) the mining boom offset our deteriorating productivity performance. But with that boom now over, we need productivity growth to return to historic levels if economic growth is to be sustained. Increased productivity will need to do almost all the heavy lifting if we want to enjoy rising living standards in an ageing population.

New KPMG economic research shows that capital productivity accounted for more than two-thirds of Australia’s output growth over the past 20 years. Labour productivity explained just 18 percent, but the findings are more nuanced than simply concluding the workforce needs to become more productive.

In many sectors, ranging from ‘white collar’ – financial and insurance to ‘blue-collar’ – manufacturing, warehousing, transport, construction and postal – most of the increased value was created by labour. By contrast, capital accounted for almost all the growth in value in the mining, electricity, gas, water and waste water sectors. In others such as health care and social assistance, the growth in value was created equally by labour and capital.

The ‘weight’ of capital invested in the Australian economy from 1995-2015 compared to total hours worked has meant capital’s overall contribution to output growth has outweighed labour’s – but this does not detract from the fact that the growth in labour productivity has been stronger than capital productivity.

This is an important finding – and one which should give policymakers and commentators pause for thought before automatically assuming our problems lie in the workforce.

But it is clear that we will need a new, comprehensive productivity-raising agenda to offset the end of the mining boom. .

KPMG has identified eight key areas that could help resolve our productivity problems and each deserves investigation;

  • exploring innovative ways of encouraging the development of infrastructure
  • reducing complexity, duplication and compliance costs to free up resources that can be used for more productive purposes.
  • reforming Competition Policy in light of the Harper Review
  • disseminating information on new technologies to businesses and how they can be adopted and applied to improve productivity to benefit the economy
  • implementing reforms to insolvency laws to encourage risk-taking without compromising protections
  • allowing individual companies, and even whole industries, to cease operating if they are structurally unprofitable. This implies a more flexible labour force policy that facilitates change where needed
  • supporting higher education outcomes beyond just finding university places
  • ensuring tax policy settings assist rather than hinder innovation

Implementing these reforms will be challenging but in their absence it’s difficult to see any major new sources of productivity growth on the horizon given our ageing population, and with no new resources boom in prospect.

Australia has great ideas, talented people and the motivation to surge ahead. We just need the right policy settings and a willingness to build consensus so that business and workers benefit mutually from the growth that increased productivity will bring.

Read more: The role of capital and labour in driving economic growth in Australia

2 thoughts on “Confronting Australia’s productivity crisis: are we still a clever country?

  1. What insights do environmental indicators provide to support change that is likely to generate mostly positive impacts? How deep a change seems to be required? How loyal are we to the status quo? How loyal should we be?

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