What is productivity? It's one of the biggest topics at this week's round table

Australia Broadcast Center

11 hours ago

The Albanese government's "economic reform round table" will be held in Canberra this week, from Tuesday to Thursday.
"Productivity" is on the agenda for the second day.
What is productivity? Why is it important? Why are policymakers worried about it?
It's a major topic that impacts everyone.
When we hear the word "productivity," our eyes can glaze over, but we're talking about something profound.
At its heart, productivity is about doing more with less effort to improve everybody's lives.
For example, imagine someone hands you a shovel and asks you to dig a long trench from one end of a football field to the other, to lay some underground cables.
How long would it take you to dig the trench? (And what would it do to your hands and back?)
Now, instead of a shovel, let's say they give you an excavator.
The difference in your "output" and the ease with which you could complete the task would be dramatic.
It would see a huge improvement in your productivity, and it would be thanks to the investment in machinery and the improvement in the state of technology you had at your disposal (shovel vs excavator).
Modern society has been built on constant productivity improvements.
They make it much easier and faster to do things compared to the past.
That has a deeply personal impact on everybody's lives — it's about our time, and improvements in our lifestyle and material prosperity.
Over time, productivity growth can lead to lower prices for goods and services, higher profits for businesses, higher wages for workers, and stronger economic growth.
A few years ago, the Productivity Commission explained things this way:
"The number of hours a person needs to work in order to buy particular goods has fallen dramatically," it wrote.
"In 1901, it would have required several months of work to afford a new bike, but today it requires less than a day of work for a basic model.
"[And] these falling costs understate the increased quality of most goods available now compared to what was available at Federation — even the lowest-quality bicycles produced now are much safer and easier to use than their 1901 versions.
"[And] more significant for many people are the goods that are cheaply available now that had not been invented at Federation.
"Antibiotics, for example, have lowered the mortality from infectious disease from about 30 per 10,000 people in 1907 to 1 per 10,000 people in 2017, all at a fraction of the price."
It published a table with more examples to illustrate its point:
This is another area where our eyes can glaze over, so we don't want to get bogged down here.
But there are two main ways to measure productivity. As the Reserve Bank explains:
The RBA has produced this handy little graphic to help us visualise what they're talking about:
Yes. There are quite a few challenges. But it depends on the nature of the "economic activity" you are trying to measure.
For example, it's far easier to measure the productivity of a manufacturing facility than a childcare worker.
How do you measure a childcare worker's "output" when their job is to care for babies and toddlers?
What about teachers? Nurses? Police?
In the terminology, "non-market" industries are notoriously difficult to measure when it comes to productivity.
The Australian Bureau of Statistics (ABS) doesn't even provide estimates for multi-factor productivity (MFP) for our three non-market sector industries: public administration and safety, education and training, and healthcare and social assistance.
The non-market sectors are characterised by providing goods and services that are either free of charge or heavily subsidised, and are not primarily driven by market forces.
The ABS only provides MFP estimates for the 16 "market" industries in our economy that produce goods and services that are sold at market prices, because their output is much more easily measured.
But even then, when you run your eye down the list of those 16 industries in the table below, you can see how it might be much easier to measure productivity in some market sectors than others.
It's why the growth of the "care economy" in Australia is presenting unique problems for policymakers.
As more and more workers enter the "non-market" industries of childcare, aged care, and healthcare, the area of the economy where "productivity" is much harder to measure is growing.
But when the Productivity Commission recently tried to estimate non-market "labour productivity" for the three non-market sector industries, by using gross-value added and hours worked, its estimate showed a steep decline over recent years.
It found that labour productivity for the "whole economy" has barely risen over the past decade, when averaging labour productivity in the market and non-market sectors combined.
Why is productivity growth so slow in Australia at the moment? Why has business investment declined?
Lots of people are trying to answer those questions, and there are probably many causes.
Participants at the productivity round table will discuss them this week.
But here's an interesting hypothesis.
In early 2023, Ken Henry, a former treasury secretary (2001 to 2011), gave a speech to the Tax Institute titled "The need for ambitious tax reform."
In that speech, Dr Henry said part of the answer to our productivity problems comes from the fact that Australian policymakers mishandled the mining boom of the early 2000s, and we're now living with the consequences.
He said if we had properly taxed the super profits of the miners in the early 2000s, we could have used that revenue to re-invest in non-mining parts of Australia's economy to lift non-mining productivity, but we didn't.
And now that the mining boom is over, we're left with a hollowed-out economy with woeful rates of productivity.
Dr Henry said, historically, much of Australia's productivity growth had been driven by "capital-deepening" (that is, higher capital per worker), thanks to a strong rate of business investment.
But two centuries of capital-deepening have stalled.
He said Australia has unfortunately experienced "capital-shallowing" in the 21st century, with declining physical investment in the non-mining sectors and more and more non-mining capital heading overseas.
He said the positive terms-of-trade shock, caused by soaring commodity prices linked to the China boom, had pushed Australia's dollar higher earlier this century.
The strong appreciation that followed in our real exchange caused a "profound loss" of international competitiveness for Australia's trade-exposed industries.
He said that pressure could have been released with a resources super profits tax or something similar, with the money reinvested in non-mining parts of the economy to boost productivity there, but it didn't happen.
Instead, he said Australian governments just "let it rip."
"The collapse in the non-mining investment rate is remarkable," he said in his speech two years ago.
"The financial mirror image of declining physical investment and capital-shallowing is that, in recent years, we have recorded net capital exports on the balance of payments.
"Many commentators appear to believe that we have become a net capital exporter merely because superannuation has boosted household saving. But I would argue that we are exporting capital because Australia has become an increasingly unattractive destination for doing business, in the eyes of foreign investors and Australian savers alike.
"It is truly extraordinary that this country, which stood to gain the most, should be suffering capital-shallowing, and should be a net capital exporter, not withstanding a historic mining boom," he said.
Also in 2023, the RBA's Jonathan Hambur and the e61 Institute's Dan Andrews released a paper suggesting another reason why productivity growth may have slowed in Australia.
"We find evidence that increasing market power [of powerful companies] has played a role, muting incentives for better firms to invest and grow their capital stock," they wrote.
"This finding complements earlier work that found declining competition had limited incumbent firms' incentives to reallocate labour to more productive firms and to innovate and adopt technologies.
"It reinforces the need to understand why competitive pressures may be declining, and whether that reflects competition policy or other frictions that prevent new firms from growing and challenging incumbents."
Last month, the Productivity Commission supported that thesis, warning that Australia's 21st-century economy is dominated by powerful firms that are extracting above-normal profits from the system, and their power is growing.
It said those firms are extracting "economic rent" from our economy, which means they're charging higher prices and collecting higher profits from a lack of competition, and it's crippling investment (and undermining productivity growth) elsewhere in our economy.
It said that if we wanted to reform our tax system, we should focus on that issue.