Do we really have a productivity problem? How wage restraint and a mining boom helped kill our productivity

Australia Broadcast Center

26-05-2025

There was a sudden look of panic.
A little over 18 months ago, on a live panel before a large audience, a well-known economist was running through a shopping list of failures from the federal government at a post budget gabfest.
Foremost among those shortcomings was productivity. There was absolutely nothing in the budget designed to address our flagging productivity, an issue shaping up as a national disaster.
And then the clanger, in the form of an obvious follow-up question from one of the panellists.
"So, what would you do to improve our productivity? What are two initiatives the government could employ to fix the problem?
Silence.
For an agonising couple of seconds, the wheels were spinning, until this: "Ah, cut red tape and lower company taxes."
In other words: "I have no idea."
For all the pontificating, very few people understand the concept of productivity and whether or not it is even a problem, let alone how to fix it.
Most, especially in the business world, confuse productivity with profitability and usually offer up solutions that will make the "problem" even worse.
Consider this. Sluggish wages growth can be terrible for productivity. In fact, it might well be the case that our highly regulated industrial relations system — which has slashed days lost to strikes and minimised wages growth — has put a brake on productivity growth.
Here's another couple of unexpected pearls.
Taxes that are too low can also weigh on productivity growth. And, given we rely on mining for most of our national income, it might come as a shock to learn that a boom in mineral prices can kill productivity. More on that later.
There's another pothole on the road to productivity perfection, one that few economists are willing to acknowledge.
If the recipe for improving productivity, or even ensuring it doesn't decline is elusive, measuring it is even more difficult. That's particularly the case in an advanced economy such as Australia, where most of the population works in service industries.
Difficult to fix, even harder to measure. Are we even sure we have a productivity problem let alone the crisis that many believe is engulfing our economy?
It's a simple enough phenomenon. If you produce more during a certain amount of time, then you are becoming more productive.
That's it.
The tricky bit is, how do you achieve that? In most cases, it is through investment in better equipment or technology for workers. Often, it is through better management practices.
And so, while the business lobby groups bang on about how governments need to reduce red tape, lower taxes and keep wages under control, the solution largely is in their hands.
Those government measures may help, but if companies don't invest in their equipment and improve their techniques, you can't expect productivity to magically grow.
And oddly, the wages logic doesn't apply in mahogany row where bonuses, short and long term, are required to enhance performance.
As a nation, we've embraced productivity growth with open arms.
In 1901, at federation, we were one of the world's most important food producers and more than 23 per cent of our workforce was employed in agriculture.
Fast forward 120 years, and just 2 per cent of the nation's workers are engaged in the sector.
But our status as a global food supplier has only grown. We are the world's biggest wool exporter, the second largest wheat exporter and usually vie for second place when it comes to meat exports.
That's because our farmers have invested in better machinery and equipment and employed the latest agricultural management techniques.
They've replaced labour with machinery because the machines are cheaper and more efficient. The workers moved to the cities where manufacturing jobs were being created, jobs that paid better than farm labouring.
If labour costs had remained stagnant from 1901 to 2020, that productivity growth wouldn't have occurred, at least not at that pace, because the incentive would not have been there.
Higher wages helped drive, not hinder, productivity growth.
Much of the confected outrage around our poor productivity performance focuses on the terrible decline in the past five years.
A quick look at the graph below confirms this. But that period included the pandemic as can clearly be seen on the graph.
It also shows multi-factor productivity, which is the combination of labour and capital productivity. Clearly, capital productivity has been dragging the chain.
Two distinct parts of the graph are interesting. One is the decade between the Global Financial Crisis and the pandemic. Labour productivity growth steadily declined from just under 4 per cent to almost zero before suddenly rebounding.
This was a period when resource prices boomed as China boosted the price of minerals and energy to feed its insatiable appetite for growth.
And the second period, between the turn of the century and GFC is equally fascinating.
That's when there was a dive in capital productivity as enormous amounts of capital was invested in the upgrade and construction of new mines. A lot of equipment was being installed. But no minerals were being produced.
The economy was transformed through both these periods as mining profits boomed and a soaring Australian dollar hurt domestic manufacturers.
As Griffith University Professor David Peetz notes, lower productivity isn't always a bad thing.
"Sometimes higher selling prices can lower productivity," he explains.
That takes more time and makes the productivity stats look bad because it is output per hour. "For this reason, with high commodity prices, mining labour productivity fell by 13 per cent between 2019-20 and 2022-23. "Mining productivity had the largest negative impact on national productivity growth in 2022-23," he explains.
Productivity is pretty easy to measure in manufacturing industries. You can quickly count how many cars you produced in a given time and whether you're improving output.
It is the same with agriculture. Tonnes of wheat or meat are easy to measure over a given period of time. Then just divide by the number of workers.
But that's not the case with service industries. Is a teacher more productive with 60 students than with 30? Is an emergency unit specialist more productive because she treated 50 patients instead of 10 in three hours?
In both instances, arguably no.
As economies mature, as ours has, industries shift. Manufacturing now accounts for just 6.1 per cent of the workforce, while around 80 per cent of Australian workers are employed in some kind of service industry such as tourism, education or aged care.
You can see the margin of error that might occur when compiling the stats and the increasing degree of irrelevance the data holds.
The corporate world has long argued for lower taxes to fix our "problem". The resulting higher profits will allow for more investment and, hence, greater productivity.
But that doesn't always happen. When interest rates were declining after the GFC, most big corporations handed back their improved earnings to shareholders as bigger dividends.
They chose not to invest the windfall gains in new equipment because wages growth was at a bare minimum.
Encouraging investment would be better served by offering incentives such as tax breaks on productivity enhancing.
Many of best economic minds and business leaders tend to look at issues in isolation as though improving one factor can be achieved without impacting everything else.
The mining boom may well have been a big contributor to our lower productivity growth. Wage restraint may well have played a role too. Maybe it's just too hard to measure for an economy like ours.
But would anyone seriously suggest we order the miners out, abandon wage controls and revert to an economy based on farming and manufacturing?
It'd be a lot easier to measure. And, who knows, the productivity numbers might look terrific.