Australia’s falling productivity a ‘grave concern’ , says report

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Australia’s falling productivity a ‘grave concern’ , says report

Australia’s rate of productivity growth has fallen over the past decade, mainly due to the lack of genuine reform during that period, according to a report recently released by the Grattan Institute. This follows a substantial increase in the rate during the 1990s.

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Australia’s rate of productivity growth has fallen over the past decade, mainly due to the lack of genuine reform during that period, according to a report recently released by the Grattan Institute. This follows a substantial increase in the rate during the 1990s.
 
The Report, Australia’s Productivity Challenge, by Saul Eslake and Marcus Walsh, claims there has been a ‘substantial deterioration’ in Australia’s rate of productivity growth during this millennium, and that the broadest measures of productivity growth have been ‘starting to go backwards over the past 5 years’. It argues that continuing productivity growth is needed to:
  • assist with the challenges of demographic change such as an ageing workforce and population
  • reconcile potential conflicts between environmental constraints on economic growth and individual aspirations to improve living standards
  • help to cope with some of the side effects of the current resources boom, such as high exchange rates.
 
What has caused the decline?
 
The report lists a number of causal factors:
  • fading of the impact of previous productivity initiatives of the 1980s and 1990s
  • the comparative lack of any new productivity-enhancing reforms since 2000
  • increased government regulation and legislation that stifles productivity
  • loss of appetite by governments, business and voters for productivity-enhancing changes
  • capacity constraints due to the Australian economy approaching the state of ‘full employment’
  • Australia’s take-up of productivity-enhancing technologies has failed to keep pace.
 
Gloomy future predicted, unless …
 
The report suggests that the current resources boom, improvements in terms of trade and success in weathering global economic shocks have all largely disguised the impact of declining productivity, so far. But, it predicts, once the boom ends, Australia’s economic prospects will deteriorate significantly if the decline in productivity growth performance is not reversed. To reverse the decline will require the following initiatives:
  • more attention to education and training needs
  • improved governance of infrastructure investment
  • greater emphasis on innovation.
 
The impact of a long-term decline would include problems such as reduced living standards and increased unemployment.
 
Productivity rates in more detail
 
The report is careful to emphasise that working longer hours, perhaps assisted by laptops, Blackberries, email, etc, is NOT ‘increased productivity’. The latter refers to people working smarter, not achieving more because they work longer or harder.
 
The report discusses in detail the definition of ‘labour productivity’, the factors that influence it and the techniques for measuring it. In particular, it emphasises ‘value added’ rather than actual output.
 
Over the past decade, Australia’s Gross Domestic Product growth rate has averaged 3.1% per year, only slightly less than in the 1990s. Of this, population growth contributed 1.8%, productivity improvement contributed 1.4% and a slight decline in the labour supply growth rate (the latter because a fall in average hours worked exceeded small growth in the workforce participation rate) brought the average back to 3.1%.
 
However, over the next two decades, the rate of population growth is predicted to fall and so will the workforce participation rate and average working hours due to an ageing population. This means that continued growth in GDP will become increasingly dependent upon productivity increases.
 
The labour productivity growth rate reached a peak of 2.8% (versus historical average of 1.6%) for the 5 years ending 2001–02, but fell to only 0.8% growth for the 5 years ending 2008–09. When other factors such as growth in capital stock are taken into account, this trend is even stronger. Multi-factor productivity ‘growth’ (defined as the combined productivity of labour and capital) has actually been negative over the past 5 years, after reaching a peak of 2.1% in 1998–09.
 
Although Australia’s fall in productivity growth is not unique, because the average for all OECD countries has also fallen, its rate has fallen below the OECD average since 2007–08 after being significantly above average before then.
 
Why has productivity declined?
 
The report suggests the following reasons contributed:
  • Perverse trends in the mining, utilities and agriculture industries. However, new mining projects tend to have a long lead time, so this industry can be expected to rebound and reverse its productivity decline. Droughts, which affected agriculture and led to water use restrictions, also had an impact.
  • Productivity-stifling regulation and legislation. Changes to trade, workplace relations and competition regulation/legislation contributed to increased productivity during the 1990s. However, there have been few changes in these areas over the past decade. Instead, regulation concerning issues such as national security and corporate governance, although desirable for other reasons, has had a stifling effect on productivity.
  • Australia’s long period without a recession, and its success at withstanding global economic ‘shocks’ appear to have reduced the perception of urgency for changes.
 
The report referred to a study by Telstra in 2010 that found just 42% of organisations measured productivity and used specific productivity targets, while 25% did not measure it at all. Only 34% assigned individual responsibility for productivity improvements.
 
There are currently signs of political consensus that immigration levels should be reduced. The report suggests this is likely to exacerbate skills shortages, which in turn will restrain productivity growth.
 
Recommendations
 
The report contains the following recommendations:
  • Regulations and legislation intended to promote fairness in industrial relations should not act unduly as a deterrent to productivity. The report adds that this is not an implied criticism of the Fair Work Act 2009, because it considers it too early to judge the impact of that Act.
  • Not responding to new economic and social issues in knee-jerk fashion. 
  • Further investigation of possible deregulation in several industries, including service sectors such as law and medicine, newsagencies, pharmacies, international aviation and agricultural marketing. 
  • Reviewing the tendency to equate service quality with staffing levels in the public sector (eg education, health, police, public transport), which can be counter to improving productivity.
  • Upgrading education to provide a better educated workforce. Also, the vocational education and training system is notable for low completion rates in many industries that have skills shortages. 
  • Better infrastructure, but also much better targeted and managed. 
  • More resources devoted to innovation. The report said that the commercialisation process is the weakest link in the innovation chain.
 
Further information
 
The report can be downloaded from the Grattan Institute website.
 
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