You will no doubt have noticed the pounding chorus of “productivity now” emanating from the government’s economic pow wow today.
Productivity is vital, absolutely so. Wikipedia describes it thus:
Productivity is a measure of the efficiency of production. Productivity is a ratio of production output to what is required to produce it (inputs). The measure of productivity is defined as a total output per one unit of a total input.
So, the more you produce from less the more money you have at the end of it. Hence you get richer.
There are many ways to measure productivity and the above is one grotesquely simple method, even though it fails to capture other dimensions of the production process.
Working with our overly simplistic definition, I’ve reproduced above a table of GDP per hours worked from the national accounts which we might take as a proxy for productivity if not productivity itself.
You can see the problem. The first ring shows a consistent growth rate in 1%+ range per quarter over the 1990s, following the competitive reforms of the late eighties. The second circle is the more recent decade in which growth is essentially zero.
That is, until the recent March quarter, where we see a breakout not seen for over ten years. Of course it’s wildly speculative to say so but there is every chance that is the front edge of the surge in productivity that the RBA and myself have been waiting for owing to the new and enduring competitive pressure from the high dollar and a rise in the household savings rate. That has to be good news and does rather throw cold water on the limited approach to productivity reform espoused by some of major business papers: that wages should be slashed.
Cheaper labour is one input only into productivity growth and not the most important. What is more important is competition, something that Australian business was subjected to in the 1990s for the first time in a century but went soundly back to sleep in the 2000s as consolidation across every industry turned corporate managements into a back-slapping bunch of Macquarie Bank alumni.
Competition is now a matter of survival and the drunk and flatulent have returned to discover that they have now to actually improve their businesses to grow.
Just think of what we could do if we broke up a few of those cartels.