Why Australia’s productivity stinks

The Productivity Commission (PC) has released its Productivity Insights 2020 report, which shows that Australia’s productivity performance is poor:

Accordingly, growth in per capita GDP has bombed:

According to the PC:

Overall, this year’s data present a continuation of a pattern of weaker productivity outcomes evident in Australia since about 2005, in step with a slowing in productivity growth globally. Such high level productivity measures rarely provide guidance to policy makers about specific problems to target, but the sustained weakness in productivity data is rightly cause for concern.

The PC also notes that the Australian economy is being driven by growing inputs (workers) via population growth (immigration), rather than productivity improvements:

The Australian economy slowed in 2018 19. Economy wide growth in output of goods and services, measured as real gross domestic product (GDP), was 2 per cent, its slowest pace in a decade. Output per person, measured as real GDP per capita, a commonly used measure of living standards, grew by only 0.4 per cent…

The main driver of output growth was that more Australians were working. Total hours worked in the market sector grew by 1.5 per cent (figure 1), in line with population growth.

Investment remains relatively weak by historical standards, which partly reflects the end of the mining investment boom (figure 2)…

Outside the mining industry, however, investment has been trending lower as a share of GDP over the past two decades (figure 3)…

The secular shift to a service driven economy means a lower rate of investment in physical capital may be necessary in future. Instead, intangible investment — which is only partially measured in the national accounts — is likely to play a stronger role. Outside the mining sector there has been little growth in real investment in machinery and equipment or buildings and structures…

Slower growth in output this year was driven by falling productivity. Labour productivity — the amount of output produced with one hour of labour — in the market sector declined 0.2 per cent. Further, multifactor productivity — the amount of output for a given amount of labour and capital — in the market sector fell for the first time since 2011, declining by 0.4 per cent (figure 1 above)…

Fortunately, the strong lift in commodity prices and the terms-of-trade has boosted national income and masked the productivity weakness:

While labour productivity is the dominant long term driver of incomes, the past two decades have seen favourable changes in the world price of Australian exports compared with the price of Australian imports (the ratio of the two is referred to as the ‘terms of trade’). This has allowed Australia to sustain strong growth in incomes despite weak productivity…

While GDP per capita has grown 28 per cent since 2000, the terms of trade has caused GDI per capita to increase 42 per cent (figure 9), while GNI per capita has grown by almost the same amount (the difference from GDI is so small it was omitted from the figure), after adjusting for negligible foreign income outflows to date…

However, lower productivity has helped drag down wage growth:

Overall, slower labour productivity growth explains over half of the fall in consumer wages growth, with relative consumer inflation (consumer prices growing more quickly than producer prices) and the fall in the labour share of income explaining about a quarter and a fifth respectively…

While the productivity slowdown is a global phenomenon, there are specific factors that are dragging Australia’s productivity lower:

  • Crush-loading infrastructure via the immigration ponzi, thus diluting Australia’s capital stock and requiring expensive new infrastructure to be built that is less efficient than what was already in place;
  • Massive over-investment in unproductive capital via the housing bubble (driven in part by egregious property tax concessions);
  • Massive mis-allocation into white elephant energy infrastructure;
  • Over-inflated land costs; and
  • Oligopolies and rent-seeking across almost all facets of the economy, thus destroying innovation, efficiency and good management.

As long as the economy relies on mass immigration and the housing ponzi to juice growth via consumption and pushing the capacity envelope, productivity will remain weak.

The outlook for wages is also poor. In addition to poor productivity, national disposable income (NDI) growth will fall as the current terms-of-trade boom – brought about in part by the surge in iron ore prices after the Brazil floods – reverses:

Another lost decade beckons.

Leith van Onselen
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