How Australia fell from productivity leader to laggard

The Productivity Commission (PC) has released its interim report on its 5 Year Productivity Inquiry, which shows that Australia’s productivity growth rate has fallen to its lowest level in 60 years.

It also shows that Australia’s labour productivity ranking has fallen ten places, from 6th in the OECD to 16th, with Australia only maintaining its high living standards by working hard.

The PC also finds that the service sector’s high share of the economy is hindering Australia’s productivity growth, since these sectors are typically not exposed to global competition.

Below are key extracts from the PC’s report summarising Australia’s productivity performance:

Despite its strong income and consumption performance, Australia’s productivity growth has slowed significantly in the past decade, falling to its lowest rate since the 1970s (figure 2.2). To put this in perspective, if, over the decade, productivity had instead grown at an annual rate consistent with the average over the past 60 years (1.7 per cent compared to 1.1 per cent), gross national income per person would have been around $4 600 higher (6 per cent) in 2020 (ABS 2021a).

Australia's labour productivity

Australia’s performance should be placed in a global context. There has been a widespread and sizable slowdown in productivity growth across most advanced economies recently.12 For example, average productivity growth among OECD economies since 2005 was about one percentage point per annum below the historical average (figure 2.3).

Labour productivity across OECD

Despite maintaining a high income ranking since the 1970s, there has been a long term decline in Australia’s relative labour productivity growth performance; labour productivity has not recovered after falling behind in the three decades to 2000. Between 1970 and 2020, Australia’s labour productivity ranking fell ten places from sixth in the OECD, to sixteenth (figure 2.4).

Australia's income performance
Australia’s productivity is now about 22 per cent lower than that of the US — a country typically acknowledged as the ‘global frontier’ economy.

An important reason that the living standards of Australians have remained among the top tier advanced economies despite our middling productivity growth, is that a higher-than-average proportion of Australians work, and they work relatively long hours (figure 2.5).

Australians work harder

Insight 2.2 – The increasing share of people in the workforce has shielded Australia from some of the effects of slowing productivity growth, but sustaining an ever-increasing share of people in the workforce (and maintaining their income levels), is neither possible nor desirable.

Australia’s employment to population ratio has increased since 1970, from around 42 per cent to 51 per cent, moving from below the average to above the average in the OECD. (This is primarily due to a substantial increase in Australia’s female participation rate over the past 40 years… Although average working hours in Australia fell by around 10 per cent, or about 4 hours in the 5 decades to 2019, average hours amongst OECD peers fell more…

On a per capita basis, Australians work longer hours than about 60 per cent of their OECD peers. This maintains a relatively high level of GDP per capita (figure 2.6).

Labour productivity per head

Australia’s goods sector has performed relatively well over the past two decades when compared to European countries, the United States and Japan (figure 2.7).15 The relative performance of the services sector is less impressive, but both sub-sectors (non-market and market) are steadily improving…

Services productivity

As Australia continues to become a more service-centric economy, real wages and national welfare will be increasingly dependent on service-sector productivity. But driving productivity growth in (at least parts of) the services sector has, on average, been more difficult compared to the goods sector, which includes agriculture, manufacturing and mining.

If Big Australia lobbies like the Grattan Institute were correct in arguing that mass immigration improves productivity, then why did Australia’s productivity collapse after immigration was more than doubled in the mid-2000s? Something doesn’t add up.

Australia's net overseas migration

The fact of the matter is that the dramatic lift in immigration very likely contributed to Australia’s poor productivity performance via several channels.

First, the massive rise in population growth created chronic infrastructure bottlenecks across capital cities, driving up congestion costs.

The infrastructure investment required to keep pace with population growth is much more expensive than in the past, due to diseconomies of scale (e.g. tunnelling and land buy-backs). This means that every additional unit of infrastructure increases average costs across the economy, acting as a productivity drain.

Second, while migrants typically have high levels of labour force participation, the migrants that Australia imports are typically less productive, as evidenced by them earning lower than median wages and suffering higher unemployment than the general population.

Third, the increased labour supply and downward pressure on wages caused by mass immigration necessarily disincentivises employers from investing in labour-saving technologies and automation to lift productivity (see here and here). After all, why invest in these productivity enhancements when you can instead bring in low cost workers to do the task?

There are also broader macroeconomic arguments suggesting that strong immigration suppressed Australia’s productivity growth, mainly by diverting resources (eg, capital and labour) from the tradable to non-tradable sectors.

Australia has held the pillow over its globally exposed manufacturing and replaced its employment with careers in a never ending housing construction sector that never provides enough homes for Australian housing to become cheaper for Australians. Australia has also turned its once well respected university sector into a lower quality, casualised conduit for more immigrants, who are prepared to pay top dollar for degrees primarily because they enable migration to Australia.

Tradable goods and services are those that can be sold at locations other than at the place of production (i.e. can be exported overseas). Non-tradable products are those than can only be sold at the place of production (eg, coffees, personal training and haircuts). As noted above by the PC, tradable firms are typically more productive than other businesses because they benefit from economies of scale and must be competitive against firms both nationally and internationally.

Thus, the diversion of resources resulting from mass immigration encourages growth in low productivity ‘people-servicing’ industries, alongside diverting the nation’s productive effort into houses and infrastructure.

Australia’s economic performance over the pre-pandemic years are consistent with this argument given the fall in both productivity and non-mining business investment as the Australian economy became increasingly concentrated on ‘people servicing’.

Non-mining business investment

Australia is also unique in that it pays its way in the world mostly by selling its fixed endowment of minerals. Thus, importing a bigger population via immigration necessarily dilutes this mineral wealth among more people, resulting in lower wealth per capita (other things equal).

In short, the planned reboot of the ‘Big Australia’ mass immigration model is very likely to achieve exactly the same result as last decade: sluggish productivity and per capita GDP growth, low wage/income growth, and overall falling livability as both housing and infrastructure are crush-loaded.

It is a recipe to enrich those that have already hoarded assets and capital, namely the already entrenched, wealthy and corporate interests such as Big Business, Big Property, and the education-migration lobby.

Sadly, those are also the groups that pull our policy makers’ strings, cheered on by the likes of the Grattan Institute, CEDA and their ilk.

Unconventional Economist
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Comments

  1. Another victory lap please, for the most successful multicultural nation, the envy of the world, with 50% being migrant or with migrant parents. Who needs boring productivity?

    • Paul TuckerMEMBER

      Precisely. And with the MSM and woke media cheering them on.
      Let’s not forget the symbiotic relationship between the two largest media organisations in the nation and big property (think realestate.com and domain).
      The MSM almost never gives any air time to arguments against the big Australia project.
      And why would they?
      They’re players within the real estate industry.

  2. SkepticviewerMEMBER

    There is strength in diversity – for example, let’s say I want to build a major bridge. I’m ordered to make it diverse, I ask for bolts from many sources – some are sticks with a crude thread carved in them, others made in backyard steel furnaces, some from corrupt places and a few german high-tech ones. I build the bridge it’s opened – trucks cars on top and oil tankers passing under. The diverse bolts give way the bridge falls on the tanker – death, pollution and mayhem result.
    Nothing wrong with full diversity until there is.

    • Ronin8317MEMBER

      By using the cheapest bolt they can find, the bridge would have earned the construction company billions of dollars in profit, and it’ll earn them even more to fix the collapsed bridge.

    • drsmithyMEMBER

      Exactly.

      When I built my bridge I insisted every component be sole-sourced the same supplier, regardless of their competence or the cost, confident in the inherent superiority of uniformity. It was a phenomenally corrupt process, of course, but I was assured that homogeneity produced the best results.

      Unfortunately while their bolts were really strong, they sucked at manufacturing beams, and their suspension wires were mediocre as well. So my bridge also collapsed and killed hundreds.

      But at least I had the warm embrace of conformity to quiet the screams and help me sleep at night.

      • SkepticviewerMEMBER

        Do you have evidence for your statement because if I had to provide it (evidence) I do have it? While a mixture of ideas and openness to other cultures is a good thing in small doses, a flood of diverse viewpoints and directions is destructive in any situation more so when facing multiple crises.

        • drsmithyMEMBER

          LOL

          I just used the same reducto ad absurdum fallacy you did.

          Bit late now to come back claiming a nuanced view.

  3. DingwallMEMBER

    Yea but we are second to none in the buying and selling of houses……………. and that’s the only game in town

  4. High net migration benefits the owners of labour and capital. They enjoy a boost to the value of their property while simultaneously suppressing wage growth, raising capital’s share of income. No surprise that the elite support it so strongly, its the gift that keeps on giving.

    Plantation economics.

  5. pfh007.comMEMBER

    That’s what happens when you failure to distinguish between productive investment and speculation.

    It would be nice to know that we are learning how to make that distinction but all we hear is a bunch of asset fluffing sooks moaning that the RBA has marginally increased the price of speculator betting chips in response to inflation.

    Let them howl into their pillows until they fall asleep exhausted from the effort.

  6. The Travelling PhantomMEMBER

    Long time since DLS haven’t republished his:
    Servicing “the date” economy article

          • The Travelling PhantomMEMBER

            DLS used to publish every second month what he thinks the greatest article he wrote,
            It’s about all the shops around him are to service him (hair dresser, nail saloons, massage, real estate etc)
            And an epiphany comes at the end of it…
            Can’t find it but definitely some commentators will remember it

          • ah yeah takeaways for his belly, barber for his barnet, nail salon for his nails, entertainment lounge for his stress, etc. Good stuff.
            ps Zoltan wrote about this but not in such an entertaining style, talking about service economies needing to mine cheap workers now put into jeopardy by dangerous nativists like @haroldus.

          • The Travelling PhantomMEMBER

            Harry is nativist?! Never knew he joined the nativity seen! Whose he playing?

  7. ‘Sadly, those are also the groups that pull our policy makers’ strings, cheered on by the likes of the Grattan Institute, CEDA and their ilk.”

    Also cheered on by most of the media class.