Former Treasury Secretary Ken Henry’s recent interview with Joe Walker explained how the structural decline in capital deepening has driven the decline in Australia’s productivity growth:
[Capital deepening] makes each hour worked more productive, right?.. And capital deepening is obviously driven by having a rate of national investment that is matched to the rate of workforce growth, obviously, right? And so if your rate of workforce growth stays constant and your level of investment plummets, you’re going to suffer capital shallowing eventually.
And by the way, that is what Australia has suffered in the last 10 years, capital shallowing. It’s an extraordinary thing, capital shallowing, and it’s a consequence simply of the collapse in the investment rate. You experience capital deepening when the investment rate is sufficiently high relative to the rate of workforce growth, right? And that’s what Australia has experienced for most of the post-war, I mean post-World War II period, is capital deepening.
