Australia’s choice: the ‘high road’ to productivity or a race to the bottom

It is not easy to devise a solution to Australia’s productivity slowdown when a shared understanding of the problem is so elusive. While there is recognition among policy-makers that productivity is a key driver of growth, competitiveness and living standards, there is much less agreement on the sources…

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There is little evidence to support the belief that Australia’s productivity declines are linked to the need for labour market reform. AAP

It is not easy to devise a solution to Australia’s productivity slowdown when a shared understanding of the problem is so elusive.

While there is recognition among policy-makers that productivity is a key driver of growth, competitiveness and living standards, there is much less agreement on the sources and measurement of productivity performance, and consequently on the policies that may contribute to a sustainable improvement in performance.

The need for such improvement has been sharpened and made more urgent by two separate but related problems that have recently received considerable public attention. The first problem is the impending fall in Australia’s terms of trade from the heights reached during the commodity boom.

The unprecedented rise in our terms of trade as a result of increased commodity prices delivered a massive boost to the growth in our national income in the early 2000s, helped to shield Australia from the worst of the global financial crisis and made our economy the envy of the world. However, it masked a second problem which is the underlying deterioration of Australia’s productivity performance since the 1990s.

While this problem could be safely ignored, and was ignored in the past, with rising terms of trade taking up the slack, it is now fully exposed by the turnaround in our terms of trade as the commodity cycle runs its course. There were warning signs but a cyclical event was confused by many policy-makers and commentators with structural change.

Our report for the McKell Institute Understanding Productivity explores Australia’s productivity slowdown and the policy measures that are being proposed to address it. The report finds that just as the slowdown was previously ignored, it is now misinterpreted and exaggerated to justify measures that may have little or no relevance to our future productivity performance, and which may themselves have contributed to the slowdown.

The most common measure of productivity performance is labour productivity, which measures output per unit of labour input. The slowdown in Australia’s labour productivity growth in the early 2000s has less to do with the waning of the 1990s microeconomic reform agenda than the subsequent increase in total employment and, additionally, at least since the global financial crisis, the decline in output growth.

Commentators have argued that structural change should be facilitated throughout the economy in order to reinvigorate productivity growth. Some forms of structural change may well do so, particularly those which embody new technology and innovation, but the change associated with the deregulation of product and labour markets has simply shifted much of the jobs growth to low productivity sectors. This means that structural change has detracted from rather than enhanced labour productivity growth.

The report also examines the decline in “multi-factor productivity” (MFP), which is a more comprehensive measure of productivity performance encompassing not only labour inputs but also capital and other sources of productivity. The report finds that this decline, far from being generalised, is the result of large falls in productivity in a small number of specific industries, notably mining, utilities and agriculture.

The decline in MFP in mining and agriculture reflects well understood and quantified impacts of factors such as drought and large increases in capital expenditure without a corresponding increase in output. Most of the factors are temporary, as may be seen in the case of mining where huge levels of capital expenditure will eventually be offset by rising output as productive capacity is brought on stream.

In addition, higher commodity prices have encouraged the exploitation of high cost mineral deposits. In effect, these deposits require more inputs of capital and labour to achieve the same level of output as more easily accessible and higher grade deposits extracted previously. This is simply a playing out of the long recognised phenomenon that the mining sector is subject to diminishing returns to scale.

In the case of utilities such as electricity, gas and water, the recent substantial increase in capital investment was required to compensate for inadequate investment and large employment losses in the context of privatisation and corporatisation in the 1980s and 1990s. The apparent “productivity miracle” in utilities during this earlier period was mainly due to short-term profit maximisation through unsustainable cost-cutting.

The surge in utilities investment in the 2000s was also promoted by policy measures to improve security of supply (eg. desalination plants) or quality of supply (eg. increased telecommunications coverage). There is now clear evidence of “gold plating” of utilities capital expenditure. Ironically, such gold plating can be viewed as the outcome of the same neoclassical economic thinking and policies that provided a rationale for the initial privatisation and corporatisation of these assets.

These policies also provided for a pricing regulator to ensure monopoly infrastructure and utilities suppliers did not abuse their market power. However, it has long been recognised that it is difficult, if not impossible, to establish a pricing system that can achieve such multiple and sometimes conflicting economic, equity and environmental objectives. The pricing regulation of Australian utilities is a case study of these difficulties.

Finally, the report finds that other factors can account for much of the remainder of the MFP decline, especially large swings in capacity utilisation rates over the last decade. Record high capacity utilisation rates over the 2000s were achieved up to 2007 but these dropped rapidly to much lower levels in response to the global financial crisis. Both excessive capacity utilisation and low capacity utilisation give rise to productivity declines.

In theory, the methodology used to calculate MFP is meant to capture and control for these effects, and in doing so largely discount their negative impact on productivity. However, due to a range of data and conceptual problems, these effects are not adequately captured, resulting in the large ‘apparent’ decline in MFP over the last decade which is now the cause for so much concern.

Given that this decline in MFP can be adequately accounted for as the outcome of a number of either temporary or policy-induced effects, the report finds no evidence to support the claim that the decline was due to factors such as changes to the industrial relations regime or excessive business regulation. Indeed, the period of most significant productivity decline coincided with the most radical deregulation of the labour market through the Work Choices legislation.

In sum, the report acknowledges and indeed emphasises that improved productivity is central to rising living standards and sustainable economic growth. Moreover, given the prospect of declining terms of trade as the commodity price cycle runs its course – and the pressure on Australia to reposition and compete globally as a “high cost” economy – living standards will be even more dependent in the future on increasing our rate of productivity growth, particularly in trade-exposed sectors.

Australia is once again faced with a fundamental policy choice – the “low road” of narrow cost-cutting and an unwinnable race to the bottom, or the “high road” of longer term dynamic efficiency gains in a knowledge-based high wage, high productivity economy. While there is clearly a range of factors influencing productivity performance, the report proposes a “high road” productivity strategy with a focus on three empirically grounded and integrated policy measures.

These policy measures are first support for enhanced innovation capability and performance of firms, including new business models, systems integration and “absorption” of technological change; second, adoption of transformative management practices, drawing on improvements in management education and engaging with the full spectrum of talent and creativity in our workplaces; and third, expansion of participatory work organisation methods and improvements to skills formation and skills utilisation so that firms and organisations can achieve their potential.

Join the conversation

42 Comments sorted by

  1. Craig Minns

    Self-employed

    Prof Green, how are we to become a high-productivity knowledge-based economy when we are preferentially training women as knowledge-workers over their male peers at the rate of 2:1 in the knowledge that women are less productive than men in every field in which labour productivity has been studied?

    I am interested to note that you say that our decline in labour productivity is due to a dilution of the workload, which is a roundabout way of saying that it comes down to employing more people to…

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    1. Dennis Alexander

      logged in via LinkedIn

      In reply to Craig Minns

      Sorry Craig, I don't see any links to substantiate your assertion of a gender productivity differential. However, http://www.sciencedirect.com/science/article/pii/S0148296301003290 Dwyer, Richard, Chadwick, 2003 does provide counter examples to your assertion. Specifically, for growth oriented firms, gender diversity in management leads to higher performance. This tends to support the idea of that firms that employ and promote qualified females perform better than those that do not. Also, your argument on nurturing tacitly attributes a currently uncounted productive contribution to productivity and the economy: perhaps if the unpaid home-making was adequately costed and measured, you might find that your narrow view of the workplace as the only source of productivity might evaporate and your assertions about gender productivity differentials further discredited.

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    2. Craig Minns

      Self-employed

      In reply to Craig Minns

      I suggest you google "productivity by gender" Dennis. There are several very authoritative reports from groups like Goldman Sachs, KPMG, the MJA, the German ZPA and lots more. These are all reports from the last few years and none of them are hidden behind paywalls.

      The report you cite does not show any causation in relation to profitability, merely that more profitable firms can afford to hire some staff that are more productive. It's important to remember that correlation does not necessarily imply causation, Dennis. Nor does wishful thinking make thing true.

      Rae, see my response to Dennis. I'm afraid you're simply mistaken.

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    3. Craig Minns

      Self-employed

      In reply to Craig Minns

      Sorry, of course that should read "more profitable firms can afford to hire some staff that are LESS productive".

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    4. Craig Minns

      Self-employed

      In reply to Craig Minns

      It seems Dennis is excellent at making assertions but not so good at acknowledging when he's clearly shown to be wrong.

      I'll bear that in mind in future when responding to his drivel.

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    5. Craig Minns

      Self-employed

      In reply to Craig Minns

      Peter, anecdote is no substitute for rigour. My point is not that women CANNOT be as productive as men, it is that on average they ARE not as productive as men.

      That is borne out by every study I: have been able to find. Please feel free to show me studies that contradict my POV, I would be very pleased. After all, if I am right, then it means our last 40 years of Government education and labour policies have been no more than wishful thinking based on fluff and makeup or a cynical desire to pander to the squeaky-wheelism of professional feminists looking for an inside run, not on evidence. Personally, I find that a far worse thing to contemplate than the lack of productivity of women in paid work.

      Go find those papers!

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    6. James Haughton

      Social Policy Researcher

      In reply to Craig Minns

      Googling "productivity by gender" as Craig suggests turned up a number of papers, covering different sorts of economic activity
      For example: "Are Female Workers Less Productive Than Male Workers? Productivity and the Gender Wage Gap" by Trond Petersen, Vemund Snartland & Eva M. Meyersson Milgrom at UCB focussed on piece-work (where one is paid per thing made, and there is therefore little scope for gender discrimination) and concluded "In summary, then, women are slightly less productive than men…

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    7. Craig Minns

      Self-employed

      In reply to Craig Minns

      James, you've convinced me, I'm going on the dole and leaving the work to women...

      Or perhaps not just yet.

      The first piece you cite I am quite familiar with. Their findings are that when women work at blue-collar piece-work occupations they can be nearly as productive as men doing the same job. However, there are some clever selective biases in their choice of and treatment of data. For example, they don't assess the piece work productivity across

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    8. Craig Minns

      Self-employed

      In reply to Craig Minns

      Don't know how that got posted, I'll continue anyway.

      As I started to say, they assess piece work productivity only at the per-shift level, they don't assess it across a longer baseline. This means that of a woman works really hard on one or two days a week then has the rest of the week off her total productivity is apparently higher than it really is.

      Second, they ignore possible discrimination against men, as is usual for studies with an agenda to demonstrate that women are victims of discrimination…

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  2. Daniel Boon

    logged in via LinkedIn

    A good read; however, when one reads such an article, certain flaws in a hypothesis are revealed ... what was articulated (paraphrased) was ‘the decline in multi-factor (as one of many factors in) productivity in agriculture – quantified by droughts – are mostly temporary, but eventually will be offset by rising output’.

    Australia is a net-importer of food, we are losing arable food land (even in competition with mandated low energy high cost ethanol) while corporate government speeds up the…

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  3. Steven Liaros

    PolisPlan - town planning and eco-village consultants

    "While there is recognition among policy-makers that productivity is a key driver of growth, competitiveness and living standards..."

    The premise of this article is that there is a consensus that economic growth = growth in living standards. That as a result of increased competition everyone will win!

    The consequence of any competition is that some will win at the expense of others.
    The consequence of increased productivity is more work for everyone.
    The consequence of economic growth (which…

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    1. Garry Claridge

      Systems Analyst

      In reply to Steven Liaros

      Well said Steven. I had that same quote copied and ready to paste before I read your comment.

      In any "high road" transition planning a fourth policy measure should be considered. That being, the adoption of business designs to perform optimally in a steady-state while providing adaptive resilience.

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  4. Rae Cooper

    Senior Lecturer, University of Sydney Business School at University of Sydney

    Well done to all of your for some thoughtful analysis. Much more nuanced than the shouty business about wage and labour flexibility that has dominated the productivity debate in the past year.

    (Chris - I think it best to revisit your attitude toward working women, women's education and training, women's engagement and the engagement of non-full time workers in general. You make some very big and very loaded assumptions that are not broadly supported by the research or by most enlightened manager).

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    1. Spiro Vlachos

      AL

      In reply to Rae Cooper

      The problem with comparing women's productivity with that of men is that it is usually done in a microeconomic context of number of things produced per hour (as per the industry reports mentioned above), and the fact that women self-select themselves out of the workforce. Men don't bear the burden of carrying another human for nine months. This makes the comparison difficult, but it is common knowledge that the presence of a greater supply of labour due to the increased presence of women in the long-term has increased productivity and living standards.

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    2. Steven Liaros

      PolisPlan - town planning and eco-village consultants

      In reply to Rae Cooper

      Rae and Dianna,
      I find it ironic that 'economics' which actually means 'management of the household', fails to include the work done in the household in its measures of productivity.

      Spiro,
      You assert that the greater supply of labour resulted in an increase in productivity and living standards!

      I might agree that greater supply of labour increased productivity. You neglect to say, though, that increases in supply of labour also increased the costs of living, especially house and food prices and therefore many women now have no option but to work and that in many households there is nothing in life other than work both at home and in the workplace. (Of course if you don't count the work in the household then we all have lots of free time and capacity to increase our productivity in the workplace).

      Your assertion that increased productivity results in an increase in living standards is therefore questionable.

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    3. Craig Minns

      Self-employed

      In reply to Rae Cooper

      Actually, Diana, I do value unpaid work. Apparently far more than you do, since you are so keen to push women into paid work whether they want to do it or not, when it is obvious that most simply want to have the time to look after the things important to them.

      Never mind, you can continue stalking me across threads, making your wild accusations and I'll continue to point out your looniness in doing so, as if that wasn't already obvious to all. After all, what sort of "environmentalist" would you be if you regarded facts as more than inconveniences?

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    4. Craig Minns

      Self-employed

      In reply to Rae Cooper

      Rae, I'm afraid you're still mistaken. It's interesting that you've chosen insult rather than a discussion. That's often the response of those who are incapable of resenting a reasoned argument, so I'm not terribly surprised.

      In the meantime, women are still less productive than men and we are still stupidly prioritising women's education over that of men and wondering why productivity keeps declining...

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    5. Craig Minns

      Self-employed

      In reply to Rae Cooper

      Spiro, I have no complaint whatever with employing women. My point is that selectively training women instead of men is a foolish activity, for the reasons you have mentioned. It would make far more sense (and increase productivity) to train men preferentially and women after the male positions have been taken.

      The path we have taken is like deciding to try to compete in a race against V8s with a 4 cylinder and wondering why you lose ground every lap.

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  5. Spiro Vlachos

    AL

    A statement on this page that economic growth equals a reduction in living standards confirms the opening premise of this article that understanding of productivity remains elusive.

    Some research by McGrattan and Prescott explain that standard models have not explained much of the productivity boom in the 1990's that Australia shared with the US.

    http://www.nber.org/papers/w13499

    The authors explained that intangible investments was the unmeasured component. This phenomenon can be described as entrepreneurship, or what the authors call sweat equity, or unpaid enterprising behaviour. If this is a factor that enhances productivity and raises our living standards by creating jobs and increasing income per capita, then policy could be better designed to enable this type of enterprising behaviour.

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    1. Steven Liaros

      PolisPlan - town planning and eco-village consultants

      In reply to Spiro Vlachos

      My comment that economic growth results in a reduction in living standards was intended to illustrate that the fundamental assumptions of economics are flawed.

      More productivity is not 'by definition' a good thing however it is defined, nor is the creation of more jobs and therefore more work a good thing just because it is the prevailing orthodoxy. If you want to include unpaid enterprising behaviour then you also need to include all the unpaid work done in the household that means everyone…

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    2. Joseph Bernard

      Director

      In reply to Spiro Vlachos

      'Sweat Equity'

      this is so true. I have witnessed this on countless occasions and i can confirm that in many occasions there is no reward or compensation for these types of 'sweat' activities. The costs are hidden in countless unpaid hours that are used either to:

      - prop up an existing business
      - and/or developing new business
      - and/or developing products or innovation.

      vast majority of small business traders fall into the first category.

      For my part…

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  6. Daniel Boon

    logged in via LinkedIn

    Spiro … ‘increased productivity and (improved) living standards’? This is just double speak …there is a point where productivity cannot go higher than so many widgets per hour; increased capital costs in machinery may produce more (but is a glut not counter-productive ?), but the contributing on-cost costs, make it dearer … and if living standards are so ‘good’ why are most struggling to make ends meet in every facet of their chosen life-styles ?

    I for one, value women very highly, but not for their ‘productivity’ … It is their holistic contribution to society that – when one tries to put a value on it – demeans the very essence of their contribution by highlighting the inability to quantify that worth …

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    1. Spiro Vlachos

      AL

      In reply to Daniel Boon

      So, Daniel, when talking about the whole economy, we are not talking about widgets per hour. Over 70% of our economy is services. Manufacturing is less than 20%. In the services sector, the amount you can produce per hour is does not have the same meaning. Increased productivity for the whole economy depresses costs and therefore prices, other things equal.

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    2. Craig Minns

      Self-employed

      In reply to Daniel Boon

      Spiro, it is the very nebulousness of the services economy that allows magic-pudding theories of economics like those espoused by Rae and her ilk to take hold. To the individual business the important factor is profitability. As the German ZPA study I referred to points out, some of the most profitable manufactring businesses in their national study have relatively high female staff levels, but they achieve the profitability by paying those staff less than the shortfall in their productivity would…

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  7. Ngoc Luan Ho Trieu

    logged in via Facebook

    Structural changes imply movements of productive resources between economic sectors and changes in the composition of goods&services produced by an economy. Any measure of productivity at any level of aggregation - be it at the economy level down to the enterprise level - disregarding the effects of structural changes fails to present the true state of productivity, and then of efficiency. Proper measurement of productivity requires the ironing out of the effect of structural changes when measuring factor inputs beside considerations of short-term commodity price cycles. For efficiency measurement, results from analyses of relative prices of productive factors and their outputs across different sectors will be needed. Considerations on the coming pressures for structural changes coming from technological changes, changes in trades, policy changes will help to formulate better policies for productivity improvement, whether it is labour productivity or multifactor productivity.

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  8. Michael Lardelli

    logged in via Facebook

    "In addition, higher commodity prices have encouraged the exploitation of high cost mineral deposits. In effect, these deposits require more inputs of capital and labour to achieve the same level of output as more easily accessible and higher grade deposits extracted previously. This is simply a playing out of the long recognised phenomenon that the mining sector is subject to diminishing returns to scale."

    Rather, the mining sector is subject to the fact that resources are finite. Australia is…

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  9. Ralph Bennett

    Geologist

    Simply, the stupidity of adding an extra 1 million people every 3 years to Australia's population is air brushed out of the debate.

    This adds to economic and environmental woes on an enormous, compounding scale.

    No hope, if stabilisation is not pursued.

    It is called "The Opportunity Cost " of growth. Yes, there is 4 billion dollars for road upgrades for population growth, while scientists bare being sacked and Universities and schools are falling on world rankings.

    Australia......complacent and asleep at the wheel.

    Happy to debate any refutations,

    Best regards,

    Ralph

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  10. Peter Hindrup

    consultant

    Those who talk of continued growth could perhaps tell me where or when they see the end of growth, if ever, and what they see as plan B?

    The proposition that women are less productive than are men, does not hold up in my experience. I ran a company where it mattered not what gender took a job, the hours, conditions and pay were the same --- actually the single exception, my highest paid employee ever, was a young woman who was paid every dollar that I could afford, and it was still not enough for the talent and skill that she had.

    This was skilled work, and without exception the women out performed the men, with a damned sight more cooperation than the men exhibited.

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    1. Spiro Vlachos

      AL

      In reply to Peter Hindrup

      Hello Peter, the notion of the "end of growth" is an ideologically motivated notion that has flourished amongst those who reject or do not understand basic economic principles based on evidence. Even low growth means unemployment increases, so no growth means a permanent depression. Long run growth in income per capita which leads to higher living standards depends on technological change as measured by multi factor productivity (MFP). Note that MFP, as measured in the article is not the productivity we are talking about when we express things as output produce per hour. Often the two do not even correlate.

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    2. James Haughton

      Social Policy Researcher

      In reply to Peter Hindrup

      I think economists and environmentalists might see more eye-to-eye if we focussed upon "ending the growth of natural resource use", that is, doing more with less, which is what productivity is all about, rather than sweeping statements about "ending growth" - "growth" is a catch-all which clearly means different things to different people.

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    3. Steven Liaros

      PolisPlan - town planning and eco-village consultants

      In reply to Peter Hindrup

      James,
      Thank you for making that point.
      A steady state economy does not aim to 'end the growth of natural resource use'... it aims to use only resources that naturally replenish themselves, eg. solar, wind, timber etc.... it aims to enhance natural systems so that they provide for human activities.

      It does not prohibit growth but ensures that the use of resources is balanced against their replenishment and the users are responsible for the replenishishing.

      Natural systems provide for growth as well as decay and death.
      Human systems only provide for growth... and that is why we have our boom and bust cycles. The consequence of growth will always be collapse if we don't plan for the decay and death.

      Instead of regarding our systems are all 'too big to fail', we need to accept that they must fail because they are too big and then we will see the new possibilities for a more sustainable growth +decay, steady-state system.

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  11. Lisa Taylor

    Workforce Demographer and PhD student at University of Tasmania

    productivity is the sum of many things. increasing it will lead to increased economic growth and an increase in living standards (measured as GDP per capita). No, it doesn't take into account the level of social divide that may result, it is purely an economic measure. Governments rely on information which is measurable and quantifiable. The assumption is that increased productivity will result in higher incomes and thus higher tax revenue for the government from which to provide services to those…

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    1. Spiro Vlachos

      AL

      In reply to Lisa Taylor

      "No, it doesn't take into account the level of social divide that may result".

      I could not agree with you more. Usually Economists use the ceteris paribus assumption. Of course, we do not live in a ceteris paribus world, but think the consequence on the social divide that would occur if GDP per capita stagnated, or began to fall.

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    2. Garry Claridge

      Systems Analyst

      In reply to Lisa Taylor

      Spiro,

      We need to build our economy so that we do not have adverse consequences when GDP per capita is steady.

      The "steady-state" paradigm is about developing an economy that does not "NEED" to grow its GDP to be widely prosperous.

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    3. Spiro Vlachos

      AL

      In reply to Lisa Taylor

      A steady-state in Economics is a level of capital per worker that is steady, not a growth rate of zero. Developed economies operate at or near their steady state, with a positive growth rate, driven primarily by technological advances. A zero long run growth rate would is akin to a depression, with rising unemployment and falling living standards.

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  12. James Haughton

    Social Policy Researcher

    Roy, Phillip and Renu,
    You mention that "The slowdown in Australia’s labour productivity growth in the early 2000s has less to do with the waning of the 1990s microeconomic reform agenda than the subsequent increase in total employment", which I interpret to refer to a diminishing-returns process of lower-productivity workers are being drawn into the workforce as unemployment drops.

    Doesn't this expose a weakness in the way productivity is calculated, over the employed workforce rather than the…

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  13. Ralph Bennett

    Geologist

    To Spiro Vlachos :

    I can't let you get away with this "porky". I quote from your post ::

    " the notion of the "end of growth" is an ideologically motivated notion that has flourished amongst those who reject or do not understand basic economic principles based on evidence. Even low growth means unemployment increases, so no growth means a permanent depression "

    If population stabilises, you don't need economic growth for full employment .

    If you base your business model on population growth, such as land speculators, then endless growth is your design. However, if you base your business design within the constraints of population stabilisation, then productive capital is released for new product research ,This capital would have been spent on real estate infrastructure, which is an investment in pollution .

    Cheers,

    Ralph

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    1. Spiro Vlachos

      AL

      In reply to Ralph Bennett

      This question is best answered by the model formulated by Robert Solow and the famous Australian economist Trevor Swan in the 1950's. Making Malthusian reasoning redundant, the two had shown that even with a population decline, technological growth ensures that we have economic growth and improving living standards. This technological growth is captured by MFP, as indicated in the article.

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