Sections

Services

Information

UK United Kingdom

FactCheck: has productivity dropped by 3% - and is the government to blame?

“They [the Labor government] haven’t just slowed the growth of productivity, they have actually produced a diminution of Australia’s multi-factor productivity by 3% since the end of 2007. This is a very…

Is Labor to blame for a “productivity crisis”? Factory image from www.shutterstock.com

“They [the Labor government] haven’t just slowed the growth of productivity, they have actually produced a diminution of Australia’s multi-factor productivity by 3% since the end of 2007. This is a very serious situation.” - Opposition leader Tony Abbott, press conference, 25 July.

Along with a few other areas, the economy is at the forefront of voters' minds. The opposition has accused the government of economic mismanagement including blaming it for reduced productivity. The government recognises it as an issue; one of Prime Minister Kevin Rudd’s first announcements when he resumed the Labor leadership was to push for a “productivity pact” between government, business and unions.

So is productivity slowing? And is Labor to blame?

What is productivity?

The Australian Bureau of Statistics defines productivity as the “efficiency with which an economy transforms inputs (such as labour and capital) into outputs (such as goods and services)”. If productivity is increasing, it means more goods and services are being produced for each unit of production inputs - for instance, for each worker employed. You can improve productivity through better management and work practices, new technology and reallocating labour and capital from less valuable areas to more valuable areas.

Higher productivity increases a country’s consumption capacity and its living standards. Our official measures of productivity are provided by the Australian Bureau of Statistics (ABS).

Multi-factor productivity is considered the most comprehensive measure because it measures the efficiency of producing goods and services per unit of a combined set of inputs - labour and capital - rather than just one. Annual changes in the Productivity Index provide a measure of the growth or loss of productivity each year.

But caution is required when interpreting productivity measures. First, there are measurement errors. Second, the stage of the economic cycle has an important effect. The table below shows the average growth rate of multi-factor productivity per year for the 1990s, the early 2000s period of the Coalition government, and then under the Labor government.

This table shows the rate of change for multi-factor productivity under Coalition and Labor governments since 1994. Author/ABS

There has been a marked decline in productivity growth in the last decade or so compared to the 1980s and 1990s. The decline has occurred during the tenure of both of the main political parties.

Who’s to blame?

Abbott is correct to say productivity growth has fallen by 3% since 2007, when Labor came to power. He also lays the blame directly at the government’s door.

In fact, there are a number of reasons for the low and negative growth of productivity in Australia so far this century.

A paper prepared for the Productivity Commission in April last year provides useful insights. Some of the reasons for a fall in productivity are likely to be short term. In particular in recent years the mining boom has seen several hundred billion dollars invested in expanding mining output. But, because of time lags, much of this investment is yet to result in increased output. In the coming years, the current investment boom will result in a large increase of mining output with limited additional investment - a productivity return on investment.

Some other investments, especially in the electricity and water industries this century, have resulted in very small increases in measured output. The ABS measure of productivity shows a fall in productivity. Arguably, capital intensive desalination plants to increase the security of water supply in droughts and investments in electricity infrastructure to meet more extreme peak demands have provided benefits nonetheless.

But governments do have an impact on productivity. The business community, including the Business Council of Australia in its Action Plan for Enduring Prosperity Restoring Prosperity, regularly argues that increases in government regulations, and especially duplicate regulations across the federal, state and local governments, have restricted the ability of businesses to adjust their practices to introduce productivity improvements.

Other government policy actions that would support productivity growth include ending handouts to selected industries, including co-investments for car manufacturers and subsidised loans to some primary producers; taxation reform; simplification of the social security system; and using transparent benefit cost assessments to choose government investments.

The productivity growth rate in Australia is a critical issue for both parties. Australian people have entrenched expectations for further increases in personal expenditures and more government services. Productivity growth is required to meet these expectations.

The anticipated reversal of the short-term forces on recent negative productivity will not be enough to meet current expectations. Then, either proactive government policies to support productivity growth, or a lowering of expectations, will be required over the next few years.

Verdict

Tony Abbott is correct that Australia’s multi-factor productivity has fallen by 3% since the end of 2007. Poor government policy has been an important cause, but not the only cause. As a country, we either increase productivity or reduce our expectations for higher living standards.


Review

This article is a balanced assessment of the recent productivity growth in Australia. Broadly, it is correct to say that multi-factor productivity growth peaked in the mid-2000s. Hair splitters will look to the ABS’s 16-sector measures of multi-factor productivity: that measure actually peaked in 2003-04, not in late 2007, as implied by the opposition leader. And while multi-factor productivity does remain below the level achieved in 2003-04, it actually grew a bit in 2009-10 and 2011-12. Labour productivity for these sectors has grown consistently, with the 2012 full year of labour productivity growth not far below the growth achieved in the golden age of productivity growth in the late 1990s.

The discussion of the potential contributions of policy is also broadly in line with the literature. But of course, the contribution of poor policy has not been measured, so it is only probably true that it’s been an important cause of low productivity growth.

The Conversation is fact checking political statements in the lead-up to this year’s federal election. Statements are checked by an academic with expertise in the area. A second academic expert reviews an anonymous copy of the article.

Request a check at checkit@theconversation.edu.au. Please include the statement you would like us to check, the date it was made, and a link if possible.

Join the conversation

44 Comments sorted by

Comments on this article are now closed.

  1. Billy Field

    logged in via Facebook

    I think it is simple...if people make money it goes into investment & hiring.
    If Govts. take too much money it gets spent...(& often misspent or wasted).

    If Govts spend & borrow to much THEY NEED TO PUT TAXES UP....This is akin to throwing sand in the gearbox of wealth creation.

    ..it all ends up like Greece & Spain & most others. Then the nation is rooted & raped by foreign debt & ownership.

    What small & medium business is going to want to hire ANYONE in Australia if they can't "unhire…

    Read more
  2. Mick Shadwick

    Consultant

    As the reviewer notes "This article is a balanced assessment of the recent productivity growth in Australia". Unfortumately, the review is not especially balanced. The reality is that the current government has gone backwards on structural reform and that has adversely impacted on productivity growth.

    report
  3. Tony Martin

    Mr

    Are there any accepted measures that judge the effect of corporate management and inter company competition as a factor in National Productivity?
    Certainly the allocation of capital to gold plating electricity poles and wires, and water security measures looks suspect. I would also suggest over investment in retail building to cement market dominance could be included.
    That together with the lack of capital availability for start-up or technically innovative small and medium enterprises has surely been a major brake on Australian productivity growth.

    report
  4. Dennis Alexander

    logged in via LinkedIn

    at least get the date formats in the table correct: 94-95, 2011-12, etc, otherwise, as Joe would say, how can we trust your numbers?

    report
  5. Dennis Alexander

    logged in via LinkedIn

    Now, 0.22 - -0.62 does not come to 3%. please explain how you get the 3%, or did you just stuff up the decimal point. Again, as Joe would say, how can we trust your numbers if you can't get a simple table correct?

    report
    1. Account Deleted

      logged in via email @drdrb.net

      In reply to Dennis Alexander

      It's -0.62 per year. -0.62 * 5 years since 2007 = -3.1%

      report
    2. Dennis Alexander

      logged in via LinkedIn

      In reply to Account Deleted

      Thanks James, thought so, but it is the responsibility of the fact checkers to make that clear from the data they present. If they don't do this, Joe is entitled to question their numbers and their conclusions.

      report
    3. Gay Alcorn

      Editor at The Conversation

      In reply to Dennis Alexander

      Hi, here's John's response to this query.

      Here are the ABS numbers. From 5260.0.55.002, Table 2, line for
      Growth Accounting Analysis-Contributions to Growth
      Contribution of output growth(MFP-Quality adjusted hours worked basis) (annual % change)
      2007-08 -0.74
      2008-09 -1.53
      2009-10 0.13
      2010-11 -1.05
      2011-12 0.11

      The five year average is -0.616. Multiplying by 5 for the period gives a bit over 3%,

      Alternatively, the MFP index is for 2007-07 is 103.27 and for 2011-12 it is 100.11. This, I imagine is the basis of the Tony Abbott comment.

      report
  6. Account Deleted

    logged in via email @drdrb.net

    I suggest the article neglects a number of important nuances.

    First, other articles on this issue (particularly Crikey) have noted that labour productivity has been rising under Labor - what has declined is capital productivity. This suggests that the BCA is neglecting the log in their own eye - the problem is not workplace relations, the rollback of Workchoices, etc, but poor allocation of capital by shareholders and management (although some of this may be due to the "not yet online" factors…

    Read more
    1. Account Deleted

      logged in via email @drdrb.net

      In reply to Account Deleted

      sorry, that word "inversely" shouldn't be there.

      report
  7. Dianna Arthur

    Environmentalist

    Abbott is correct, but then he should know as the reduction in productivity began during his term in office.

    According to the graph in this article, the decline in productivity gathered momentum during the Liberal government and has continued at a lesser speed - given that business slowed throughout Australia and the rest of the world (GFC) it is surprising that the decline did not slide further than it did. Perhaps this was due, in part, to the stimulus efforts funded by the Labor government. However, industry captains also play a part in business productivity - strange I should even have to point this out.

    report
  8. Kevin Bain

    Teacher

    There often seems to be a voluntarism theme in productivity discussions, that it's all about a triumph of the will to work harder or smarter. It would have been useful to call the "unavoidables" in the productivity equation, such as the effect of the 2011 floods in Qld and the diminishing marginal returns from mining lower quality ore as mines end their useful life.

    report
  9. Glen Maher

    Economist

    Government policy, for good or ill, is just one cause of productivity change. A more important cause is changes in technology, management and organisation.
    Productivity is highly correlated in western countries. It's not easy to make accurate comparisons, but around 21 of 25 OECD countries had lower productivity growth in the 2000's than in the 1990's. Productivity growth slowed to a similar extent in Australia as for the OECD.
    There are a whole bunch of things contributing to the productivity slowdown that are common across western countries. But it's very difficult to tease out the key causes and what to do about it.

    report
  10. Michael Lardelli

    logged in via Facebook

    Since most of the work done in the economy is done by externally supplied energy rather than by humans, any increase in the price of energy will decrease productivity. Oil production flatlined in 2005 and global net energy may also be flat or even decreasing by now. This would explain the decreased productivity of the workforce. See the biophysical economists for more info:

    http://www.springer.com/engineering/energy+technology/book/978-1-4419-9397-7

    report
  11. William Cranston

    logged in via email @iinet.net.au

    This was a missed opportunity to talk about the the flaws in any residual-based analysis framework, such multi-factor productivity, which cannot be reconciled easily with glib attempts by the business lobby to achieve labour market micro reform when we know labour productivity is high.

    Unit productivity is certainly something we should lift, but MFP is a measure of everything that tells us very little specifically about what to change. To quote Noah Smith:

    "It could be "human capital". It…

    Read more
  12. Mike Farrell

    Former Penny Wong employee (DSP)

    I think I'm in the Twilight Zone:

    "Arguably, capital intensive desalination plants to increase the security of water supply in droughts and investments in electricity infrastructure to meet more extreme peak demands have provided benefits nonetheless."

    Only a professor of economics at Melb U could come up with that fatuous statement. All east coast desal plants are in mothballs, producing no water. The state governments continue to pay hundreds of millions for the non-production of water.

    How can an economics professor state that productivity has increased and produced benefits ??? Those ivory towers that most academics inhabit must be surrounded by lead shields, a bit like the series on TV called "Under the Dome".

    report
    1. Greg Young

      Program Director

      In reply to Mike Farrell

      If I crash my car on the way home, there will be a positive contribution to GNP due to the labour and parts required to fix it. My car however, will not be worth any more.

      report
    2. Mike Farrell

      Former Penny Wong employee (DSP)

      In reply to Greg Young

      And if you manage to kill someone, you provide work for the Coroner, the undertaker, the priest, the courts and the prison system. But on the other hand, you also save the state paying future medical bills for the recently deceased which puts nurses, ambos and doctors out of a job, reduces future electricity and water consumption by the deceased, stops them from gainful earnings that could have contributed towards paying my pension and have probably killed a future Einstein who could speak both Mandarin and Hindi under #Gonski. Based on these facts, GNP/GDP has suffered a negative effect.

      report
    3. Greg Young

      Program Director

      In reply to Mike Farrell

      Yep, you're basically agreeing with the point I Was making, that GDP is not always a sensible measure at a micro level. It is incorrect to say in your scenario that GNP has taken a hit though, as it is only a measure of the present and past. Your future scenarios do not enter into it.

      It should also be borne in mind that the desal plants, even when idle, are assets that can be leveraged fur future benefits.

      report
  13. Robert Tony Brklje
    Robert Tony Brklje is a Friend of The Conversation.

    retired

    "Higher productivity increases a country’s consumption capacity and its living standards." is a falsity as it does not scale through to very highly automated levels of productivity. At that point where labour is only needed in maintenance, consumption capacity and living standards collapse as unemployment dominates.
    If fact the US market is an excellent analogue for this where tax supported off shoring of it's manufacturing capacity is substituted for automation, when can see a steady erosion living…

    Read more
  14. Geoffrey Harold Sherrington

    Boss

    For a graphic demonstration of an effect of de-unionisation of a workforce, with resulting productivity and safety increases, there is a neat capsule example involving about 1,000 people. I'm surprised that rare examples like this have not been used very often to quantify productivity factors, instead of taking a guess at them. There is also the inverse, the cost of loose management on productivity, in the lead up to this episode.
    There's a book "The Power Switch at Robe River" by Patrick Gethin…

    Read more
    1. Account Deleted

      logged in via email @drdrb.net

      In reply to Geoffrey Harold Sherrington

      When the Howard government used the Building Industry Taskforce and the ABCC to reduce union influence on OH&S in construction, rates of workplace death in the construction industry increased by 30%: http://www.crikey.com.au/2010/03/03/when-dead-workers-werent-quite-so-important/, while The Australian praised the government for reducing union influence over OH&S. Is this the kind of "resulting productivity and safety increases" you want?

      Conversely, since Labor was elected, the rate of workplace…

      Read more
    2. Mike Farrell

      Former Penny Wong employee (DSP)

      In reply to Account Deleted

      I have often wondered why unions, particularly the CFMEU, where most deaths occur, refuse to allow for random drug testing, both for alcohol and licit/illicit drugs. Someone high as a kite, both literally and figuratively, has no place on a worksite. Yet the employer, who faces jail if the worker is killed, has no right at law to protect himself by ensuring his employees are acting responsibly.

      report
    3. Account Deleted

      logged in via email @drdrb.net

      In reply to Mike Farrell

      While I don't know anything about the CFMEU's policy on this question, I suppose it is for basic privacy reasons. Same reason they would oppose strip searches of employees even though that would cut down on theft from the workplace. The balance of evidence seems to be that unions improve workplace safety.

      For that matter, I assume most employees are grownups who don't need the employer standing over them before they tolerate something obviously unsafe, e.g. a drunk colleague on a construction site.

      There's also an argument that enforcing the law (on drugs, drunkenness, etc) is the function of the police, not of the employer.

      report
    4. Mike Farrell

      Former Penny Wong employee (DSP)

      In reply to Account Deleted

      Well the Secretary of the CFMEU in Victoria has a criminal record that would make you blush. But that is not what I'm arguing. You believe that that privacy rights outweigh health and safety. I don't.

      Tell that to the wife and kids that are killed by a drunk fellow employee that kills his mate due to his inability to properly do his job. He wont be breathalysed under existing legislation. He gets off scott-free and the employer is prosecuted. Where is the logic or justice in that ???

      Lots of jobs require compulsory drug testing eg cops, train drivers, railway station assistants etc. Random testing should be available to those employers who are in high risk industries. I'm not talking about the local checkout chick.

      report
    5. Account Deleted

      logged in via email @drdrb.net

      In reply to Mike Farrell

      I would prefer some statistics on the extent to which this is actually a problem to anonymous anecdote. The safety record of the construction industry has been steadily improving for many years now. If there was widespread evidence of drunkenness, etc leading to deaths in workplaces and it was a growing or non-reducing problem, I would probably agree with you.

      PS Now I've done some searching, it appears that employers actually do have the right to do drug tests on construction sites:
      http://www.theage.com.au/victoria/drug-tests-get-goahead-20111011-1lj3s.html

      There's a good overview of the pros and cons of drug testing in the workplace here: nceta.flinders.edu.au/download_file/-/view/527/‎Cached

      report
  15. Ho Trieu Ngoc Luan

    logged in via Facebook

    Factors mentioned in this article '...better management and work practices, new technology and reallocating labour and capital from less valuable areas to more valuable areas...', and a basket of other factors cited @ http://noahpinionblog.blogspot.com.au/2012/08/the-perils-of-phlogistonomics.html render the measurement of multifactor productivity MFP problematic, and thus the association of MFP movements with government's various policies is thus extremely hard and can be misleading because some…

    Read more
    1. Peter Redshaw

      Retired

      In reply to Ho Trieu Ngoc Luan

      Your comment provides a far better fact check that the article itself which as with the politics of the debate on productivity, rather limited and devoid of the facts of the matter. Productivity outcomes are based on very complex factors, some internal and some external to the business or economy. Yet too often in politics it is relegated to wages and work practices and conditions under the in this case the "Fair Work Act'.

      From businesses I have worked in as well as businesses people I know…

      Read more
    2. Ho Trieu Ngoc Luan

      logged in via Facebook

      In reply to Peter Redshaw

      Your experience in the business sector will be valuable for more in-depth studies of productivity, especially the point on ' ...In fact too often work places create a management culture where a employee feels it can be detrimental to their future employment prospects if they were to provide feedback on issues relating to current work practices that they are having to deal with in their job.' This issue certainly deserves much more studies so that managers can find ways to overcome this problem…

      Read more
    3. Peter Redshaw

      Retired

      In reply to Ho Trieu Ngoc Luan

      Ho sorry to have to tell you this but you probably have more chance of holding back the flood waters of the Yellow River than you have of stopping politicians and the media for that matter misusing ABS data to suite their own purpose.

      Even the use of fact check here fails badly in this aspect because its analysis is far too narrow and does not deal with the complexity of the issues that they are supposed to be fact checking. It seems even those doing the fact checking tend to approach the task of fact checking what a politician say in a far too narrow and simplistic way. And by doing that their act of fact checking is worst than useless.

      It would be nice to have proper debates in this country that actually acknowledge the complexity of the issues that we are dealing with instead of the too often simplistic and biased debates that we tend to get.

      report
    4. Ho Trieu Ngoc Luan

      logged in via Facebook

      In reply to Peter Redshaw

      Peter
      I was able to guess what you are going to respond with regard to political misuse of results from ABS analyses. However, as you say the flood of Yellow River is hard to stop since the Yellow River is too big and its current is too violent. However, people can build dykes to stop the flood or the Red River so it's possible and time for TC academics to start building the dyke before the flood of misuses becomes uncontrollable.
      After the productivity slowdown of the seventies, Australia government…

      Read more
    5. Peter Redshaw

      Retired

      In reply to Ho Trieu Ngoc Luan

      Ho if we are to look at solutions to productivity I think the first question has to be is there really a productivity slowdown in the first place. I am not saying that there should not be a drive to improve productivity in this country, because that should always be the case. As a nation and or as a business one should always be looking to improve productivity over the long-term. But that is very different thing to saying we have had a productivity slowdown.

      Over the economic cycle there will…

      Read more
    6. Ho Trieu Ngoc Luan

      logged in via Facebook

      In reply to Peter Redshaw

      Peter
      Please do not misunderstand me. When MFP indicator as given by government's statistics shows negative in a few ANA quarterly publications, politicians need to keep their hands off and let the academics and government analysts investigate and diagnose the problem all along the lines mentioned in this article and in the commentaries here including yours. There should be no big deal politically. Face the problem cool-headedly, do good analyses, provide good diagnosis, prescribe good measures…

      Read more
  16. Peter Redshaw

    Retired

    This is another rather simplistic analysis by the conversation when it comes to the fact check. Maybe the fault is in the "ABS 16-sector measures of multi-factor productivity", but without looking at the ABS data it would be hard to discern the truth of that. It is a pity the article did not provide a link to it.

    Now I do not know if I would call it hair splitting to say that as the article admits the data shows that the "multi-factor productivity: that measure actually peaked in 2003-04…

    Read more
  17. Ian Rudd
    Ian Rudd is a Friend of The Conversation.

    Retired accountant & unapologetic dissident

    I have for a long time wondered about measures of productivity. Presumably to measure productivity in a complex economy involves converting all inputs and outputs to a representative unit eg the A$ adjusted for inflation.

    Over the last decade or more their has been a shift in the share of income away from labour into profits. Would this in itself not show up as an improvement in productivity when it is really just a redistribution of the total pie other things being equal.

    Can anyone help me out on this?

    report
    1. Ho Trieu Ngoc Luan

      logged in via Facebook

      In reply to Ian Rudd

      Ian, as far as I can see the higher share of entrepreneurs in the gross operating surplus indicates that more capital equipment is being used in the production process.
      At the aggregate economy level, the income shift to profits is the result of a multitude of socio-economico-politico factors of which I can see the concentration of the combined political and economic powers into the entrepreneurial class in the economic production and distribution system is the major cause.

      report
    2. Ian Rudd
      Ian Rudd is a Friend of The Conversation.

      Retired accountant & unapologetic dissident

      In reply to Ho Trieu Ngoc Luan

      Ho,

      Entrepreneurs are one thing but I would suggest that the bulk of the share of profits go to the owners of capital; to big corporations and the executives that run them (whether they are regarded as earning profit or wages). Some of those owners of capital (capitalists) actually inherit their wealth or gain it through speculation - not that all speculation is necessarily unproductive but much of it is.

      I would go as far as to say the big corporate monopolies or near monopolies actually stifle entrepreneurial activity as they construct barriers to entry.

      report
    3. Ho Trieu Ngoc Luan

      logged in via Facebook

      In reply to Ian Rudd

      Ian,
      '...the big corporate monopolies or near monopolies actually stifle entrepreneurial activity as they construct barriers to entry...'
      Yes, the economic power is in their hand, that is the problem. It is the role of people holding the political power to find solutions to alleviate the problem.
      Just imagine if the political power holders collaborate with those corporate monopolies, more income will be shifted to profit and the income gap will be widened. The society is prone to class struggle, turmoils and revolution.
      Thanks to Australia's liberal democracy we are not there yet!

      report
    4. Ian Rudd
      Ian Rudd is a Friend of The Conversation.

      Retired accountant & unapologetic dissident

      In reply to Ho Trieu Ngoc Luan

      But Ho the political powers DO collaborate with the monopolies. That's why we have very weak climate change responses, no container deposit scheme outside South Australia, mining tax legislation written by the mines, privately run prisons and much else.

      I think most citizens do know this but more or less shrug their shoulders and allow it to go on, They could vote these people out if they would only become more engaged and stopped being concerned with the present at the expense of their futures.

      report
    5. Ho Trieu Ngoc Luan

      logged in via Facebook

      In reply to Ian Rudd

      Ian
      From what I read and hear in the Australian press media, I concur with what you said on the climate change issues and mining tax issues. I trust that the voters think the same and liberal democracy will prevail victoriously in the coming federal election. May whatever you wish comes true too!

      report
  18. Steven Waters

    logged in via Facebook

    yes there are always other causes that's when we need a good govt policy to help them in those times. its when the govt does the opposite to what was needed that it compounds and then it goes beyond the point of recovering back. labor have brought in a raft of fees, taxes and regulations that strangle business. like the recent new sole trader laws. just kills the incentive to want to go into business risking most of your life savings to create a new enterprise and maybe employ people. there's just more and more small business closing. there's just more and more of a lot of things slowing and then closing. we need to be supporting small business as that's the bedrock that builds jobs for the future.

    report
  19. Tony Martin

    Mr

    Perhaps what this fact check reveals is that while the ABS reports on levels of productivity the value of that data is limited. How it is interpreted seems solely in the eye of the beholder.
    Either data is not collected, or the evaluation tools do not exist, to apportion blame or gain between inputs.
    Is Government, Capital, Labour Unions, Corporate management decision making, or even Environmental factors, the major force in any change?
    Perhaps this is an area in which someone could enlighten us on how an economic model could be developed to fill this gap in our knowledge.

    report
  20. Ian Rudd
    Ian Rudd is a Friend of The Conversation.

    Retired accountant & unapologetic dissident

    For the uninformed laymen, especially those Abbott targets, things like increasing productivity, efficiency or GDP are "obviously" good things by definition. But all these measures hide complicated relationships between various factors as many comments on this article have pointed out. As Noam Chomsky has observed for instance "efficiency is a word steeped in ideology". I agree.

    So what Abbott has stated may be correct but it means nothing. Like his comment about CO2 just being an invisible gas, it's true but it's tripe; almost as good as a lie - designed to suck in the uninformed.

    report