tag:theconversation.com,2011:/uk/topics/multi-factor-productivity-4242/articlesMulti factor productivity – The Conversation2013-08-05T20:17:35Ztag:theconversation.com,2011:article/165172013-08-05T20:17:35Z2013-08-05T20:17:35ZFactCheck: has productivity dropped by 3% - and is the government to blame?<figure><img src="https://images.theconversation.com/files/28869/original/zpdmb2dm-1375907957.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Is Labor to blame for a "productivity crisis"?</span> </figcaption></figure><blockquote>
<p><strong>“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, <a href="http://www.scottmorrison.com.au/info/speech.aspx?id=704&page=7">press conference,</a> 25 July.</strong></p>
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<p>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 <a href="http://www.theaustralian.com.au/national-affairs/kevin-rudd-calls-for-productivity-pact/story-fn59niix-1226677651752">first announcements</a> when he resumed the Labor leadership was to push for a “productivity pact” between government, business and unions. </p>
<p>So is productivity slowing? And is Labor to blame?</p>
<h2>What is productivity?</h2>
<p>The Australian Bureau of Statistics <a href="http://www.abs.gov.au/ausstats/abs@.nsf/Lookup/by%20Subject/1370.0.55.001%7E2012%7EMain%20Features%7EProductivity%7E20">defines productivity</a> 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.</p>
<p>Higher productivity increases a country’s consumption capacity and its living standards. Our <a href="http://www.abs.gov.au/AusStats/ABS@.nsf/MF/5204.0">official measures of productivity</a> are provided by the <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5260.0.55.002">Australian Bureau of Statistics (ABS)</a>.</p>
<p>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.</p>
<p>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. </p>
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<span class="caption">This table shows the rate of change for multi-factor productivity under Coalition and Labor governments since 1994.</span>
<span class="attribution"><span class="source">Author/ABS</span></span>
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<p>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. </p>
<h2>Who’s to blame?</h2>
<p>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. </p>
<p>In fact, there are a number of reasons for the low and negative growth of productivity in Australia so far this century. </p>
<p><a href="http://observgo.uquebec.ca/observgo/fichiers/36310_productivity-slump.pdf">A paper prepared</a> 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.</p>
<p>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.</p>
<p>But governments do have an impact on productivity. The business community, including the Business Council of Australia in its <a href="http://www.bca.com.au/Content/99520.aspx">Action Plan for Enduring Prosperity Restoring Prosperity</a>, 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.</p>
<p>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. </p>
<p>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. </p>
<p>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. </p>
<h2>Verdict</h2>
<p>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.</p>
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<h2>Review</h2>
<p>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.</p>
<p>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.</p>
<p><div class="callout">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.</div></p><img src="https://counter.theconversation.com/content/16517/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>“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…John Freebairn, Professor, Department of Economics , The University of MelbourneLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/109462012-11-27T19:12:24Z2012-11-27T19:12:24ZChanging work practices alone will not boost productivity<figure><img src="https://images.theconversation.com/files/17966/original/mmhf3qvg-1353646041.jpg?ixlib=rb-1.1.0&rect=59%2C35%2C1907%2C1299&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Three recent reports into productivity highlight differing issues but agree that targeting industrial reform is not the key to lifting outputs.</span> <span class="attribution"><span class="source">Image sourced from www.shutterstock.com</span></span></figcaption></figure><p>The Australian Government’s recently released white paper on <a href="http://asiancentury.dpmc.gov.au/">Australia in the Asian Century</a> identified productivity as one of five key areas for action, at a time when we are engaged in a major national debate on productivity. </p>
<p>Soon after the release of the white paper, two reports on Australian productivity were released: the <a href="http://mckellinstitute.org.au/understanding-productivity-australias-choice">McKell Institute’s Understanding Productivity: Australia’s Choice</a>, by <a href="https://theconversation.com/australias-choice-the-high-road-to-productivity-or-a-race-to-the-bottom-10695">Roy Green, Philip Toner and Renu Argarwal</a>; and the <a href="http://www.ey.com/AU/en/Services/Advisory/Australian-Productivity-Pulse">Ernst & Young Australian Productivity Pulse</a>. There is a high degree of convergence between all of these documents that lift the debate above the blame game that has dominated it to now.</p>
<p>Unlike some contributors to the recent national debate, none of these three documents targets industrial relations reform as the key to improving productivity. All of them agree, however, that skills and innovation are central to lifting productivity growth. </p>
<p>Australia in the Asian Century highlights “five pillars of productivity”: skills and education, innovation, infrastructure, tax reform and regulatory reform. The McKell Institute’s report focuses on the importance of management skills and innovation. The Ernst & Young survey found that the three main contributors to individual productivity according to employee respondents were people management, organisation structure and design, and innovation.</p>
<p>However, Green and his co-authors argue that part of the problem with Australian productivity may be the labour market deregulation since the 1990s that has shifted jobs to low productivity sectors of the economy, notably in hospitality and retail. </p>
<p>There are resonances here with the New Zealand experience of complete deregulation under the Employment Contracts Act 1991. Since then, New Zealand wages have fallen behind their Australian equivalent by 25-30%, but productivity growth has also declined. There is little incentive for employers to invest in new technology or innovation if cheap labour is readily available.</p>
<p>In simple economic terms productivity is the ratio of total outputs to total inputs. Outputs can be represented by GDP at the national level, or total number of widgets or value of production in an organisation. Labour inputs are measured by number of employees, or more accurately, number of hours worked. </p>
<p>However, inputs include those from capital, even if commentators frequently refer to labour productivity only. If businesses do not invest in innovation and new technology, work practices alone cannot produce high productivity.</p>
<p>At the same time, there may often be lags between investment in new technology or innovation and growth in outputs. Australia’s productivity may have been reduced by investment in mining infrastructure that has not yet come into full production.</p>
<p>We know productivity is largely determined in the workplace, but the traditional economic understanding of productivity works best at the national level of the whole economy. Once we drill down to organisations it is not always so clear. </p>
<p>In manufacturing we can easily identify the number of widgets produced as outputs. But it’s not so easy in the service sector, which accounts for three quarters of our employment. What outputs do we measure as productivity in schools, hospitals, art galleries, aged care facilities and the like? </p>
<p>Can hospital productivity merely be measured in terms of how quickly patients are turfed out of beds, or should quality of service be a consideration? These issues are particularly important as Australia in the Asian Century envisages service provision to Asia as a key economic activity.</p>
<p>Many businesses do not have effective performance measurement systems in place, especially in the service sector. An important starting point to address the issue of productivity would be to encourage small and family businesses to adopt effective performance measurement. This issue goes to the requirement for upgrading management skills mentioned in the McKell Report.</p>
<p>For the large services sector quality of service is a critical and achievable factor for measurement, through, for example, customer satisfaction surveys. This is not the same thing as productivity, but at an organisational level it can be an indicator. It also affects the bottom line, as poor service provision will hinder market growth. To compete in Asia in this sector, service quality will be important in a growing and discerning middle class market.</p>
<p>Quality of the work environment is also associated with high productivity in substantial research in Scandinavia over many years. My own research comparing New Zealand and Denmark shows that quality of work environment, including well-being, job satisfaction, employee voice and workforce development through training, impact on indicators of productivity such as employee engagement and quitting behaviour. </p>
<p>Employee voice may also contribute to innovation, and quality of the work environment is clearly where management skills are important.</p>
<p><em>Ray Markey will be among the speakers at Macquarie University’s <a href="http://www.businessandeconomics.mq.edu.au/research_in_business_economics/centre_for_workforce_futures/the_challenge_of_workplace_productivity">The Future of Work Symposium Series</a> in Sydney on November 29.</em></p><img src="https://counter.theconversation.com/content/10946/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Ray Markey does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The Australian Government’s recently released white paper on Australia in the Asian Century identified productivity as one of five key areas for action, at a time when we are engaged in a major national…Ray Markey, Director of the Centre for Workforce Futures, Macquarie UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/106952012-11-13T19:21:01Z2012-11-13T19:21:01ZAustralia’s choice: the ‘high road’ to productivity or a race to the bottom<figure><img src="https://images.theconversation.com/files/17541/original/72mcn73k-1352768307.jpg?ixlib=rb-1.1.0&rect=23%2C20%2C1940%2C1263&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">There is little evidence to support the belief that Australia's productivity declines are linked to the need for labour market reform.</span> <span class="attribution"><span class="source">AAP</span></span></figcaption></figure><p>It is not easy to devise a solution to Australia’s productivity slowdown when a shared understanding of the problem is so elusive. </p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>Our report for the McKell Institute <a href="http://mckellinstitute.org.au/understanding-productivity-australias-choice?utm_medium=email&utm_campaign=Productivity&utm_content=Productivity+CID_63722440c3a718b5e08bcb335b717465&utm_source=CampaigniQ%20Email%20Campaign%20System&utm_term=here">Understanding Productivity</a> 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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p><img src="https://counter.theconversation.com/content/10695/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roy Green is dean of the UTS Business School and a member of the Prime Minister’s Manufacturing Taskforce.
The authors are grateful to the McKell Institute for sponsoring this report.</span></em></p><p class="fine-print"><em><span>Phillip Toner and Renu Agarwal do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>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…Roy Green, Dean of UTS Business School, University of Technology SydneyPhillip Toner, Honorary Senior Research Fellow Department of Political Economy, University of SydneyRenu Agarwal, Senior Lecturer, Innovation and Service Operations Management, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.