Thu Jun 12

The government’s big productivity challenge

Written by: Stephen Bartos, Professor of Economics, University of Canberra

Higher productivity has quickly emerged as an economic reform ^[1] priority for Labor’s second term.

Prime Minister Anthony Albanese has laid down some markers for a productivity round table ^[2] in August, saying he wants it to build the “broadest possible base” for further economic reform.

The government is right to focus on productivity. Improving economic efficiency will increase real wages, help bring down inflation and interest rates, and improve living standards.

Treasurer Jim Chalmers is flagging a broad ^[3] productivity agenda, but acknowledges the rewards will take time to percolate through the economy:

Human capital, competition policy, technology, energy, the care economy – these are where we are going to find the productivity gains, and not quickly, but over the medium term.

Making the economy operate more efficiently is simple in concept. But Albanese and Chalmers would be well aware productivity is hard to measure, and even more difficult to shift.

The numbers are fraught

What do we mean by productivity growth? And how will it help lift the economy? The authors of the bestselling new book Abundance ^[4] offer this neat explanation:

People need to think up new ideas. Factories need to innovate new processes. These new ideas and new processes must be encoded into new technologies. All this is grouped under the sterile label of productivity: How much more can we produce with the same number of people and resources?

At its most basic, productivity measures ^[5] outputs divided by inputs – what we produce compared to the resources such as labour and capital used to produce it.

Jim Chalmers and Anthony Albanese in hi-viz and hard hats

Treasurer Jim Chalmers and Prime Minister Anthony Albanese - productivity a big priority. Dean Lewins/AAP ^[6]

But large parts of the “non-market” economy including the public service, health care and education are excluded from the official productivity figures ^[7].

The Australian Bureau of Statistics is working to address the gap in the data. For example, it is developing “experimental estimates ^[8]” for the health sector, which suggests hospital productivity has fallen.

However measurement is fraught. If a nurse, for instance, who previously cared for four patients now looks after eight, is that a productivity improvement? Or a drop in standard of care?

Flatlining productivity

Australian productivity growth has averaged just 0.4% a year since 2015 – the lowest rate ^[9] in 60 years.

The exception was during COVID ^[10], when industries with low productivity, such as accommodation and food, were shut down and those with high productivity – such as IT and communications – thrived.

The objective must be to return to, or even surpass, historical levels of productivity. However, it won’t be easy given economists have no clear idea ^[11] why productivity growth has fallen in Australia and overseas.

Theories include:

measurement problems
new industries
decline in business investment in equipment and technology
more service industries, where productivity is lower
the easy reforms have all been done.

No shortage of advice

Productivity is multidimensional, with an absurd number of moving parts. It depends on skills, technology, investment, knowledge, management, and a host of other factors. Like the movie, it’s “everything, everywhere all at once”.

The government has a plethora of advice on how to improve productivity. Scientists argue for more scientific research ^[12]; business lobbies for more investment breaks ^[13];innovators for more technological advances ^[14].

This poses a dilemma for the Treasurer. Most suggestions on their own would make some difference. Doing all of them would make a huge difference. Alas, government cannot do everything. It must choose where to apply its limited resources.

Beyond money and time, the government must also have appetite for the fight.

Interest groups typically support productivity reforms in principle, but resist them if they are directly affected. Every inefficient regulation or program has a supporter somewhere.

Five pillars

Jim Chalmers does not need another shopping list. He needs help to sort through options and set priorities for which fights to pick. To this end, in December year he tasked ^[15] the Productivity Commission ^[16] with new inquiries into the five main drivers – “pillars” – of higher productivity.

Yet the Albanese government has already been handed a comprehensive blueprint for productivity reform.

Several workers wearing hi-viz with a traffic saying 'slow'

Over the past decade, productivity has grown at below the historical average. Joel Carrett/AAP ^[18]

In March 2023, the Productivity Commission released the Advancing Prosperity ^[19] report, which it described as a “road map”.

However, it had more of a shopping list feel, incorporating 71 recommendations and 29 “reform directives”. Many were of the “should” variety, lacking a detailed plan of how to do them.

Roughly speaking, any government only has bandwidth for one big and a few small reforms a term. It cannot implement more than 70, even if that’s ideal.

Productivity reform will succeed if it involves only a few changes – preferably those that deliver the most improvement for the least complaint.

Some proposed measures are desirable but controversial. The tax system ^[20], for example, is crying out for improvement, but the government is unlikely to take it on.

Reforming occupational licences ^[21] to make it easier for tradies to move states is a more modest aim. It would not generate the same productivity gains, but politically would be simpler to implement.

Nothing to fear

Finally, some words of caution.

Productivity is not code for exploiting workers. As The Guardian recently noted ^[22]:

When most people hear the word ‘productivity’ they think of their boss wanting them to take on more duties for the same pay. That’s not the case. It’s about getting more out of the hours you work.

Working harder to get the same result is in fact a drop in productivity. Working shorter hours for the same outputs is productivity growth, with the benefits seen in better work-life balance.

Nor is productivity just about producing more outputs. Who needs more useless stuff?

And statistics can mislead, because they measure the value of production, not the quality. A broader accounting for production, incorporating society and the environment, would help the productivity debate avoid this trap.

Albanese and Chalmers readily acknowledge the government can do more on productivity. Anyone with an interest in driving a more efficient economy, higher real wages and better living standards will hold them to their word.

This article is part of The Conversation’s series examining the productivity dilemma.