By Nick Hurley, 22nd November 2023.

We are reading endless headlines showing that Australian productivity is going backwards or at least flatlining, contributing to the Reserve Bank of Australia’s (RBA) need to raise interest rates in order to balance stagnant supply with higher demand. Notably, Australian productivity has experienced its slowest growth in six decades prior to 2020. But it is rather simplistic to look at productivity as one homogenous issue across the entire economy.

This article delves into the nuances of productivity across various industries, shedding light on areas showing promising advancement and those facing hurdles. Dive into our analysis to uncover the evolving productivity landscape in Australia – your guide to understanding economic progress at its core.

Key Takeaways

• Labour productivity has faced a challenging environment post-pandemic, with efforts to rebound and adapt to new working conditions.
• Businesses have accelerated digital transformation, leading to efficiency gains in some industries.
• Sectors such as Information Technology and Professional Services have shown potential for higher productivity growth.
• Key sectors where productivity is improving include technology (software development, IT services, and technology start-ups) driven by innovation and high-skilled workforce.

Understanding Productivity in the Australian Economy

Productivity in the Australian economy refers to the amount of goods and services produced per unit of input, such as labour, capital, or technology. It is a crucial measure of economic performance and efficiency.

Recent trends show a slowdown in productivity growth, which has significant implications for future prosperity.

What is productivity and why does it matter?

Productivity measures how efficiently goods and services are produced by an economy. It’s a crucial indicator of economic performance, reflecting the ability to turn inputs such as labour, capital and materials into outputs.

Higher productivity means more can be produced with the same amount of resources, leading to greater output per hour worked and ultimately driving economic growth and living standards.

As such, boosting productivity is essential for future prosperity in Australia.

The importance of this concept becomes clear when we consider that an increase in labour productivity has contributed over 80% towards the growth in Australia’s living standards since records began.

A thriving economy often rests on its ability to enhance efficiency and competitiveness through technological improvements or better work processes. With a direct impact on gross domestic product (GDP) and employment levels, understanding shifts in productivity provides insights into how sectors adapt and which areas need strategic support for continued development.

Recent trends in productivity growth in Australia

Recent trends in productivity growth in Australia reveal a complex economic landscape. These patterns highlight both the strengths and weaknesses within different sectors.

• Australia experienced its slowest decade of productivity growth leading up to 2020, with a rate not seen in the past 60 years.
• The 1990s through mid-2000s saw a robust average productivity growth of 2.1 per cent, thanks largely to deregulation, take-up of the internet and pro-competition policies.
• According to Treasury’s 2021 Intergenerational report, labour productivity has been key for living standards, contributing over 80% to their rise.
• The Australian Bureau of Statistics tracks productivity by measuring output and inputs across industries and sectors.
• The economy gained momentum with a 3.4 per cent annual increase as well as a 0.4 per cent growth during the June quarter of 2023.
• Government agencies like the Productivity Commission continually provide extensive research on economic, social, and environmental impacts on productivity.
• Economic policies have played an influential role in shaping Australia’s long-term productivity experience.
• Measuring and understanding various factors affecting productivity has become a recent focal point for economic analyses.
• Technological advancements have contributed significantly to efficiency gains within certain industry sectors.
• However, weak business investment remains one of the primary barriers impeding faster productivity growth across the board.

Key factors behind the slowdown

Australia’s productivity growth has seen a significant downturn in recent years. Understanding the root causes of this slowdown is vital for reversing the trend and boosting economic performance.

• Structural shifts in the economy: The Australian economy has experienced fundamental changes, with a movement away from traditional industries like manufacturing towards services, which often show slower productivity improvements.
• Insufficient capital deepening: Investment in machinery, technology, and infrastructure—a process known as capital deepening—has not kept pace with workforce growth, limiting improvements in labour productivity.
• Stagnant innovation and technological adoption: Despite advances globally, there’s been a lag in embracing new technologies and innovative practices within Australian businesses, hindering efficiency gains.
• Regulatory burdens: Overly complex regulations can stifle competitiveness and innovation, making it harder for businesses to adapt and grow more productive.
• Weakness in business investment: A reluctance or inability to invest in new capital can lead to outdated practices that do not maximise output per hour worked.
• Declining economic dynamism: A competitive marketplace spurs innovation and efficiency; without it, productivity tends to stagnate as there is less incentive for firms to improve.
• Skills mismatch in the workforce: When employees’ skills don’t align with job requirements or industry demands, it results in underutilised talent and lost opportunities for productivity gains.
• Ageing population: An increasing number of retirees compared to workers puts pressure on the labour force participation rate, reducing the overall rate of economic growth.
• Inadequate infrastructure: Poor infrastructure can create bottlenecks and inefficiencies, dragging down the potential for productivity improvement across sectors.

The Current Productivity Landscape

The pre-pandemic productivity landscape in Australia showed varying levels of productivity growth across different sectors, with some experiencing improvements while others faced challenges.

Since the pandemic, there has been a notable impact on overall productivity, particularly in labour productivity growth and changes in workforce dynamics.

Pre-pandemic productivity landscape

Before the global disruption caused by COVID-19, Australia’s productivity landscape had room for improvement. Economic growth experienced a notable deceleration, with productivity growth hitting its slowest pace in six decades.

Despite this, labour productivity remained a significant contributor to living standards, highlighting the need for efficient resource allocation and innovation. During these years leading up to 2020, industries across the country felt the impact of less robust economic policies compared to those from the pro-competition era of deregulation in the 90s.

Indicators from this period show that while multifactor productivity—which includes both labour and capital—was lesser than desired, there were still sectors making strides towards efficiency and technological advancement.

Acknowledging these dips and rises in different sectors aids in understanding where strategic efforts must be channelled to revive and sustain economic dynamism pre-pandemic.

Impact of the pandemic on productivity

The pandemic substantially disrupted productivity across various sectors in the Australian economy. Lockdowns and restrictions forced businesses to halt or reduce operations, leading to a significant dip in output per hour worked.

This unprecedented situation spurred many organisations to adopt remote working arrangements, which initially caused disruptions but eventually led to innovative approaches for maintaining and sometimes even enhancing workforce productivity.

During this period, certain industries like technology and communications saw a surge in labour productivity due to increased demand for digital services. Conversely, sectors reliant on physical presence, such as hospitality and retail, experienced decreased productivity levels.

The swift adoption of digital tools and platforms became essential for businesses striving to maintain efficiency amid the challenging environment. Such changes laid the groundwork for potential long-term shifts in how various sectors approach productivity improvements post-pandemic.

Labour productivity growth since the pandemic

Labour productivity growth has seen a pivotal shift since the pandemic, reflecting changes across various sectors of the Australian economy.

Aspect	Details
Recent Performance	Labour productivity has faced a challenging environment post-pandemic, with efforts to rebound and adapt to new working conditions.
Technological Adoption	Businesses have accelerated digital transformation, leading to efficiency gains in some industries.
Remote Work Impact	Remote and flexible work arrangements have influenced productivity, with mixed outcomes across sectors.
Industry Variation	Industries such as Information Technology and Professional Services have shown potential for higher productivity growth.
Sectoral Shifts	There is a shift towards high-value sectors, which traditionally exhibit higher productivity rates.
Investment in Skills	Upskilling and reskilling of the workforce is crucial for sustaining productivity improvements in the long term.
Economic Recovery	As the economy recovers, sectors such as construction and manufacturing are focusing on overcoming pre-pandemic productivity barriers.
Policy Influence	Government interventions and policy adjustments are under review to support productivity enhancement post-pandemic.

Sectors where productivity is improving

In the Australian economic landscape, certain sectors are showcasing signs of productivity enhancement, reflecting the dynamic response of industries to recent challenges and opportunities. It is still fascinating how great the impact of rainfall has on Australia’s productivity. Higher rainfall means bigger harvests and thus surging productivity in the agriculture sector.

Sector	Description	Contributing Factors
Technology	Software development, IT services, and technology start-ups	Innovation, high-skilled workforce, increased demand for digital solutions
Healthcare	Medical services, biotechnology, and pharmaceuticals	Technological advancements, aging population increasing demand, investment in R&D
Financial Services	Banking, insurance, and investment services	Fintech innovations, regulatory reforms, competitive markets
Agriculture	Farming, livestock, and agribusiness	Technological adoption, sustainable practices, export market expansion

The technology sector is leading the charge with significant advancements in software and IT services, driving greater efficiency across industries. Healthcare continues to benefit from technological improvements and a robust R&D landscape, while the mining sector capitalises on automation and global demand. Financial services see gains with fintech innovation, and agriculture leverages technology to improve yields and access new markets. These sectors represent the areas where Australia’s productivity is not just growing but also contributing to economic resilience and future prosperity.

Sectors where productivity is declining

Despite sustained efforts to bolster the national economy, certain sectors within Australia continue to exhibit a downward trend in productivity. Factors such as outdated practices, regulatory hurdles, and global economic pressures have contributed to these declines, reflecting a need for targeted interventions and renewed focus on innovation and efficiency.

Here is a closer look at those sectors experiencing a low productivity growth or a productivity downturn:

Sector	Reasons for Productivity Decline	Impact on Economy
Mining	Exhaustion of high-quality reserves, increased regulatory constraints, and global commodity price volatility. Outages due to scheduled maintenance.	Constrains growth in a sector that has traditionally been a strong contributor to Australia’s economic prosperity.
Construction	Low investment in technology and innovation, skills shortages, and fragmentation of the industry.	Slows the building of infrastructure crucial for long-term economic growth and productivity across sectors.
Retail	Intensified competition from online platforms, stagnant wages affecting consumer spending, and a slow adoption of digital technologies.	Affects consumer services and retail, which are significant for employment and daily economic activity.
Manufacturing	Aging machinery, lack of skilled workforce, and competition from economies with lower production costs.	Reduces the ability to compete internationally and innovate within a sector crucial for diversifying the economy.
Agriculture (weather dependent)	Climate change impacts, water scarcity, and reliance on traditional farming methods.	Threatens food security and commodity exports, impacting rural economies and trade balances.

Despite the challenges, understanding where productivity is lagging offers a blueprint for where Australia can invest resources to stimulate growth and fortify the economy against future setbacks.

Non-Market Sectors

Non-market sector industries, government, public healthcare, and public education have a large portion of output provided at prices that are not economically significant; that is, where goods and services are provided to final consumers at prices below the cost of provision.

Given the growing importance of non-market industries to the Australian economy, the ABS has a research agenda to address this gap in productivity statistics.

Schools

Experimental measures of school education labour productivity index show a decline of 1.1% on average per year over the period 2008-09 to 2018-19. Experimental multifactor productivity measures show a similar decline, about 1.2% on average per year over the same period. Faster growth in the labour input index relative to output growth was the biggest contributing factor to each of these declines. About 60% of the MFP decline was attributable to falling student to staff ratios over the timespan. The above chart shows productivity whilst controlling for increasing staff to student ratios.

Higher Education

Higher education experienced growth in labour productivity at an annual rate of about 1.2% from 2008-09 to 2018-19. Multifactor productivity grew at around 0.5% over this same period. The main sources of labour productivity growth were growth in multifactor productivity and increased use of intermediate inputs (this contributed to 0.6 percentage points to annual growth in labour productivity).

Hospitals

Hospital productivity growth has generally been lower than Australian productivity growth, although health care is an area of the economy where there has been technological progress (such as the development of new or improved procedures and new drugs in treating patients). Labour productivity grew at an annual rate of 0.5% over the period from 2008-09 to 2018-19, lower than the market sector average. Increased use of intermediate inputs (per hours worked) was a major contributor to labour productivity growth.

Multifactor productivity grew at an even slower rate of about 0.1% per year. This means the contribution of multifactor productivity to hospital output was relatively minor, with the majority of output growth attributed to growth in labour input. This reflects the fact that hospital services are labour intensive

Barriers to Productivity Growth

High labour market turnover and labour market hoarding have contributed to the barriers of productivity growth in the Australian economy. Weakness in business investment and declining economic dynamism have further compounded these challenges.

High labour market turnover and labour market hoarding

High labour market turnover and labour market hoarding have been significant barriers to productivity growth in the Australian economy. High turnover rates within the workforce result in the loss of valuable human capital, leading to increased costs associated with recruitment and training.

This not only affects productivity but also contributes to decreased employee morale and engagement. Additionally, labour market hoarding, where businesses hold onto excess labor, can lead to underutilisation of resources and skills.

Both these factors hinder efficiency and limit the potential for productivity growth across various sectors.

Weakness in business investment

Business investment refers to the spending by businesses on assets such as machinery, buildings, and equipment. However, in recent years, there has been a weakness in business investment within the Australian economy.

This can be attributed to several factors including uncertainty over economic conditions, which has led businesses to hold back on making long-term investments. Additionally, slow wage growth and low inflation have also played a role in discouraging companies from committing to significant capital expenditure.

Furthermore, structural issues such as regulatory burdens and red tape have hindered the willingness of businesses to invest in expansion and innovation. Addressing these barriers is crucial for fostering an environment conducive to increased business investment, thereby driving productivity growth across various sectors of the economy.

Declining economic dynamism and competition

Business investment and productivity growth are closely linked. Declining economic dynamism and competition in Australia have been attributed to factors such as high market concentration, limited entry by new firms, and a lack of innovation.

These trends can lead to reduced incentives for businesses to invest in technology, skills, and efficiency-improving processes. As a result, the economy may experience slower productivity growth, ultimately affecting overall economic performance.

Barriers to competition and dynamism can also contribute to lower consumer welfare through higher prices or reduced product variety. Policymakers should carefully consider measures that promote fair competition in markets while encouraging innovation and business dynamism.

The Outlook for Productivity Growth

The outlook for productivity growth looks promising with potential government interventions, enhanced business investment and workforce capabilities, as well as efforts to address barriers to productivity growth.

For a deeper understanding of how these factors will contribute to Australia’s economic performance, continue reading our blog.

Potential for government interventions

The Australian government has the potential to intervene and facilitate productivity growth in the economy through various measures:

1. Implementing policies to encourage investment in technology and innovation, thus improving overall efficiency and output per hour.
2. Providing financial incentives or grants to businesses for workforce training and skill development, enhancing workforce capabilities and productivity cycles.
3. Enforcing pro-competition policies to stimulate economic dynamism and competition, fostering an environment conducive to productivity growth.
4. Investing in infrastructure projects, such as transportation and communication networks, to support economic growth and enhance competitiveness.
5. Offering tax incentives for research and development activities, encouraging businesses to invest in technological advancements that can drive multifactor productivity.
6. Creating supportive regulatory frameworks that promote deregulation while ensuring fair market practices, allowing for increased capital deepening and economic prosperity.

Role of business investment and workforce capabilities

Business investment and the capabilities of the workforce play a crucial role in driving productivity growth in the economy. Adequate business investment, especially in technology and infrastructure, can enhance efficiency and output per hour worked.

This leads to increased economic performance and overall competitiveness. Additionally, a skilled and adaptable workforceis essential for capitalizing on business investment. Workforce capabilities such as training, education, and adaptability are vital factors that contribute to productivity growth.

By investing in these areas, businesses can foster innovation, improve processes, and ultimately drive productivity growth.

Addressing barriers to productivity growth

Addressing barriers to productivity growth is crucial for the Australian economy to thrive. To achieve this, the following measures can be implemented:

1. Encourage higher workforce participation through targeted policies and initiatives to engage more individuals in productive employment.
2. Foster a pro-competition environment by implementing deregulation and pro-competition policies that promote innovation and efficiency across industries.
3. Promote business investment in technology, infrastructure, and human capital to enhance productivity and drive economic growth.
4. Implement measures to reduce labour market turnover and hoarding, ensuring a more stable and efficient workforce.
5. Focus on enhancing economic dynamism and competition to stimulate innovation, efficiency, and productivity across various sectors of the economy.
6. Support initiatives aimed at addressing skill gaps in the workforce through targeted training programs and educational reforms.

Conclusion

The Australian economy’s productivity growth is crucial in driving overall economic progress and living standards. Recent trends show the impact of various economic and policy factors on productivity growth, with labor productivity being a significant contributor to Australia’s living standards.

The slowest productivity growth experienced in the past 60 years has drawn attention to measuring and understanding productivity growth in Australia. As the economy navigates through these trends, addressing barriers such as high labor market turnover, weak business investment, and declining economic dynamism will be essential for sustaining and enhancing future prosperity.

Addressing barriers such as high labor market turnover, weak business investment, and declining economic dynamism will be essential for sustaining and enhancing future prosperity. This includes potential government interventions to stimulate productivity growth by focusing on business investment and workforce capabilities while fostering competition through pro-competition policies.