The high road to productivity or the 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 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.