Economic Pulse: Australia’s productivity conundrum

All business owners have an instinctive feel for their own business’ productivity.

How much they spend on capital, labour and maintenance, and how much they sell at the end of it, directly determines their profits after all. Ultimately, what every business wants is to be more productive than its competitors.

Australian productivity as a whole is far more nebulous as a concept. But almost nothing in economics is as important. In the short term, productivity is an esoteric and abstract series of measurements. In the long run, it is everything. Productivity is why some countries are richer than others, why their citizens live in more comfort, and why you’re paid what you are.

But the statistics we have on productivity are notoriously complex, and only account for what Canberra’s policy wonks call the ‘market sector’, which leads to things funded by the government or on not-for-profit terms being excluded for lack of available data. This is despite the health industry being one of Australia’s largest.

The Productivity Commission is trying to clarify just where we stand, and last week released the first of what will be an annual Productivity Update. The publication, a summary of Australia’s productivity situation, is important, if somewhat dry.

What becomes clear from reading it is that the story of Australian productivity – defined as what Australian businesses produce for the inputs they put in – is far more complex and varied than what you usually read.

A capital problem

Here’s something you probably didn’t know about productivity: if we go on Australia’s past performance, recent years have seen decent productivity growth in the one area you hear the most about. Labour productivity, which is tied up with calls for a loosening of our industrial relations framework, is at nowhere near crisis levels. It’s continued its fairly steady upwards trajectory since the 1990s.

What has plunged is capital productivity, which is a measure of how much employers get in product out of every dollar they spend on capital – in this case meaning equipment and land. It’s capital productivity which has the problem, and as a result, our multifactor productivity, which is what it sounds like, hasn’t moved much in the past 20 years. It’s now below its peaks in 2003-4.

Why has capital productivity plunged? It’s largely because of the mining industry. Mining investment has grown every year for much of the past decade as resource deposits take more and more equipment to haul out of the ground due to the depletion of the easiest-to-reach deposits.