For a few years now, Treasury and the Reserve Bank have been banging on about Australia’s hopeless productivity performance.
Successive secretaries of the Treasury, Ken Henry and now Martin Parkinson, as well as RBA governor Glenn Stevens have been sternly lecturing us that productivity growth has slackened off and that we need to lift our game. The report card is in: can do better, not fulfilling potential.
It is an appealing story that fits with the notion of a lucky, lazy country basking in the sunshine of our terms of trade boom. Unfortunately, or perhaps fortunately, it doesn’t seem to be true.
It’s true that average annual labour productivity growth has declined from 2.8% to 0.9% between the mid-1990s and the mid-2000s. Multi-factor productivity, which includes capital as well as labour, was static during the 2000s, compared with annual growth of 1.6% during the 90s.
But it doesn’t seem to have been because we slacked off.
A new report published yesterday by NAB concludes that most of it is due to a decline in mining productivity, which is not only explainable, but a good thing.
The NAB report, written by head of Australian economics, Rob Brooker, reinforces earlier work by Richard Denniss of The Australia Institute and Saul Eslake of Grattan Institute, although Eslake continues to argue that we have a productivity problem.
Brooker concludes: “A plausible case can be mounted that much of the decline in labour productivity performance in Australia since the middle of the last decade is attributable to special and cyclical factors.
“These include high levels of investment in the mining and utilities industries that have not yet come on stream, the impact of slower GDP growth during the GFC and an apparent stalling in the growth of real wages faced by producers, even outside the booming mining sector.
“The current slowing in measured productivity may begin to unwind as new mining and infrastructure capital comes on stream and as GDP growth picks up in response to the second mining boom.”
In their short paper earlier this month, The Australia’s Institute’s Richard Denniss and David Richardson conclude that the decline in productivity is entirely – not even partly – a temporary phenomenon caused by the mining boom.
They say that since the beginning of the mining boom in the early part of the 2000s, labour productivity in the mining industry has almost halved, from $1.2 million per annum to $666,000, while productivity growth in the rest of the economy has increased.
“A major explanation of this decline (in mining productivity) is related to the fact that high commodity prices are encouraging mining companies to pursue less and less productive mine sites.”
Saul Eslake’s paper to the RBA annual conference in August was titled “Productivity – The Lost Decade”. He pointed out that whereas Australia’s productivity growth during the 1990s was in line with the OECD, it was 0.5 percentage points below the (unweighted) average during the 2000s.
Of the three, Eslake did the most detailed work on productivity by industry, and it seems to confirm much of what the other two are saying: that much of the loss in productivity occurred in mining. However, in the end Eslake sided with Henry, Parkinson and Stevens.
According to his paper, the industries that saw the greatest decline in productivity growth (not actual productivity) were mining and quarrying (down 11.5%, from 5.4% in the 90s to minus 6.1% in the 2000s), utilities (down 10.4%) and public administration and defence (down 3.5%).
Manufacturing, construction, hospitality and real estate all improved their growth in productivity between the 1990s and 2000s.
I asked Eslake why he thought it was still a “lost decade”, and it boiled down to the fact productivity declined on average, and that our performance was worse than the United States and Europe.
Any discussion about productivity quickly becomes political – an argument about whether there should be more or less industrial relations reform, and whether WorkChoices or Fair Work Australia is the better system.
Actually, construction and manufacturing, which is where the IR laws have most effect, have seen productivity improve, not go backwards.
More broadly, growth in non-mining productivity has picked up, not slowed, and the reason for that is simply to do with the commodity price boom and the huge amount of capital being poured into mining and energy.
I’ve spoken to a lot of people about this subject recently, and most agree that there are few serious productivity gains left in IR reforms, even if we went back to WorkChoices. Most of the effort now needs to be directed at education and infrastructure, both of which are very long term in their results.
So what’s going on? Why are the top economic bureaucrats being such hard markers?
I guess it’s because they feel the burden of responsibility to crack the whip over politicians who will take the easy way out whenever possible. And even if they are being a bit loose with statistics, well, urging the nation to try harder can’t hurt.
This article first appeared on Business Spectator
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
