Pearls and Irritations

For most of our history too much of Australian business was focussed on rent seeking, rather than the creation of wealth. Manipulating government to obtain protection, or other forms of favoured treatment by way of regulation or taxation, was far too often pursued as the easiest way to increase profitability. While the economic reforms of the 1980s and 1990s put an end to much of this behaviour by denying many of the opportunities for rent seeking, business is still too inclined to look to government; hence the cacophony of calls for government to introduce further ‘reforms’, when much more of the responsibility for improving Australia’s economic performance should lie with business itself.

As John Menadue posted last week, productivity is important. It is a key source of long-term economic growth, business competitiveness, and our living standards. But business associations, some leading employers and their camp followers in the media are insisting that future reform must focus on alleged labour market rigidities and reductions in taxation, as if these were the most important influences on productivity. Instead what follows is an assessment of the key facts regarding our productivity performance and how it might be improved.

Technological Change

Over the many centuries before the Industrial Revolution productivity increased very little. What changed with the Industrial Revolution was a series of technological breakthroughs, and since then the steady upward climb in productivity in all the industrialised countries has been largely ascribed to technological progress. More recently, however, since the 1970s, the development of human capital through increasing skills and education has also been recognised as another important driver of productivity improvement.

So it might be expected that the critics of Australia’s recent productivity performance over the last decade would examine what has been happening to technological progress and skills.  Furthermore, one of the features of technological progress in a globalised world is that any new technology is quickly available to all, or at least to all the developed countries. Consequently if most advanced economies have exhibited much the same variations in their rate of productivity growth, then this increases the likelihood that a change in the rate of technological progress is the main cause, and not something that is unique to an individual country such as its labour market institutions and regulations or its tax system.

In fact, as has been widely remarked, Australia’s rate of growth of (labour) productivity does seem to have slowed down since around 2000, or perhaps more accurately since 2003-04. Thus in the fourteen years leading up to 2000 – the years of the widely applauded economic reforms – labour productivity in Australia rose at an average annual rate of 1.8 per cent compared with an average annual rate of only 1 per cent since then (Table 1 below). But this decline in the rate of productivity increase does not of itself prove that we have become ‘complacent’ in this new century and that our slower productivity growth is all the fault of a lack of reformist zeal. Instead, what is equally interesting is that the rate of increase in labour productivity seems to have slowed by much the same amount in almost every other advanced economy, with the only exception being the US among the countries and regions shown. Furthermore, even in the case of the US, the rate of productivity increase has fallen substantially over the last three years since the Global Financial Crisis, whereas it has picked up in Australia during this period. Robert Gordon, who has been widely recognised as the leading analyst of US productivity over many years, is inclined to attribute this slower productivity growth to the ICT revolution playing itself out, and in his opinion ICT was never as powerful a disruptive technology as electricity or the motor car. 

Investment and the influence of specific industries

The other key factor influencing labour productivity is the amount of capital per worker, although again new technologies often create the requirement for new investment and increasing capital intensity of production. Ideally the immediate direct influence of technology is captured by considering changes in total factor productivity (TFP) which is the increase in output per unit of labour and capital combined. Unfortunately international data for TFP are not available, but in Australia’s case it is the poor performance of TFP since the beginning of this century that most worries the critics (Chart 1 below).

Source: OECD Economic Outlook, accessed 27 July

Investment and the influence of specific industries

The other key factor influencing labour productivity is the amount of capital per worker, although again new technologies often create the requirement for new investment and increasing capital intensity of production. Ideally the immediate direct influence of technology is captured by considering changes in total factor productivity (TFP) which is the increase in output per unit of labour and capital combined. Unfortunately international data for TFP are not available, but in Australia’s case it is the poor performance of TFP since the beginning of this century that most worries the critics (Chart 1 below).

Closer examination of the performance of TFP for individual industries suggests, however, that about half of the fall in the total Australian TFP since 2003-04 is accounted for by mining and the utilities. In fact what seems to have happened is that the investment phase of the mining boom was associated with a huge increase in capital but no immediate increase in output. In addition, it seems likely that the very high prices for minerals a couple of years ago, led to some marginal mines with lower ore content being kept open, and this also lowered productivity. But looking ahead these factors dragging down mining productivity can be expected to reverse themselves in the years ahead.  Somewhat similarly investment has surged in the various utilities in the last decade, partly in response to demands for greater security of supply, but also problems of increased peak demand and water restrictions. Again, however, these factors seem unlikely to continue forever, and will soon stop dragging national productivity down. Finally manufacturing TFP has also fallen a little, but all that fall can be explained by the fall in output, and again this decline in output was caused by the high exchange rate, and has not been a response to labour market rigidities or taxation.

Labour market reforms

As John Menadue pointed out in his blog last week, serious examinations of the Australian labour market have shown that it has proved to be very flexible in achieving the necessary adjustment of relative wage rates to support the transfer of labour to the fast growing mining and construction industries. Indeed, as the Secretary of the Treasury, Martin Parkinson commented ‘if it were not for our flexibility … Australia would not have avoided the worst of the impacts of the Global Financial Crisis’.

Only two years ago there was an independent and comprehensive review of the Fair Work Act which received over 250 submissions. This review found that ‘since the Fair Work Act came into force important outcomes such as wages growth, industrial disputation, the responsiveness of wages to supply and demand, the rate of employment growth and the flexibility of work patterns have been favourable to Australia’s continuing prosperity, as indeed they have been since the transition away from arbitration two decades ago’. The Review was concerned by the slower rate of productivity growth, but it was ‘not persuaded that the legislative framework for industrial relations accounts for this productivity slowdown’. In fact this slowdown dates from around the time that Work Choices was introduced by the Howard Government in an attempt to radically alter the industrial relations framework in favour of employers. So insofar as workplace relations legislation could affect productivity, perhaps we should blame that legislation for contributing to slower productivity growth by destroying the necessary trust and goodwill between employers and workers and their representatives.

Going forward it is, of course, always possible to do better in the future. One key aspect of Australia’s economic performance which we could improve is our development and use of skills. And, as already noted, skills do matter for productivity.

While governments have responsibilities for education and training, employers also have responsibilities for the development of workplace skills.  Perhaps even more importantly, the organisation of work, so that the skills that we already have are used optimally, is an area of employer responsibility where we could improve significantly. For example, even at a time of skill shortages encompassing the traditional trades, one third of people with trade qualifications were found to be working in jobs that were apparently less skilled. Survey evidence of why they were not using their trade qualifications reported that almost always it was because they felt their trade skills were not being used adequately. In other words employers had dumbed down the work of trades people, reducing the amount of discretion, so that many tradesmen preferred driving a taxi because of the autonomy and discretion that work allowed. 

Conclusion

Any reasonable interpretation of the available evidence clearly suggests that the slower rate of increase in productivity in Australia experienced over the last decade has little to do with labour market rigidities or our taxation regime.  A slower rate of technological progress and increasing capital intensity which has not yet paid off, loom as much more likely explanations of this slower productivity growth. There is scope for improved labour relations to make a modest contribution to improved productivity by improving workforce development and the use of existing skills, but the main responsibility for improvements in that regard lie with employers themselves.

In sum, the best thing that employers and their trade associations could do is to stop passing the buck to everyone else for their own failings, and get on with making their workplaces more productive using the existing freedoms that they undoubtedly have.

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