Productivity has dropped: What does that mean for the economy?

Labour productivity across Australia has seen a decline post-pandemic. What impact will this slump have on the economy?

According to the Productivity Commission’s Productivity Insights Bulletin 2023, productivity dropped by 4.6 per cent between March 2022 and March 2023. The commission believes that record-low unemployment and the easing of COVID-19 restrictions are to blame for this decline.

“The COVID-19 pandemic led to a temporary increase in measured labour productivity. With the service sector affected by restrictions, many less productive firms paused operations, and higher productivity sectors accounted for a larger share of hours worked in the economy,” said Productivity Commission chair Michael Brennan.

The Productivity Commission noted that high productivity brings with it plenty of advantages for the economy, such as:

• Goods and services became cheaper through a fall in the number of hours of labour needed to produce existing goods and services.
• Goods and services improved in quality on multiple dimensions.
• Entirely new goods and services were produced.

The pandemic resulted in the reallocation of jobs, with low-productivity roles taking a back seat to the frontline positions. This saw Australia’s productivity rate increase. As the pandemic subsided, so too did our productivity.

Mr Brennan said that there is hope in the form of digitisation, as Australia grew its digital capacity during the pandemic, in turn strengthening the potential of our productivity.

“Government and business should continue to embrace innovation and invest in upskilling the workforce to maintain that momentum,” he said.

Similarly, mining has the effect of boosting productivity. There are reportedly signs of mining investment picking up, signalling an increase in productivity on the horizon.

“Higher commodity prices and the global demand for critical minerals could see the start of a new investment phase for mining, which could help drive longer-term productivity,” explained Mr Brennan.