Stalling productivity growth could do serious economic harm

Productivity has the ability to sway the economy and, according to a recent government report, progress is stalling. This could have far-reaching consequences. Luckily, work is being done to resolve this.

The state of Australia’s productivity was discussed in the Better Competition, Better Prices report released by the government.

The research revealed that the productivity over the last two generations in Australia has been concerning and, if left unaddressed, could impact living standards.

“Australia is at a crossroads. This report identifies the many opportunities – at an economy-wide level and at a sectoral level – for meaningful reform that not only produces immediate benefits for consumers but that also delivers higher standards of living for future generations,” commented Dr Daniel Mulino MP, chair of the standing committee on economics.

According to the Parliament of Australia: “Productivity measures how efficiently firms, organisations, industry, and the economy as a whole convert inputs – such as labour, capital and raw materials – into output. Productivity is commonly defined as a ratio between the output volume and the volume of inputs. New products or improved products are also captured by productivity measures. Productivity does not reflect the value we put on what is produced; it only measures how efficiently we use resources.”

There are a variety of factors influencing the lagging of productivity growth, namely, a lack of innovation and technological improvements, economies of scale and scope, workforce skills, management practices, competitive pressures, and the stage of the business cycle.

Productivity levels have a significant effect on the economy, but also affect the individual. The report claimed that in today’s workforce, the average worker produces about as much in one hour today as it took a full day’s work to produce at Federation in 1901. Furthermore, higher productivity levels translate to increased wages and reduced working hours.

“Thanks to this evidence and interaction with industry and regulators, the Committee has pinned down some of the key factors that have led to the stalling of productivity growth in Australia over the past decade,” said Mulino.

“Australia has had one of the highest standards of living in the world thanks to decades of high productivity. However, the data is showing declining competition and dynamism as measured by the high market share of leading firms, the profit margins in key sectors, and a declining rate of firm entry and exit in some sectors.

“Australia needs to lift its game when it comes to competition and economic dynamism because together they drive innovation, which in [turn] drives productivity. In the short term, this will put downward pressure on prices, thereby improving the cost of living – and it will place a check on poor corporate behaviour towards consumers. If we don’t tackle this challenge, future generations will also be far poorer than they might have been.”

The government has reacted to this threat by recommending interventions. In total, there were 44 recommendations listed in the report, each aimed at addressing economic concerns.

There were a variety of issues raised in the report, said Mulino: “This includes progress on mergers law; the regulation and measurement of non-compete clauses; the regulation of landing slots at Sydney Airport; and the announcement of a regulatory grid for the financial services sector.

“Furthermore, government spends tens of billions of dollars procuring services. The efficiency and effectiveness of this procurement could be improved by including more social enterprises and SMEs and through better designed auctions and panels.

“I commend the recommendations and the information that informed them to both governments and the market for a way forward for the betterment of the Australian economy.”