The productivity of Australian workers appears to have fallen off a cliff, baffling pundits and making the Reserve Bank of Australia suddenly more alert to wage rises stoking inflation.
Guardian Australia looks at the key issues around productivity.
What is productivity and how is it changing?
As the Productivity Commission puts it, the more goods and services we produce with a given set of inputs, the richer our material standard of living.
In March, the government released the commission’s latest five-yearly tome that found annual productivity in the decade to 2020 grew just 1.1%.
At this meagre pace, it would take 64 years to double output compared with 39 years if we had kept up the average rate of improvement recorded in the previous six decades.
Parts of the economy that are easier to automate – agriculture, mining and manufacturing – have declining shares of Australia’s economy (and those of other rich nations). The expanding service sector is typically harder to extract gains from, the commission says.
“Take a string quartet,” says John Hawkins, a former senior official with Treasury and the Reserve Bank now lecturing at the University of Canberra, offering an extreme example. “Are they going to play Vivaldi’s Four Seasons in half the time?”
Why the sudden concern?
Trajectories of productivity have been dismal for many years. However, comments by the RBA governor, Philip Lowe, in particular have lately elevated the issue’s urgency.
When the central bank lifted the official interest rate again on Tuesday, Lowe cited “subdued” productivity growth, even as unit labour costs were rising “briskly”, as one reason why inflation might not recede at the preferred pace.
In a speech on Wednesday, Lowe highlighted how productivity growth had evaporated in the past three years.
The release of national accounts figures by the Australian Bureau of Statistics later on that day showed productivity as measured by GDP an hour worked fell by 4.6% from the March quarter of 2022.
That was the largest annual decline in records going back four decades.
What’s the cause of the dive?
As Lowe says, the reasons for productivity’s retreat “are not well understood”.
“Productivity growth was slowing before the pandemic and it is entirely possible that the disruptions caused by the pandemic made things worse,” he said.
“Many firms had to focus on survival, rather than growing their business. Supply chains were interrupted, there was both labour hoarding and labour shortages, investment was delayed and finance tightened up,” he said.
Hawkins agrees Covid seems to be playing a role: “More people are working from home and are not as efficient as they think they are.”
Anecdotally, malls are reporting an uptick in Friday activity as people take advantage of working at home to bring forward weekend shopping.
Statistical overreach?
The ABS, though, issued its own cautionary note in late 2020.
At the best of times, productivity measures must account for technical change, scale and cyclical effects “which are difficult to separately identify”. Covid made things murkier.
“Care should be taken when interpreting year to year productivity growth for the market sector and by industry,” it said.
Take the latest gross value added (GVA) gauge for the market sector that excludes education, health and public administration. It fell 4.3% in the March quarter but was actually better than the previous quarter, the ABS told Guardian Australia.
Baseline effects may also be amplifying the size of recent movements. The ABS revised its June quarter GVA decline to 3% from an initial reading of 1.8% after altering how it counted hours worked.
Similarly, hours worked in March 2022 reflected many people being asked to stay at home as the Omicron Covid strain played out. Come the March quarter of this year, hours worked rebounded 7.1% – producing the record large GDP an hour decline in the process.
Should we panic?
One big gain in the economy in recent years has been the drop in the jobless rate to half-century lows of 3.4% last October.
In theory, average productivity drops as employers scramble to hire people who previously found it hard to find work.
Now as the jobless rate starts rising again – reaching 3.7% in April on course to a projected 4.5% by mid-2025 – less productive workers will presumably be let go first. Average output of remaining staff will start to pick up.
Employer groups have a big incentive to talk up the lack of productivity to avoid paying higher wages. If the recent output drop turns out to be a statistical blip they won’t be forking out more dough.
And as Greg Jericho wrote early this year, it’s not as if workers enjoy much of whatever productivity spoils eventuate.
And while Lowe noted fatter pay packets without productivity gains would make the path to lower interest rates longer, wages were just one of his worries.
After all, we’ve had “upside surprises on inflation, upside surprises on wages, upside surprises on housing prices, upside surprises on inflation overseas”, he said.
