Why Australia is stuck with these low productivity rates
In difficult economic times, politicians of all stripes love to bemoan the nation’s “low productivity”. Productivity is the value of the economy’s total output divided by the hours worked and capital deployed. In theory, it is related to investment, innovation, skills, enterprise and competition. In practice, it is poorly understood and difficult to measure – the late economist Moses Abramovitz called it a “measure of our ignorance”.
There are complex reasons as to why it is difficult to improve productivity in Australia, an economy that is increasingly focused around the caring and services industries. But these factors go some way to explaining our flagging productivity growth.
Machines are replacing labour
It may seem obvious but the ongoing shift from manufacturing to services affects our productivity.
Industrial processes lend themselves to automated mass production. They allow production, of whole items or components, to be outsourced to low-cost suppliers.
In certain industries, machinery and computers have already substantially replaced workers.
Services do not lend themselves to the same degree of automation. Wherever possible, customer call centres and processing that can be performed remotely have been moved to lowcost jurisdictions or automated. The remaining Australian businesses are predominantly local labour-intensive personal services and trades. They are often non-routine and non-repetitive tasks where boosting productivity is complex.
This explains in part why healthcare, education and childcare costs are rising more than general price levels while many manufactured products are becoming cheaper.
Education is expensive
The effects of rising literacy and numeracy levels over the last two centuries and the rapid expansion of higher education in the last 50 years may not be repeatable.
Educational standards have also declined. The cost of higher education places it beyond the reach of many, forcing graduates to start their working lives with significant debt. The decreasing income advantage of higher qualifications after deducting costs has reduced its attraction.
There is more regulation
Businesses must adhere to more rules to protect the environment, their employees and their consumers. This is obviously a good thing, but excessive regulations can make some business activities more complex and expensive.
It may also lead to fewer businesses forming, therefore reducing competition in the marketplace.
Lack of competition
Increased market concentration (ie more monopolies) limits opportunities for new businesses to form.
In Australia, major industries – retailing, banking, energy, telecommunication, technology, media – are dominated by a few local or foreign companies. This increasingly restricts competition and reduces incentives to improve productivity.
Management incentives
Short tenures of chief executives and incentive structures linked to short-term performance favour financial engineering to boost earnings and share prices. There is less incentive to make productivity-enhancing but risky investments in research and development or staff development.
Zombie businesses
Since 2008, low interest rates and unconventional monetary policy have distorted the economy, creating zombie businesses.
These are companies that can pay off the interest on their loans but lack sufficient cashflow to repay the actual debt or invest to improve operations.
Lenders are reluctant to call in the loans because they would incur losses. It impedes what Joseph Schumpeter called “creative destruction” – investment remains tied up in inefficient businesses. It also restricts the supply of credit to smaller businesses, which are often more innovative, therefore reducing productivity.
The consumption paradox
Some of these factors are structural, while others can be addressed by policy changes. But improving productivity may not have the benefits often claimed. This is because it entails several paradoxes.
Linking wage increases to productivity may not boost real wages, especially where inflation is higher than the rate at which incomes are rising.
Reducing the number of workers to zero might give you infinite productivity. But given consumption makes up 60% to 70% of economic activity in Australia, reducing employment and incomes limits the market for any additional production.
It is unclear why we need to increase production given that purchases frequently need money we don’t have.
Ultimately, the emphasis on productivity is symptomatic of a society conditioned to want more and more for less and less.
• Satyajit Das is the author of Fortune’s Fool: Australia’s Choices (2022) and A Banquet of Consequences – Reloaded (2021)