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Bernard Keane

Productivity Commission calls bullshit on ‘productivity crisis’ narrative

By now you know the basics of the “productivity crisis” narrative: Australian workers aren’t productive enough, and wages growth without productivity is inflationary, which means the Reserve Bank must keep interest rates higher for longer.

But the Productivity Commission’s latest annual productivity bulletin puts a bomb under the whole narrative. It’s only nine pages, but it’s all killer, no filler.

“Labour productivity for the whole economy fell by 3.7% in 2022-23,” the commission reports upfront. So far, so Financial Review/Reserve Bank. That’s a huge fall. Narrative intact.

But two industries — wholesale trade, and accommodation and food services — “contributed to more than 50% of the decline”. Okay… that complicates things a little. Still, it’s a huge fall. But why? A single paragraph from the commission explains it:

The decrease in labour productivity was a result of large increases in hours worked for the whole economy and market sector (both 6.9%). This increase in hours worked is unprecedented — the next highest growth rate on record was 4.3% for the whole economy (in 1988-89), and 3.8% for the market sector (in 1999-2000). The growth in hours worked outpaced growth in output for the whole economy (3%) and the market sector (3.8%).

Can we have a round of applause, or at least some acknowledgement, from employers, their cheerleaders at the AFR and the Reserve Bank, for Australia’s workers, who are working longer hours than ever before in our history, and increasing those hours by record rates?

As the commission says, this historic surge in work by Australians isn’t leading to higher output. “The increase in hours worked led to a decline in the capital-labour ratio (4.9% — the largest decline on record), as the capital stock did not keep pace. This resulted in a decline in labour productivity as workers had access to less capital, and as a result were, on average, less productive.”

So the productivity decline is the result of businesses not investing enough. And, you can add, the fact that businesses are operating in a sluggish domestic economy that has been smashed by multiple interest rate rises, curbing demand and crimping output as a result (and let’s not forget distortions of the tax system around negative gearing, capital gains tax and imputation rules for retirees — all rorts that drive investment towards negatively geared investments like housing, not productive investment in more businesses).

None of that fits the narrative of greedy workers demanding pay rises in excess of their productivity growth, or lamentations about how the industrial relations system stifles productivity, does it?

But wait, the commission isn’t done with that narrative yet. Like everyone else, it’s worried about “wage decoupling” — when wages grow at a different rate to productivity. So it investigated how the two were faring.

To do this, it uses something called “producer wages (the wage costs producers face) as distinct from consumer wages (the purchasing power of the wages consumers receive) as the measure of wages”. For the layperson this is problematic, because you don’t go to the shops and buy your groceries with “producer wages” — you’re stuck with bog standard consumer wages — but it’s the measure some economists prefer to use. The result?

Considering the economy as a whole, there is evidence that the growth in labour productivity exceeds growth in producer wages — a signal of wage decoupling.

Hang on… did they say productivity exceeded wages? That’s exactly the opposite “decoupling” that the Financial Review and the Reserve Bank have been issuing apocalyptic warnings about.

Remember, these are producer wages, not real wages, and the commission says it’s mainly happened in the two big trade-exposed industries of mining and agriculture, but it blows up the entire “rates higher for longer” nonsense.

Oh, and, as Columbo liked to say, “just one more thing”. The big collapse in labour productivity last year should be seen in context. Which context?

Labour productivity increased rapidly at the start of the pandemic … [due to] a rapid drop in hours worked, combined with relatively sticky output. The decrease in labour productivity in 2022-23 reversed gains observed at the start of the COVID-19 pandemic. The fall in labour productivity reflects, in part, an unwinding of the distortionary effects of the COVID-19 pandemic. Overall, labour productivity was 0.8% above its pre-pandemic average at the end of 2023-23, and 2.4% above its pre-pandemic average at the end of 2022-23 within the market sector.

Two point four percent higher. Some productivity crisis, eh?

Let’s finish on that earlier point about the long hours Australians are working. Why are they doing that? In part it’s opportunity — we’ve entered a world with too few workers due to population ageing, and it’s pushing our participation rates up. That’s a good thing. But a key reason is that ordinary households are struggling with high inflation — much of it profit-led — and high interest rates for the giant mortgages now needed to buy even modest housing. The Reserve Bank is helping drive this surge in working hours — at the same time as it is smothering output by smashing demand in the wider economy.

It’s vicious circle — the RBA’s actions are leading to lower labour productivity figures, which inflation hawks are then using to justify keeping rates higher for longer, which will in turn drive more people to work longer hours and smother output, leading to lower labour productivity…

Too bad the whole narrative of lazy, greedy workers is, as the Productivity Commission has shown, a load of rubbish.

Is it time the RBA changed course? Let us know your thoughts by writing to letters@crikey.com.au. Please include your full name to be considered for publication. We reserve the right to edit for length and clarity.

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