Productivity is often viewed as the secret sauce that will deliver improved an standard of living and yet while improved productivity does lead to benefits, what the most recent data on productivity shows is quite often productivity growth comes at the expense of workers.
In a general sense – as Paul Krugman wrote in 1994 – “productivity isn’t everything, but in the long run it is almost everything”. The reason being is that if you want to improve the standard of living over time you need to produce more per worker than you did in the past.
The only other way to increase national income is to have people pay more for what you produce. During the mining boom this is what happened – China’s growth meant the demand for iron ore sky-rocketed and Australian mining companies were in the very fortunate position that what they produced was suddenly worth more.
But the strive for productivity needs to be seen in the context of how it is produced.
Every year the Bureau of Statistics produces its estimates of industry multi-factor productivity which break down the performance of each market-sector industry (public sector productivity is much harder to measure). What the figures highlight is how disconnected productivity growth can be with those industries which are seen to be powering our economy.
In 2016-17, the ABS estimates labour productivity grew by 1.1%, while multi-factor productivity grew by 0.7% - the 6th straight year of growth:
While labour productivity is essentially unit of output per hour worked, multi-factor productivity attempts to measure the ability of labour to make use of capital to produce that output.
The breakdown of productivity into labour, capital and multi-factor highlights the problem of looking at productivity growth and assuming something needs to be done with IR to make things more “flexible” or that somehow we are becoming uncompetitive due to penalty rates or other nonsense that often is spouted.
If we look at productivity over the past couple decades it is clear that the flattening of productivity occurred in the mining boom period at a time when capital productivity fell sharply:
Essentially what happened is during the mining boom, mining companies invested a massive amount of money in the industry, but that money did not produce an increase in output for some time. It takes a while to build a mine, but the cost of building it actually reduces productivity because you are spending lots of money for little increased output.
At the same time there was a large surge in the investment in the electricity sector – the so-called gold plating of the network also saw productivity in that industry slump:
It meant that during the mining boom, the mining industry was actually a drag on our productivity growth – but huzzah since 2012-13 that hasn’t been an issue – mining industry multi-factor productivity in that time has grown the third fastest out of all market sector industries.
In that same time the amount of labour input has fallen by the most:
Such are the vicissitudes of productivity.
This year, for example, the biggest productivity growth came in the agricultural industry. Was it due to technical innovation in the past year, or smarter workers, or better IR laws? Nope, it was due to a bumper year for crops.
And whereas during a drought, agricultural productivity falls, during a bumper yield year, productivity increases. And despite the big increase in output, the agricultural industry saw the second biggest decline in labour inputs in 2016-17.
And yet construction – the industry which has been the biggest employer in the past year of men, accounting for around 65% of the growth of all male full-time work – saw the biggest fall in multi-factor productivity in 2016-17.
So while construction has been a huge source of employment growth, it has been a drag on productivity growth. As the ABS notes, the industry has seen an increase in labour but a decline in output because the work of the industry has shifted from mining and heavy industrial projects.
Thus on the one hand the industry is the saviour – helping us transition from the mining boom – and on the other hand it lowers our productivity growth because of that same transition.
Little wonder people throw up their hands in despair when economists start to talk – especially when they talk of units of productivity with little regard for what that growth might entail for workers.
The common aspect across all industries over the past two decades is the clear link between a falling growth of labour input and rising multi-factor productivity growth:
It is almost as though while productivity is often suggested as producing more from the same amount of workers, in reality it becomes producing more from fewer workers.
We see the relationship with the national accounts figures as well, where a lower annual growth in the amount of hours worked is associated with a higher growth of productivity:
That doesn’t mean productivity growth is a bad thing – we should always be seeking to produce more with our labour – a nation that does not do that will almost certainly see its workers worse off.
But while in the long run productivity might be “almost everything”, it does not explain everything in the economy – and the key remains to ensure that productivity growth brings with it a growth in households standard of living.
