The Inside Word
The Labour Productivity Cliff
It’s the great contradiction in the Australian political debate at the moment. While all sides of politics are desperate to lift incomes and ease the cost-of-living crisis, most of our political leaders seem to be ignoring a key factor in that equation.
Labour productivity for the whole economy fell by 3.7 per cent in 2022-23 compared to growth of 1.6 per cent in 2021-22[1]. Multi-factor productivity fell by 0.5 per cent compared to a growth of 2.6 per cent across the two years.
The Productivity Commission explains that the fall, in part, is because record hours were worked and output growth failed to keep pace, and notes that the magnitude of the declines were historical outliers. This might be a short-term cliff, but labour productivity has grown by just 0.2 per cent over the past 5 years, so not all is well.
The simple truth is that if we want to retain our current living standards, let alone increase our prosperity, we need to improve our national productivity. Governments, businesses and workers all have a role to play.
The Treasurer, Jim Chalmers gets the problem and will need to do the heavy lifting if Australia is to deliver productivity growth. In his Statement of Expectations to the Productivity Commission, the Treasurer focuses on five key, important themes:
- Creating a more dynamic, competitive, and resilient economy
- Building a skilled and adaptable workforce
- Harnessing data and digital technologies
- Delivering quality care more efficiently
- Getting to net zero and becoming a renewable energy superpower
But, the Treasurer is silent on perhaps the most important lever available to lift labour productivity – industrial relations policy and modernised work practices, with productivity as a core tenant.
As the Commission points out, “the workplace relations system has a fundamental role in driving productivity and wages”.[2]
Jim Chalmers and Workplace Relations Minister Tony Burke are banking on the unconventional perspective that the private and public sector will be able to deliver productivity increases whilst being increasingly constrained in how they can manage their workforce.
By any measure, a fall of 3.7 per cent in labour productivity is huge (contrast for 2022-23: United States +1.3 per cent, Germany -1.6 per cent, Japan -0.49 per cent, Singapore +0.8 per cent, United Kingdom -0.48 per cent). You can see we are not alone in the challenges being faced, but we will have to wait to see whether the Treasurer’s plan delivers, or whether the unconventional approach takes us further over the cliff.
[1] https://www.pc.gov.au/ongoing/productivity-insights/bulletins/bulletin-2024/productivity-bulletin-2024.pdf
[2] https://www.pc.gov.au/inquiries/completed/productivity/report/productivity-volume7-labour-market.pdf, page 91