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PC News - November 2016

Australia’s productivity performance

In 2014-15, Australia’s measured productivity increased. But there was considerable variation across industries, with productivity increasing in some and decreasing in others. Although productivity increased, income per person fell, primarily because of the fall in the terms of trade.

The latest issue of the Productivity Commission’s Productivity Update was released in April 2016. The Update provides a snapshot of nationwide and industry-specific productivity trends from the most recent ABS productivity statistics.

Productivity measures how efficiently inputs are used to produce outputs in the economy. Higher labour productivity means that more output was produced for each hour worked.

In 2014-15, labour productivity increased in the Australian economy as a whole and in the 12-industry ‘market sector’ (65 per cent of the economy). Productivity statistics focus on the market sector because it is difficult to measure productivity in the ‘non-market’ sector since much of the output of this sector is not priced by the market.

At 1.9 per cent, growth in labour productivity in the market sector was lower than in recent years and below the long-term average of 2.3 per cent since 1973-74.

A more comprehensive measure of productivity, multifactor productivity (MFP), measures output relative to total inputs (labour and capital). MFP was higher in 2014-15 than it was in recent years and comparable to the long-term average.

Positive MFP growth in the past four years has just offset the decline in MFP experienced since 2007-08.

In 2014-15, MFP growth across industries was mixed. MFP improved in 7 out of the 12 industries in the market sector. Strong MFP growth in the Mining and Utilities industries was particularly notable and had a significant influence on measured MFP growth.

In both industries labour input decreased and capital input increased, resulting in strong labour productivity growth (22 and 8 per cent, respectively). In the Mining industry, this reflects the transition from an investment phase, which involved mainly construction activity, to a production phase, which involves mainly extracting and exporting minerals and energy.

The fall in mineral prices has also led to the closure of high cost, marginal mines. Measured MFP growth in Mining was consistently negative in the 2000s. In the Utilities industry, MFP has been falling for more than two decades.

These two industries and Agriculture, forestry and fisheries were major contributors to the deterioration in measured MFP in the 2000s.

Higher productivity is essential to higher living standards. In 2014-15, real GDP increased by 2.2 per cent. Growth in real GDP can be attributed to changes in: population (+1.4 per cent); labour productivity (+1.0 per cent); and labour market participation (-0.2 per cent, reflecting a reduction in the number of hours worked per worker).

Population growth increases the size of the economy but does not necessarily increase output or income per person. Growth in income per person is determined by changes in labour force participation, labour productivity, the terms of trade and net foreign income.

In 2014-15, real gross national income per person fell, due mainly to the fall in the terms of trade. Growth in net foreign income and in labour productivity did not offset the fall in the terms of trade. In the Australian economy, periods of negative income growth have been infrequent.

Since 2012-13, income per person declined for three consecutive years, which has not happened in the past 50 years. It is worth noting that in 2015 the terms of trade was still about 25 per cent above the average since 1960.

If the terms of trade continue to fall, this will put further pressure on Australia’s income. In this environment, productivity improvements will be critical to increasing future incomes.

Figure 1: Productivity growth by industry, 2014-15

  • Figure 1: Productivity growth by industry, 2014-15

    Data source: Productivity Commission estimates based on ABS (Estimates of Industry Multifactor Productivity, 2014-15, Cat. no. 5260.0.55.002, December 2015).

Figure 2: Terms of trade, 1960 to 2015

  • 100 = March 2014

    Figure 2: Terms of trade, 1960 to 2015

    Data source: ABS National Accounts.

The Productivity Commission is exploring these issues in a recently commenced inquiry into Australia’s productivity performance. This Productivity Review will be the first in a regular series, undertaken at five-yearly intervals, to provide an overarching analysis of where Australia stands in terms of its productivity performance, and to develop and prioritise reform options to improve the well being of Australians by supporting greater productivity growth.

PC Productivity Update

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