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PC Productivity Update 2015

2 Contributions to output and income growth

Productivity is a measure of efficiency in production. Changes in productivity follow from the myriad of development and operating decisions of businesses, changes in public investment decisions and policy, as well as changes in the global and domestic economic environment. The outcome of all these changes determines how productivity evolves over time and its contribution to improved wellbeing in the longer run through the growth of real output and income.

Economic growth, as measured by GDP, is jointly determined by the three Ps — changes in population, its rate of participation of the working aged in economic activities (also referred to as 'labour utilisation'), and labour productivity.

Since the 1980s both population growth and labour productivity have been the main, but varying, contributors to real GDP growth which has averaged around 3.1 per cent per year. Population growth outweighed labour productivity growth in the 1980s while in the 1990s, labour productivity contributed almost two thirds to growth. In the more recent periods — the 2000s and the latest period from 2010 to 2014 — both factors have contributed in similar proportions to growth (figure 2.1).

The contribution of participation1 to economic growth declined from the 1980s and became negative in the latest (2010-14) period. From a peak in 2012, the share of the population of working age (15 to 64) is set to decline and it is likely that workforce participation will continue to decline for some years to have a negative longer-term impact on real output and per capita income.

Moreover, the ongoing shift in the structure of the Australian population towards older ages could well offset any efforts of increasing workforce engagement through, for example, lifting the levels of educational attainment, greater attachment of women to the labour force, and a deferral of retirement (PC 2013).

  • Figure 2.1 Contributions to the growth in aggregate real GDPa
    Per cent

    Figure 2.1 Contributions to the growth in aggregate real GDP. More details can be found within the text immediately before this image.

    a Decades/periods are based on years ending in June. For example the 1980s refers to the 1979-80 to 1989-90 period, … , the 2000s refers to 1999-00 to 2009-10.

    Sources: Estimates based on ABS (Labour Force, Australia, Cat no. 6202.0; Population by Age and Sex, Australian States and Territories, Cat. no. 3201.0; Australian National Accounts: National Income, Expenditure and Product, Cat. no. 5206.0; and Labour Force Historical Time series, Australia, 1966 to 1984, Cat. no. 6204.0.55.001).

Per capita income growth

While real GDP growth depends on growth in population, participation and labour productivity, real income growth also depends on the terms of trade and net foreign income (the earnings from Australian capital invested abroad less the earnings on foreign capital invested in Australia). While growth in population has had an important role in increasing the absolute size of the Australian economy, population growth by itself cannot increase per capita real output or income. Indeed, all else equal, population growth without an increase in the working age population will lower per capita income. Growth of per capita income will be jointly determined by the changes in the rate of participation, labour productivity which influence the growth in real GDP, the terms of trade and net foreign income.

In the last five decades, per capita national income growth has averaged around 2.1 per cent per year (figure 2.2). Its growth had been increasing since the 1970s to reach 2.3 per cent per year in the 2000s, but it has retracted in the latest 2010-14 period to 1.7 per cent per year.

Along with being an important contributor to output, labour productivity has also been the primary driver of per capita national income growth throughout the period since the 1960s, contributing on average 1.8 percentage points (or 85.4 per cent of the total) to average per capita income growth.

That contribution was lowest in the 2000s period, accounting for 62 per cent of the total change in per capita national income as improvements in the terms of trade made substantial positive contributions to income growth — adding 0.9 percentage points (or around 38 per cent of the total). However, reflecting the falling prices for Australia's key commodity exports (such as iron ore and coal prices), this contribution fell considerably in the latest period (2010-14) and is expected to fall further.

The contribution of net foreign income has been most significant between 2010 and 2014, adding around 0.4 percentage points (21 per cent of the total) to the per capita income growth. Overall, the contribution of net foreign income flows has been modest and variable since the 1960s. Net foreign income receipts have only been positive in the 1990s and in the four years since 2010.

Without a serious effort to resume and sustain productivity growth in Australia, the trend decline in the terms of trade from current high levels, and falling participation rates, indicate that Australia's national income growth per person will be subdued and improvements in living standards could be eroded (Harris 2013).

  • Figure 2.2 Contributions to average annual per capita income growtha
    Percentage points contribution, annual average.

    Figure 2.2 Contributions to average annual per capita income growth. More details can be found within the text immediately before this image.

    a Post 1970s, periods are based on years ending in June. For example the 1980s refers to the 1979-80 to 1989-90 period. The 2000s refers to 1999-00 to 2009-10.

    Source: Commission estimates based on ABS (Australian System of National Accounts, 2013-14, Cat. no. 5204.0).

References

  • Productivity Commission 2013, An Ageing Australia: Preparing for the Future, Commission Research Paper, Canberra.
  • Harris, P. (Productivity Commission Chairman) 2013, Observations on Productivity, National Income and the Demographic Outlook, Australian Institute of Company Directors, breakfast address, Perth, 19 November 2013.

Footnote

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