PC Productivity Update 2016
2 Contributions to output and per capita income growth
Productivity is a measure of efficiency in production. It should not be considered an end in itself, but for what it contributes to improved wellbeing in the long run, through the growth of output and income. Higher productivity is an essential component to meeting the challenges of an ageing population.
Real GDP growth can be decomposed into three components: growth in the population, in participation rates, and in labour productivity. Changes in participation are determined by the share of population of working age, their labour market participation, employment share (share actually working, which is the inverse of the unemployment rate) and the average hours worked per person employed.
In 2014-15, real GDP increased by 2.2 per cent (figure 2.1). Growth of population (1.4 per cent per year) and economywide labour productivity1 (1.0 per cent per year) made a positive contribution, while the fall in the participation rate detracted from real GDP growth by 0.2 per cent. This pattern is similar to that in the period between 2010-14.
Figure 2.1 Contributions to the growth in aggregate real output, 1979-80 to 2014-15a
Per cent per year
a 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: Productivity Commission 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).
Growth in the population can increase the size of the economy but does not, in itself, increase output or income per capita. Growth of per capita income is determined by changes in participation (referred to as 'labour utilisation' in figure 2.2), labour productivity, the terms of trade and in net foreign income.
Figure 2.2 Contributions to average annual per capita income growtha,b
Percentage points contribution, annual average
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. b Labour utilisation refers to labour participation.
Source: Productivity Commission estimates based on ABS (Australian System of National Accounts, 2014-15, Cat. no. 5204.0).
In 2014-15, per capita income growth was -0.9 per cent, contrasting markedly with the positive average annual income growth in the five and half decades since 1960. The main contributor to the negative growth was the falling terms of trade (-2.3 per cent) while the slight decline of labour utilisation (-0.1 per cent) also made a contribution. The growth of net foreign income and labour productivity were positive but they were more than offset by the deterioration in the terms of trade and labour utilisation.
In the Australian economy, periods of negative income growth have been infrequent. Since 2012-13, per capita income has declined in three consecutive years which has not been experienced in the five and half decades since 1960. The main reason is the large decline in Australia's terms of trade which started rising in 1999 reaching its peak in 2012 (figure 2.3). Since then, it has fallen by 25 per cent. It is worth noting that in 2015, the terms of trade was still 26 per cent above the average level between 1960 and 2015. If the terms of trade continue its current downward trend, it will exert further pressure on the level of Australia's income in the years to come.
Figure 2.3 Australia's terms of trade: 1960-2015a
Index 2014 = 100
Source: ABS (Australian System of National Accounts, 2014-15, Cat. no. 5204.0, October 2015).