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Australia’s productivity performance
Seminar Presentation to
Australian Treasury
Canberra, 22nd September 2010
Saul Eslake
Grattan Institute
Australia’s productivity growth has slowed over the last
five years, after 15 years of above average growth
Labour productivity Multi-factor productivity
4.0 % growth p.a. (5 year rolling av. year end) 2.5 % growth p.a. (5 year rolling av. year end)
3.5 2.0
3.0
1.5
2.5
1.0
2.0
0.5
1.5
0.0
1.0
-0.5
0.5
0.0 -1.0
-0.5 -1.5
1988-89 1993-94 1998-99 2003-04 2008-09 1988-89 1993-94 1998-99 2003-04 2008-09
Av. 1973-74 to 2008-09
Source: Australian Bureau of Statistics.
2
Productivity growth has slowed in most OECD countries,
but the slowdown has been more marked in Australia
Labour productivity
3.0 % pa (5 year rolling average)
2.5
Av. 1973-74 to 2008-09
2.0
OECD
(30 countries)
1.5
Australia
1.0
0.5
0.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: OECD 3
Relative to the US, Australian labour productivity is back
to where it was in 1990
Australian labour productivity as a percentage of the US
96 %
94
Australian GDP per
92 hour worked as a
p.c. of US
90
88
86
84
82
80 85 90 95 00 05 10
Sources: The Conference Board Total Economy Database 2010; Grattan Institute.
4
Real GDP growth has become increasingly reliant on
population growth and rising workforce participation …
Sources of real GDP growth (1988-89 to 2008-09)
av. % growth p.a. over cycle
1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09
Sources: ABS, Grattan Institute.
P5
… while real income growth has become increasingly
dependent on favourable shifts in the ‘terms of trade’
Sources of real GDI growth (1988-89 to 2008-09)
av. % growth p.a. over cycle
1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09
Note: Real GDI (gross domestic income) is real GDP adjusted for changes in the terms of trade (the ratio of export to import prices). ‘Labour supply’
is total hours worked (ie population x participation rate x (1 – unemployment rate) x average hours worked). Sources: ABS, Grattan Institute. P6
Labour productivity growth has in turn become wholly
dependent on ‘capital deepening’
Components of labour productivity growth
av. % growth p.a. over cycle
3.5
3.0 Capital
deepening
2.5
2.0
1.5 Multi-factor
productivity
1.0
0.5
0.0
-0.5
-1.0
1981-82 to 1984-85 to 1988-89 to 1993-94 to 1998-99 to 2003-04 to
1984-85 1988-89 1993-94 1998-99 2003-04 2008-09
Sources: Australian Bureau of Statistics; Grattan Institute.
7
In the mining sector, substantial increases in factor inputs
are yet to be reflected in commensurate output gains …
Mining sector factor inputs and
outputs Mining sector productivity
140 Index 2007-08 = 100 160 Index 2007-08 = 100
120 150
Labour
140
Multi-factor
100
Output 130
80 120
110
60
Labour 100
40 Capital 90
80
20
70
0
60
1988-89 1993-94 1998-99 2003-04 2008-09
1988-89 1993-94 1998-99 2003-04 2008-09
Note: ‘inputs’ are hours worked and capital services; ‘output’ is chain-volume gross value added.
8
Source: Australian Bureau of Statistics.
… and for different reasons much the same has occurred
in the utilities sector
Utilities sector factor inputs and
outputs Utilities sector productivity
120 Index 2007-08 = 100 150 Index 2007-08 = 100
140
110
Labour
Output 130
100
120
Multi-factor
90 110
80 100
Capital
90
70 Labour
80
60
70
50 60
1988-89 1993-94 1998-99 2003-04 2008-09 1988-89 1993-94 1998-99 2003-04 2008-09
Note: ‘utilities’ sector is electricity, gas, water and waste services.
Source: Australian Bureau of Statistics. 9
Slow growth in public sector productivity partly reflects
difficulty in measuring output
Inputs and outputs Productivity
300 Index 1989-90 = 100 220 Index 1989-90 = 100
200
250
180
160
200
140
Labour
150 Output
120
Hours
100
100
80
50 60
1988-89 1993-94 1998-99 2003-04 2008-09 1988-89 1993-94 1998-99 2003-04 2008-09
In many parts of the public sector, perceptions of ‘service quality’ are inversely related to
conventional measures of labour productivity
Source: Australian Bureau of Statistics.
10
ABS national accounts & hours worked data can be used
to construct ‘additive’ measures of labour productivity
Estimates of the dollar value of output per hour worked, 2008-09
Mining
Finance & insurance
Electricity gas & water
Rental, hiring & real estate
Information, media & telecoms
Wholesale trade
All industries
Manufacturing
Admin & support services
Transport, postal & warehousing services
Public adminstration & safety
Professional, scientific & technical services
Construction
Agriculture, forestry & fishing
Health care & social assistance
Education & training
Art & recreation services
Retail trade
Accommodation and food services $ per hour
0 50 100 150 200 250
Note: Aggregate hours worked for each sector derived by ‘grossing up’ estimates of average hours worked in the survey week for the
middle month of each quarter in 2008-09. ‘Output’ is gross value added.
Sources: Australian Bureau of Statistics; Grattan Institute. 11
These estimates produce quite similar estimates of
aggregate productivity growth to those compiled by ABS
Estimates of market sector labour productivity compared
105 Index (2007-08=100)
100
$-value productivity
95 measure converted ABS index measure
to index
90
85
80
75
70
65
1988-89 1993-94 1998-99 2003-04 2008-09
Grattan is GVA (val. add.) per hour worked (weighted by industry excl. taxes & dwellings ). ABS from Cat. 5260.0.
Differences stem from excluding dwellings and internal ABS revision of selected industry hours worked data.
Sources: Australian Bureau of Statistics and Grattan 12
It’s also possible to construct estimates of MFP for most
industries
Productivity Levels of Australian Industries
% market sector av. 2008-09
375%
Note: MFP industry levels = GVA per hour of labour and capital, where capital hours equals hours worked times the capital and labour income shares ratio
(implicitly assumes equivalence of an hour worked in each industry). This data is not available for some industries.
Sources: Australian Bureau of Statistics and Grattan 13
Labour productivity growth has slowed significantly even
after excluding mining, utilities and non-market sectors
Labour productivity
3.5% % growth p.a. (5 year rolling av. year ending)
3.0%
Market excl. utilities & mining
2.5%
Market
2.0%
Total economy*
1.5%
1.0%
0.5%
0.0%
-0.5%
1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09
* GDP per hour worked
Sources: Australian Bureau of Statistics and Grattan 14
Labour productivity growth has slowed significantly even
after excluding mining, utilities and non-market sectors
Total economy Market economy
3 av. % p.a 3 av. % p.a
2 2
1 1
0 0
1988-89 to 1993-94 to 1998-99 to 2003-04 to 1988-89 to 1993-94 to 1998-99 to 2003-04 to
1993-94 1998-99 2003-04 2008-09 1993-94 1998-99 2003-04 2008-09
Market economy (excl. mining & utilities) Services
3 av. % p.a 3 av. % p.a
2 2
1 1
0 0
1988-89 to 1993-94 to 1998-99 to 2003-04 to 1988-89 to 1993-94 to 1998-99 to 2003-04 to
1993-94 1998-99 2003-04 2008-09 1993-94 1998-99 2003-04 2008-09
Av. 1973-74 to 2008-09 15
Sources: : Australian Bureau of Statistics NB: All charts exclude. taxes & dwellings
Labour productivity gains in the 1990s were largely the
result of improvements in sector-specific productivity …
Contributions of industry-mix and industry-specific productivity performance
to labour productivity growth (1988-89 to 1998-99)
Public admin.
& safety
Transport, postal
& warehousing
Contribution of change in industry mix
Rental, hiring Agriculture etc.
& real estate Construction
Retailing Wholesaling
Arts & Health care
Manufacturing
recreation etc. IT
Admin support
Other Prof & tech
services
services services
Finance
Hospitality & insurance
Education
& training
Electricity gas & water
Mining
Contribution of change in industry specific productivity
Sources: Australian Bureau of Statistics and Grattan Institute calculations.
… whereas in the past decade sector-specific productivity
slowdowns have offset the impact of structural change
Contributions of industry-mix and industry-specific productivity performance
to labour productivity growth (1998-99 to 2008-09)
Mining Hospitality
Other
services
Contribution of change in industry mix
Rental, hiring
& real estate
Agriculture etc.
IT
Admin support
services
Retailing
Electricity gas & water
Manufacturing
Finance
Prof & tech
Public admin. & insurance
services
& safety Wholesaling
Arts &
Transport etc
Education recreation
& training Health care
Construction
etc.
Contribution of change in industry specific productivity
Sources: Australian Bureau of Statistics and Grattan Institute calculations.
The same methodology can also be used to derives
estimates of State and Territory labour productivity …
Labour productivity (gross product per hour worked),
2008-09
80 2007-08 $ per hour
75
70
National
average
65
60
55
50
NSW Vic Qld SA WA Tas NT ACT
Sources: Australian Bureau of Statistics; Grattan Institute.
18
… which in turn explain a large part of the variation in
per capita income among the States and Territories …
Sources of difference between per State or Territory GSP per capita and
the national average, 2008-09
50 % point contribution to
difference in GSP per head
40
from national average
30
20
10
0
-10
-20
-30
NSW Vic Qld SA WA Tas NT ACT
Employment (as p.c. of population) Average hours worked (per person employed)
Labour productivity (gross product per hour worked) Residual
Source: ABS State Accounts (5220.0) 2008-09, and Grattan Institute calculations.
… and some of the variations in State and Territory
economic growth in recent years
Contributors to growth in real gross State product, 2003-04 through 2008-09
6.0 % pa
5.0
4.0
3.0
2.0
1.0
0.0
-1.0
NSW Vic Qld SA WA Tas NT ACT Australia
Population Participation Average hours worked
Labour productivity Residual Real gross State product
Source: ABS State Accounts (5220.0) 2008-09,
There’s a positive association between capital investment
and labour productivity across States and Territories …
Non-residential investment and labour productivity by State and Territory
80 $
NT
Gross product per hour worked
ACT
75 WA
70
NSW
2008-09
65 Vic
60 SA Qld
55 Tas
%
50
16 18 20 22 24 26 28 30
Business and public fixed capital expenditure as a p.c. of gross State product
2004-05 through 2008-09
Source: ABS State Accounts (5220.0) 2008-09; and Grattan Institute calculations.
… and between educational attainment and labour
productivity
Labour productivity and educational attainment, 2008-09
80 $
NT ACT
Gross product per hour worked
75 WA
70
2008-09
NSW
65 Vic
SA
60
Qld
55 Tas
%
50
50 55 60 65 70 75
P.c. of persons aged 25-64 with post- or non-school qualifications
2008
Source: ABS State Accounts (5220.0) 2008-09; Survey of Education and Work (6227.0) May 2009.
Differences in productivity reflect differences in sector
composition and in sectoral productivity performance
Proportion of total gross value added Proportion of total gross value added derived
derived from ‘high productivity’ from industries where productivity exceeds
industries the national average for that industry
50 % of total industry 100 % of total industry
gross value added gross value added
45 90
40 National 80
average
35 70
30 60
25 50
20 40
15 30
10 20
5 10
0 0
NSW Vic Qld SA WA Tas NT ACT NSW Vic Qld SA WA Tas NT ACT
Sources: ABS State Accounts (5220.0) 2008-09; and The Labour Force, Australia, Detailed, Quarterly (6291.0.55.003); and Grattan Institute calculations.
‘High productivity’ industries are mining, finance & insurance, electricity gas & water, rental hiring & real estate services, information media &
telecommunications services, and wholesale trade.
And there are considerable differences in productivity
in the same industries in different States
Labour productivity of sectors in Labour productivity of sectors in
which productivity was above the which productivity was below the
corresponding national average corresponding national average
in 2008-09 in 2008-09
170 % of corresponding national average
100 % of total industry
160 gross value added
95
150
140 90
130
85
120
110 80
100
75
90
80 70
NSW Vic Qld SA WA Tas NT ACT NSW Vic Qld SA WA Tas NT ACT
Sources: ABS State Accounts (5220.0) 2008-09; and The Labour Force, Australia, Detailed, Quarterly (6291.0.55.003); and Grattan Institute calculations.
‘High productivity’ industries are mining, finance & insurance, electricity gas & water, rental hiring & real estate services, information media &
telecommunications services, and wholesale trade.
Note that the slowdown in productivity growth over the
past 5 years has been broadly based across the nation
Labour productivity (GSP per hour worked) growth, 1993-94 to 2008-09
4.0 % per annum
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
NSW Vic Qld SA WA Tas NT ACT Australia
1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09
Source: ABS State Accounts (5220.0) 2008-09 and Grattan Institute calculations.
What could explain the slowdown in labour productivity
growth over the past decade?
As the Australian economy moved closer to ‘full employment’ (prior to the
recent slowdown), additional labour and capital inputs are likely to have been
increasingly less productive
– and ‘labour hoarding’ during the recent downturn probably further detracted from
productivity (a reminder, perhaps, that productivity ‘‘isn’t everything’’)
Capacity constraints – shortages of skilled labour, infrastructure bottlenecks
etc. – resulted in increasing amounts of ‘down time’ detracting from productivity
Generally buoyant corporate profitability may have diminished the importance
to management of seeking out productivity improvements
– according to a survey by Telstra, only 42% of Australian organizations measure
productivity, have a target for it and know what it is
Dearth of productivity-enhancing ‘micro-economic’ reforms since around 2000
– most of the ‘low hanging fruit’ have been picked, and the political appetite for reform
has faded
Instead there’s been an increase in regulation directed at, eg ‘national security’
and corporate governance, which has adversely affected productivity
There’s been some slowing in the rate of diffusion of productivity-enhancing
technologies since the late 1990s
– and Australia doesn’t rank as highly on these measures as it did at that time
What could be done to improve Australia’s productivity
performance?
Re-invigorated commitment to productivity-enhancing reforms
– some sectors have previously been exempted from such reforms (health insurance,
international aviation, agricultural marketing, pharmacies, newspaper distribution)
Taxation reform
– with a view to reducing the extent to which provisions in the tax system distort
decision-making
Further promotion of education and skills acquisition
– focussing in particular on engineering and science, skilled trades
– and on students from lower socio-economic backgrounds, and on young people in
neither employment nor training
– may require significant reform of vocational education system and funding
Targeted infrastructure investment
– need mechanisms to ensure the ‘right infrastructure in the right places’ with sensible
pricing and access
Serious effort to improve Australia’s innovation effort
– not simply about R&D spending but about access to risk finance, linkages with
research institutions, relevant skills and commercialization
Greater awareness of productivity impact of policies pursued with other
objectives in mind
Possible productivity-enhancing reforms identified by the
Productivity Commission and COAG
Gains from various reforms
(PC estimated gains, various reforms)
Recommendation Impact* Year
Competition and regulation reforms COAG NRA), including 2.0% GDP($17bn in 2005-06 $). 2007
• Regulatory compliance costs • 1.1%
• Competition in electricity and gas
• Improved ports, road rail infrastructure
Education and training (COAG NRA), including: ~2.4% GDP (by 2030), including: 2007
• Transitions from school •0.45%
• Literacy and numeracy •0.27%
• Adult learning •0.43%
• Participation (from above) •0.69%
Health Services (COAG NRA) 0.4% GDP ($4bn in 2005-06 $) 2007
TCF assistance
$70 million (p.a till 2015 ) 2008
• Current assistance reduction plan
Auto assistance 0.2% GDP 2008
• Removing all forms of current assistance
Other Not provided Various
• Taxation reform
• Improved consumer protection policies
* Modeling of some reforms do not fully capture costs
Source: Productivity Commission reports. P 28
Australia’s innovation rankings are below those on other
competitiveness factors
Australia’s global competitiveness rankings (2010-11)
Worse than Worse than
overall ranking overall ranking
Source: World Economic Forum Global Competitiveness Report P 29
Australian firms have relatively low levels of R&D spending,
collaboration & commercialisation
Source: OECD, Science, Technology and Industry Outlook 2008, Australia country notes P 30
