Productivity growth weak, and worsening
In the first of what it intends to be annual updates, the commission says in the four years since 2006 so-called multifactor productivity slipped by an average of 1.1 per cent a year. In the decade before, it rose by an average of 0.6 per cent per year.
France, Sweden, Ireland, Britain , the US, Canada and New Zealand also moved from positive to negative productivity growth in the same time frame (although in the case of the US from positive to zero growth), the commission says.
It says the downturn began before the financial crisis for reasons that are not clear, and it quotes the New York-based Conference Board as finding one reason it is continuing is labour hoarding, "as businesses refrain from making significant cutbacks in resources in the hope of a recovery in global demand".
Australian multifactor productivity rose 0.1 per cent in 2011-12 after sliding 1.2 per cent in 2010-11, a result still well down on the long-term growth rate of 0.8 per cent.
Labour productivity climbed by a much faster 3.4 per cent as more machinery was deployed per worker, a process called capital deepening.
The commission concedes that neither measure of productivity is particularly useful. Each excludes the "non-market" industries of health, education, public administration and security. The health and social assistance industry has become Australia's biggest employer.
Many of the outputs of the industries that are included are not measured, biasing down the published measures. The commission cites the electricity industry, which has switched from stringing wires overhead to burying them underground "in response to concerns about visual amenity and safety".
It says while the cost of putting the wires underground is counted on one side of the productivity equation, the extra benefit of burying them is not counted on the other.
The commission reports woeful productivity performance in the mining and utilities industries with declines in 2011-12 of 10.5 per cent and 5.4 per cent respectively.
One reason mining productivity is falling is a "mismatch" between inputs and outputs as money is spent developing new projects ahead of an expected payoff in production.
A longer-term reason is that resources are becoming harder to find. High commodity prices have exacerbated the process, encouraging "even more rapid development of higher-cost, less productive resource deposits".
Productivity in electricity is declining in part because of what the commission suspects to have been "greater investment in distribution capacity than was socially optimal". Productivity in the water industry is declining in part because Australians' water use has yet to return to "pre-drought levels".
Frequently Asked Questions about this Article…
The Productivity Commission found that Australia's productivity growth is weak and likely to worsen. It reported multifactor productivity slipped by an average of 1.1% a year in the four years since 2006, after averaging 0.6% a year in the previous decade, and it plans annual updates on the trend.
Multifactor productivity measures output relative to a combination of inputs (like labour and capital), while labour productivity measures output per worker. According to the commission, multifactor productivity was weak overall, but labour productivity climbed 3.4% in 2011–12 because more machinery was deployed per worker — a process called capital deepening.
The commission noted Australia isn't alone: France, Sweden, Ireland, Britain, the US, Canada and New Zealand also moved from positive to negative productivity growth over the same period (the US moved from positive to around zero), showing a broader international slowdown.
The commission cautions published measures exclude non-market industries (health, education, public administration and security) and often fail to count many quality improvements or unmeasured outputs. For example, burying power lines raises costs that are counted but the extra safety and amenity benefits aren’t. That means headline productivity stats can understate real improvements in services and quality — something investors should keep in mind when interpreting the figures.
The commission reported very poor productivity in mining and utilities in 2011–12, with declines of 10.5% and 5.4% respectively.
The commission points to a mismatch between inputs and outputs as spending ramps up to develop new projects ahead of production, and a longer-term trend where resources are becoming harder to find. High commodity prices have also encouraged faster development of higher-cost, less productive deposits.
Labour hoarding is when businesses refrain from cutting staff in the hope of a demand recovery. The New York–based Conference Board — cited by the commission — suggests labour hoarding can help explain continuing weak productivity because firms keep people on payrolls even when output is low, lowering measured productivity in the short term.
Electricity productivity is declining in part because of what the commission sees as greater investment in distribution capacity than was socially optimal; the water industry’s productivity is down partly because Australians’ water use hasn’t returned to pre-drought levels. For investors, these sector-specific drivers highlight that changes in regulation, infrastructure spending and demand patterns can materially affect productivity and sector returns.
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