The National Australia Bank has, with its paper The Productivity Puzzle, entered the productivity debate and its contribution won’t be much liked by conservative economists, columnists and perhaps even sections of the Reserve Bank and Federal Treasury.

Far from allocating blame, the NAB actually looks at the changes to Australian productivity in the most dispassionate way yet from an interested party (it has an interest in the capital side of productivity). It finds there are quite easily understood and plausible explanations for the weak performance in labour productivity in recent years, such as the rise of investment in mining and resources.

It points out that while labour productivity growth has slowed, so too has the broader multifactor productivity measure, which includes capital and which is actually falling.

“Annual national accounts data reveal that, since the middle of the last decade, labour productivity growth has slowed and multifactor productivity has actually declined. More recent quarterly data reveal that labour productivity growth has been non-existent,” said the paper’s author, Rob Brooker, the NAB’s head of Australian Economics and Commodities.

While multifactor productivity is depressed by the inclusion of measures such as empty buildings and idle equipment as part of input, there are also huge investments under way in iron ore, coal, LNG from natural gas and coal seam gas, some oil and copper, plus other minerals. These partly completed buildings and bits of plant are similar to idle production lines or empty buildings.

Much of this investment has yet to be finished and a pay-off extracted in terms of output and revenue and profits. That may not come for five years or more. Just take the $43 billion Gorgon gas project in WA, which won’t start producing LNG until 2014, and the $29 billion Wheatstone LNG project (committed to yesterday by Chevron), which won’t produce gas until 2016. The productivity of labour involved in building these projects can be measured now, but the productivity of the capital can’t, and nor can the productivity of the labour running those projects when they start operating.

Brooker writes:

“A plausible case can be mounted that much of the decline in labour productivity performance in Australia since the middle of the last decade is attributable to special and cyclical factors.

“These include high levels of investment in the mining and utilities industries that have not yet come on stream, the impact of slower GDP growth during the GFC and an apparent stalling in the growth of real wages faced by producers, even outside the booming mining sector.

“Ultimately, it is structural productivity growth (or, as it is described in the arcane world of economists, technical progress) that is relevant to economic welfare.

“The current slowing in measured productivity may begin to unwind as new mining and infrastructure capital comes on stream and as GDP growth picks up in response to the second mining boom.”

Perhaps the most interesting comment was that part of the reason for the slowing in productivity growth might be “Declining real unit labour costs may also be encouraging more labour-intensive production”.

The national accounts do confirm a solid fall in recent years in real unit labour costs and a rise in the share of income taken by corporate profits.

Much of the commentary about the current state of productivity is based in the area of labour costs: Peter Reith’s call to return WorkChoices and of others, such as conservative economists, are based on freeing up labour markets, getting rid of regulations and allowing the cost of labour to steady or to fall. They claim to be wanting to give employers and employers greater freedom, but the reality is that it is a means of cutting labour costs.

But these calls ignore the decline in real unit labour costs in recent years and the fact that WorkChoices had no discernible impact on productivity from 2004 to 2007. Labour productivity continued to fall.

“Labour productivity is affected by the real wage faced by producers. Lower real wages encourage more intensive use of labour and a tendency for measured labour productivity to grow more slowly. We saw above that the producer real wage has actually declined sharply in recent years in the mining industry despite substantial increases in nominal wages because commodity prices received by mining firms have risen even faster,” Brooker writes.

“For the market sector outside the farm, mining and utilities sectors, producer real wages have displayed little growth since the early part of the last decade, in contrast to the latter part of the 1990s. If technical progress has proceeded as normal (that is, ‘structural’ productivity has not slowed), this would be consistent with substantial falls in real unit labour costs for many industries and may have also contributed to the observed productivity slowdown.”

It continues to amaze that commentators and people such as Reith ignore this point: the more you make something cheaper, the more it will be used or consumed, often in preference to investing in new capital equipment that can actually improve productivity and profitability.

Peter Fray

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