Our productivity performance remains a bit of hit and miss — not because of what is going on in the economy, but because of how little is known and the enormous changes wrought in recent years by the resources and investment booms.

The Productivity Commission last week issued the first of what will be an annual examination of our productivity performance, and despite scattered reports about how it has worsened and likely to continue to worsen, the real story from the Commission’s report is that we don’t yet have the real story on this issue.

Productivity is being impacted by factors as disparate (temporary and more enduring) as the strong Australian dollar, weak consumer demand, weak bank lending and the de-leveraging by prudent consumers, the burying of power lines and over investment in generating and distributing capacity, the rapid growth in health and social service employment, the mining investment boom, the impact of the drought and people using less water and electricity and employers “hoarding” labour.

It is not as cut and dried as the critics claim, nor is it as bad. Productivity is on the rise from the slowdown in the naughties and into the early years of this decade.

The two main ways of measuring productivity are multi-factor productivity (which rose 0.1% in 2011-12 after falling 1.2% the year before — the long term growth rate is 0.8%). And the second is the better known labour productivity, which rose 3.4% in 2011-12.

“The industries contributing most to the slowdown are… mining, manufacturing, electricity, gas, water and waste services (utilities), agriculture, forestry and fishing, and financial and insurance services. Developments in these industries are important in explaining the broader productivity story,” the commission commented. These are all in the market sector and account for 38.2% of GDP in 2011-12.

But there are a host of temporary and more enduring factors that are impacting our productivity — from the difficulty of measuring the efficiency and output for a huge section of the service sector, to buying power lines underground and energy conservation.

The commission conceded in its update that neither measure of productivity is accurate for the modern Australian economy. Each excludes so-called ”non-market” industries of health, education, public administration and security. And this is vital because health and social assistance industry sector has become Australia’s biggest employer in recent years, while education has also seen considerable investment, and will see a lot more in coming years.

It also pointed out that the last decade has “been a testing time for many Australian businesses. Natural disasters, including major droughts and floods have been a drag on output, while economic conditions in many overseas economies have been weak and the high Aussie dollars has affected exporters”.

It says many business have hung on to labour and physical capital (s0-called hoarding), on the “expectation” of better times. We may have been seeing this for much of the past year as the labour market has grown fitfully, but not been crunched by the sluggish level of demand. But the growth in labour productivity in the December quarter of 2012-13 could be a sign that an improvement in MFP is underway.

The commission’s report gives support to critics of the power industry who claim over investment has forced up prices, despite demand not being as strong as claimed. It dryly comments: that productivity in electricity is declining in part because of have been ”greater investment in distribution capacity than was socially optimal”.

And productivity in the water industry is declining in part because Australians’ water use has yet to return to ”pre-drought levels”. But this is more socially and economic desirable than boosting water consumption. This fall in consumption has been driven in part by pricing/taxation, and you would have to argue is more socially optimal than a resumption of a rise in water use.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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