Feb 17, 2014

The real factor holding back productivity (hint: it’s not labour)

Bankers demand a reform agenda to boost productivity. But economist and commentator at MacroBusiness Leith van Onselen says there's a big elephant in the room -- and it's not labour productivity.

Last week was bank profit bonanza season, during which very senior bankers took their moment in the sun to declare that Australia needed to press forward with a reform agenda aimed at boosting national productivity. Ian Narev of the Commonwealth Bank, Mike Smith of ANZ and Brian Hartzer of Westpac all, in their own way, declared that as a nation we should get out of the way of markets and let creative destruction shift capital to its most productive uses. It is an admirable sentiment that makes perfect sense in theory. Productivity growth is the key to national prosperity, never more so than in Australia right now as we struggle with failing competitiveness after the mining boom. But Australia’s senior bankers should perhaps pause for a moment to reflect upon how productivity works. Capital efficiency is a key input into the equation and has been dragging the chain far more than labour for the past decade. Some of that is the result of a capital-intensive mining boom, yet to see its big returns, but another unexamined factor is also strongly at work. The price of land is a key input cost for most businesses. So when costs are inflated, it reduces the competitiveness of industry, making it harder for Australia to compete abroad. The associated higher housing cost also places upward pressure on wages. For decades, the resource allocation governed by the banks has been channeled away from the tradable sector and infrastructure investment towards the financial sector, as home buyers have taken on ever-bigger mortgages and chased house prices higher. It should be no surprise that the finance and insurance industries -- which are dominated by mortgage lending -- have grown at more than twice the pace of the rest of the economy since financial markets were deregulated in the mid-1980s, due in part to the housing quango operated by the various levels of government (see below charts) ...


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9 thoughts on “The real factor holding back productivity (hint: it’s not labour)

  1. Liamj

    Reasonable argument supported by evidence, but too deep for electoral politics as practiced in this country so worker bashing will continue. Preconditions for change – housing bubble pops and oil price prunes back importers.

  2. Najiv Private

    Looks like a good article, but your graphs are too small to read.

  3. Daniel Davids

    An excellent piece Leith and a point I’ve tried to make on several occasions with the dolts at Business Spectator. I’m not sure where they got their economic credential, if they actually have any, but they’re certainly not using them. I wonder why? I eventually gave up reading ther crap and decided the argument must have some validity as they refused to publish any of my missives. Cest la vie.

  4. JohnB

    Najiv, if the graphs are too small for your fancy, I suggest viewing through your browser. See the link at the top of the daily email version.

    If the display is still too small, type [CTRL+] to enlarge and [CTRL-] to reduce.

    Thanks, Leith, for demonstrating that economics needs not involve discussions with hundreds of parameters and vague conclusions.

    It will be interesting, indeed, to read the Murray Report when it is released. He may well use his special knowledge and understanding in the interests of our nation, as against those of his former shareholders, and call just as eloquently for changes to the tax rules which favour locking our nation’s capital away in real estate – which may eventually prove not to be quite as real was hoped.

  5. dazza

    ‘Bankers demand a reform agenda to boost productivity’
    They also demand tax payer bailouts, austerity measures, create housing bubbles and financial crises, shut down farms and businesses, central banks have got away with money laundering, price fixing, dealing with south american drug lords etc etc, and Hockey wants to deal with these people?


    The RBA is off loading a residential property they own in Kirribilli Sydney. Are they selling with inside knowledge that the property market is a about to tank?
    Who knows as these are the people who sold 167 tonnes of our gold at the lowest possible price in 1997.

  7. dazza

    @ negati… ..
    Hope Crikey keep this on their radar .. who will benefit?

  8. bjb “old 167 tonnes of our gold at the lowest possible price in 1997”

    Ahh – the genius of Peter Costello. The bugger keeps his snout in the public purse – given his previous record he should be forced to work for free.

  9. Scott Grant

    So, if I understand what you are saying, house and land prices are too high, and banks are lending too much money to buy houses and land. I am not sure what you mean by “housing obsession”. People have to have a place to live. Is it an obsession with so-called investment properties, perhaps?

    You give as reasons tax concessions, “a constipated supply” system, and bank’s internal risk models. I see no mention of demand or of population. Why is this?

    A “constipated supply” system presumably refers either to the problem of developing virgin land fast enough, or to redeveloping existing suburbs to put up high rises. Could it be that the problem is not supply, but demand? Demand that comes from population growth through excessive immigration as well as foreign investment in housing attracted by rising prices.

    Damn! I mentioned population again. I must be a racist.

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