Apr 29, 2014

Beyond bakeries, Productivity Commission shows who’s dragging the chain

The Productivity Commission shows that fixing our multi-factor productivity performance will take a lot of work.

The Productivity Commission certainly knows how to reinforce its brand. Saddled with a perception that it is a collection of cloistered economic eggheads acquainted only with hardline economic theory and not the realities of earning a living in the real world, its 2014 report on productivity performance does its best to confirm just that. Small wine makers are a drag on efficiency because they are ignoring market signals and remain in business. Artisan bakers and brewers are also a drag because it takes more bakers and brewers to produce their products than the likes of Goodman Fielder or Foster's. It's rather unfair on these small businesses, because there are other reasons why they do what they do, from lifestyle, to job satisfaction, to tradition or family reasons. Still, it's an important report: with an ageing population and revenue pressures on the Federal budget, repairing our poor productivity is the only way forward for growth, short of another positive terms of trade shocks from a surge in exports in the next decade. Indeed, any terms of trade shocks could very well be a negative given reports this morning from China that the country's banking regulators are planning a crackdown on the way the country's steel mills finance their imports of iron ore from countries such as Australia. News of the crackdown produced a 5% fall in iron ore spot prices in Asia late on Monday, to around $US108 a tonne. That compares with the most recent peak of $US119 a tonne. According to the Commission, Australia's productivity has been among the worst in the world for a decade. It estimates the broadest measure of productivity (multi-factor productivity or MFP), which captures the efficiency with which business uses labour and capital investment in new equipment and processes, fell 0.8% in 2013, reversing a similar gain in 2011-12. The PC says productivity has now been falling at an average of 0.6% a year since 2007-08, while it dropped at an average 0.1% a year over the previous four years. But before the commentariat race to cite poor labour productivity, the commission's report reveals that for a second year, the productivity of the labour force has been a rare positive for the economy:
"Output growth in 2012-13 was 2.2%, down from 4.3%in the previous year. Labour productivity growth was strong for four of the market sector industries -- Financial and insurance services (7.4%), Electricity, gas, water and waste services (6.3%), Mining (3.2%) and Retail trade (2.2%). For Financial and insurance services, this was lifted by relatively strong growth in MFP (3.6%). For the other three industries, LP growth was more influenced by growth in capital inputs (Mining at 16%, Electricity, gas, water and waste services at 5.0% and Retail trade at 2.9%)."
The commission notes only four industries displayed positive MFP growth: financial and insurance services (3.6%); retail trade (1.4%); wholesale trade (0.5 %); and transport, postal and warehousing (0.5%). Our poor performance is due to a combination of reasons, most of which will either take time to erase (boosting production and sales from our mines and gas plants where investment has been a record in recent years) or involve lazy or weak managements being called to account for wasting capital on poor or badly planned investment, or waiting for the economy to return to trend growth or higher. Or there's the over investment combined with badly designed regulation (or deregulation in the case of electricity) in utilities in power and water where falling demand or supplies (water in the case of the last El Nino drought) have affected output, meaning returns are below the level of inputs. And for those in the media and telecoms sector, there was bad news: it was the second worst-performer across the economy in MFP terms:
"The information, media and telecommunications industry recorded a sizeable decline in MFP (-3.8%) in 2011-12 and an even greater decline (-7.2%) in 2012-13, making a significant negative contribution to market sector MFP growth ... "If this trend continues, then further research into the industry will be warranted."
That research might find that it's the dominance of telecommunications (Telstra, etc) that is overwhelming the data for the sector, and that with money to be spent on the NBN for years to come, that will not change very quickly. But the commission points out that the labour productivity of this sector was minus 4.5%, the worst of the 12 industry sectors studied in the update.

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5 thoughts on “Beyond bakeries, Productivity Commission shows who’s dragging the chain

  1. Will

    MFP necessarily involves a catch-all black-box residual. Economists frequently refer to this as ‘technology’ but it could be anything. So that means the accurate language employed by Glenn above about MFP: “[it] captures the efficiency with which business uses labour and capital investment in new equipment and processes” is sort of right but implies both a kind of precision about variables and categories that is completely illusory.

    Here is Noah Smith on TFP:
    “This residual represents how productive capital and labor are, which is why we call it “total factr productivity” (TFP). What determines TFP? It could be “human capital”. It could be technology. It could be institutions like property rights, corporate governance, etc. It could be government inputs like roads, bridges, and schools. It could be taxes and regulations. It could be land and natural resources. It could be some complicated function of a country’s position in global supply chains. It could be a country’s terms of trade. It could be transport costs and urban agglomeration. It could be culture. It could be inborn racial superpowers. It could be God, Buddha, Cthulhu, or the Flying Spaghetti Monster. It could be an ironic joke by the vast artificial intelligences that govern the computer simulation that generates our “reality”, putting their metaphorical thumb on the scales because they are bored underpaid research assistants with nothing better to do.”

    The Productivity Commission is okay but overrated. I cannot fathom why people like Peter Martin are so obsessed with it having a presumptively sacrosanct and pre-eminent role. I mean Judith Sloan FFS. If ever a hack lived and breathed.

  2. Ian Brown

    “Artisan bakers and brewers are also a drag because it takes more bakers and brewers to produce their products than the likes of Goodman Fielder or Foster’s.”

    Have they no way of taking quality into account?

  3. Chris Hartwell

    Ian @2, quality is usually quite difficult to model. The first question being: How do you define “quality?” That’s the reason so many different quality assurance models – six sigma, TQM, etc – have been developed

  4. Salamander

    I understand there is good evidence that increasing the proportion of women in senior positions increases productivity. Are they considering this?

  5. Donald Oprie

    Seems to me a lot of workers at the Westfield in Hornsby need to pull up there socks and get back to work. On the weekend my wife and I saw a slacker at the Apple Store with unkempt hair and a stupid grin. When my Wife asked him about getting access to the National Boardroom Network he was rude to her. Time for solid Aussie companies like Apple Store to get with the 20th Century.

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