For the past few years under the Coalition, Australia’s economy has had poor labour productivity growth.

The big lift in productivity that occurred under the Rudd-Gillard governments disappeared in 2015, when measures like GDP per hours worked began turning negative on a regular basis, reducing the rate of overall labour productivity growth back to the levels seen when John Howard was in office.

But in the 12 months to March there’s been a better result.

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Yesterday’s national accounts showed growth of 0.8% in GDP per hour worked in the March quarter, and growth of 2.5% in the year to March. Part of that is statistical — there was a big fall in hours worked over the past year, while GDP growth has bounced back strongly. But the March quarter number was solid (bearing in mind it may be revised in future releases) and real unit labour costs — the average cost of labour per unit of output​ — fell 3.2% to their lowest level on record. Real unit labour costs in the non-farm sector (which is most of the economy) fell more: 3.5%.

That means businesses are enjoying a higher productivity workforce without an increase in labour costs which is why the corporate share of income remains so high. In the March quarter it eased to 29.6%, but that was after three successive quarters where the share was more than 30%. It’s the first time since this particular measurement started in 1959 that corporate profits have been so high over a 12-month (four-quarters) period.

Conversely, the wages share of income hit an all-time low of 49% in the September quarter last year, the first time it had fallen below 50%.

These kind of golden conditions for business are supposedly from a broken industrial relations system in urgent need of reform — if you believe the government, business lobby groups, the neoliberals at The Australian Financial Review and News Corp. And that’s on top of the strong employment growth we’ve seen in the recovery.

While everyone is now on the same page in relation to the need for unemployment to fall into the low 4s and perhaps even to below 4% to drive wages up, it seems everyone has also forgotten what happens when you drive unemployment down so low: productivity slumps.

One of the dirty secrets of the Howard government’s WorkChoices regime was that it knew it was going to cause a slump in labour productivity — and refused to tell anyone. In late 2005, News Corp secured a Treasury paper under freedom of information (FOI) that showed it had warned that if WorkChoices saw an increase in employment, it would reduce labour productivity as lower-skilled workers and the long-term unemployed were drawn back into the workforce.

Then-treasurer Peter Costello had failed to ever mention that advice until forced to by the FOI release.

That slump duly occurred, with labour productivity growth plunging under WorkChoices before returning to health under Labor.

Trying to get unemployment down to the low 4s may well produce a similar outcome, even if the government has abandoned — for now — attempts to impose WorkChoices-style industrial relations reforms.

And that will complicate life for the economists, businesses, government ministers and commentators who insist that the only problem with wages growth in Australia is that labour productivity isn’t strong enough.

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Peter Fray
Peter Fray
Editor-in-chief
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