• News

Productivity down 4.6% and that could be an emerging national crisis

Date: 31 July 2023

National employment data shows one of the tightest labour markets in Australia’s history, underscoring some serious challenges for the nation and its future wellbeing. Not least of these is the crunch in productivity, which saw the nation’s output per unit of labour fall a very worrying 4.6% over the year-ended March 2023.

If you are yet to do so, we recommend reading the preceding item on employment, to have some of the context for this important discussion.

It is important to define some often mis-used concepts in any discussion about productivity. Productivity is normally measured as ‘labour productivity’. This has precious little to do with how hard people work. It is a measure of how much production is achieved per unit of labour, and typically has more to do with investment in capital, skills, training and systems than it does to do with ‘effort’.

In many respects, a better (if only because it is less emotive) measure of productivity is the multi-factor productivity (MFP) model, under which outputs are measured by the sum of the inputs used to create them. That is, all the capital, resources, systems, equipment and labour needed to make or do something.

Some would argue the fixation on labour productivity is ideological (it can definitely be emotive), but it is also a useful measure when considered in the context of employment and effective use of people’s working time. Labour productivity can also be a means of assessing shares of productive output and opportunities to reduce working hours, for instance.

Addressing productivity specifically, it is the important driver of improved living standards, having accounted for more than 80% of national income growth over the past thirty years, according to the Productivity Commission.

Definitions and context established, we can note that labour productivity rose during the pandemic, mainly because labour shifted to more productive industries. Over the last year – and still the case as the employment article preceding this, addresses – that appears to be unwinding in 2022-23.

The annual report of the Productivity Commission suggests that as the labour market recovered from the COVID-19 pandemic and the unemployment rate fell to historic lows, workers who re-entered the workforce were deployed to less productive work, much of it manual and rudimentary in nature, thereby reducing unit labour productivity.

Why is this so?

A significant factor appears to have been the decline in business investment. 2021-22 was only the second time in almost thirty years there was decline in the capital-labour ratio. That is, the rate of increase in deployment of labour was greater than the rate of increase in use of capital.

It is important to note as many readers will attest, that this is not solely a ‘capital strike’, although for some businesses it was a time of reflection and recalibration that saw the chequebook remain in the safe. It was also a time when global machinery supply chains ground to a halt for many sectors, with slow shipping and freight compounded by successive and asymmetric lockdowns across different economies. Many companies are still waiting to install and commission equipment ordered in the pandemic.

As a result, business investment as a share of GDP was 11.5% in the March quarter of 2023, only marginally higher than the record lows hit in 1992 and well below the 18% high at the peak of the mining boom.

The Productivity Commission suggest the Global Financial Crisis may have made firms more risk averse and the pandemic, as we say, definitively caused rethinking and slowed down capital deployment. Low interest rates after the GFC did not stimulate investment as investors required higher returns for a given level of risk.

We can see this below, where capital contribution to total productivity has been very low for the last three years.

This is very much a macro perspective with individual sectors and firms addressing the situation in their own specific ways.

Few in the forestry and wood products industry would be surprised to learn that the Productivity Commission reports that in 2021-22, the construction industry’s labour productivity fell 0.9% for instance, while the broad Agriculture, forestry and fishing sector saw labour productivity lift 13.7%. Those differentials have everything to do with the effective use of labour and the interaction between labour and other productive inputs, to achieve each unit of output.

The total national decline in productivity is important as it can impact inflation. Here the issue is wages. The sensitivity raised by the RBA is that wage rises without productivity gains can continue inflationary cycles, as the wages increases may flow through to the cost goods and services.

The answer is not to suppress wages however, it is to invest in systems of work and capital equipment that ensure every unit of labour produces the greatest possible level of output. That might lead to higher unemployment, but it will not lead to lower living standards, in most cases.

How the forestry and wood products industry ensures its productivity is high, how it invests and manages its inputs and systems of work, will be a key to the nation’s sustainable future economy, especially to build all the houses a growing nation will require.

Posted Date: July 31, 2023

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