What is productivity?

Labour productivity is the amount of economic output produced each hour worked. It is measured as GDP per hour worked. Working harder and easing any unwarranted restrictive work practices can increase labour productivity. It can also be increased by improving skills, working with more sophisticated machines and using modern infrastructure.

Multifactor productivity is economic output per unit of capital and labour combined. It measures how efficiently capital and labour are used together. It is a better measure of the efficiency of an economy. Over time, multifactor productivity growth reflects improvements in skills, technology and management practices.

Why is productivity growth important?

As we work smarter, using better skills, technology, infrastructure and management practices, we can produce more output and so earn more income for employees and business owners.

In Australia’s case, productivity growth has contributed 80 per cent of the growth in GDP per person in the last 40 years. Without solid productivity growth we would have to rely on lucky booms in international commodity prices, hoping the world will pay us more for what we sell.

How has Australia fared in productivity growth?

Australia’s average annual productivity growth began ebbing away from the mid-1970s to just 1.2 per cent in the 1980s. But it grew at a strong 2.1 per cent during the 1990s, the yield from the economic reforms of the 1980s and early 1990s.

From around 2000 labour productivity growth slowed. In 2004 multifactor productivity growth hit negative territory – we had become less productive. But Australia had a revival in labour productivity growth in 2012 and 2013, averaging more than 2 per cent – the strongest in a decade. If labour productivity growth continues to improve, it is hoped multifactor productivity growth will follow.

What more needs to be done?

Australia’s high exchange forced exporting and import-competing industries to lift their productivity performance. The big laggards are industries not exposed to competition; for example, the electricity industry has over-investment in poles and wires.

The way forward in lifting productivity growth

Cosseted parts of the economy should be opened up to competition. If there are restrictive work practices that can reasonably be removed they should be considered. Wise investment in innovation, education, skills and infrastructure are essential to lifting productivity growth.