It is widely acknowledged that Australia’s productivity performance has been unhelpfully weak for many years. And as improving productivity is the only sustainable foundation for increasing national wealth, understanding why this is and how we can improve it is one of our most urgent economic questions.
Which is why the recent ‘Productivity Day’ – January 22nd, when the Australian Bureau of Statistics released its annual dump of productivity data – is marked in many economist’s calendars. It’s the one day of the year we get a new set of comprehensive data to analyse how productivity in Australian industry is evolving.
Unfortunately, the data out on this year’s Productivity Day does not make for encouraging reading. Overall productivity in Australia’s market sector rose by a risible 0.07% over the last financial year, while labour productivity managed only 1.1%.
Even with the disruptions of the pandemic now well behind us, it’s clear we have a long way to go on the journey to restoring healthy rates of productivity growth in our industries.
But admiring the problem does little to change it. So, what does the data tell us about why Australian productivity is stuck in the doldrums? And with the Federal Government clear in its desire to “reignite productivity growth”, how can the diagnosis inform future policy efforts?
The Australian economy was radically disrupted during the COVID pandemic, and so too was our productivity performance. And somewhat counterintuitively, the pandemic appeared to give productivity a shot in the arm.
When public health restrictions shuttered many lower-productivity service industries in 2020 and 2021 – as such food, retail and personal services – our productivity numbers artificially spiked. Australia came out of the pandemic with overall (multifactor) productivity 3.2% higher than we went in, mostly because of the effect of restrictions.
But as industries reopened and social life returned to normal, this artificial boost fell back out. The 2022-23 financial year saw the biggest annual decline in productivity on record, which the Productivity Commission attributed to the last vestiges of the pandemic disruptions working through the system. The expectation was the 2023-24 financial year would be the one where normal productivity dynamics returned.
Which is why this year’s productivity data is so disappointing. With effectively no growth in overall productivity in 2023-24, it is clear Australia’s productivity engine has not properly restarted after the pandemic. It also means Australia has only banked 2.3% of total productivity gains over the five years since the pandemic, well below the 4.4% uplift achieved in the five years prior.
So what’s going wrong? Why have meaningful productivity gains fail to materialise in the post-pandemic period? A deeper look into industry-level performance helps explain the causes.
Strictly speaking, its incorrect to say the Australian economy has failed to materially improve productivity since the pandemic. Rather, we have a multi-speed pattern where some industries are powering ahead while others are struggling.
Ai Group Research & Economics have analysed this year’s Productivity Day data, and have identified three different “speeds” for market sector productivity growth since the pandemic (chart below):
Insofar as Australia has a productivity problem, most of it stems from the presence of these flat or declining industries. Our high performing industries have delivered solid uplifts, only to have these results be offset by slippages in the low performing cluster.
Of particular concern is the fact the industries in the low-performing cluster are some of the most important for Australia’s future. The decline in construction augurs poorly for federal and state efforts to raise our low home building rates and improve housing affordability. An 11.1% fall in utilities productivity says the same about industry readiness for the energy transition. Manufacturing sorely needs an uplift to deliver on the federal governments’ Future Made in Australia agenda.
The problem of low productivity clusters is brought into sharper relief if we also consider the performance of the so-called ‘non-market sector’.
The non-market sector comprises three industries – public administration, education, healthcare & social – which are closely government-linked and predominantly government funded. They are a sizeable chunk of our productivity base, accounting for 25% of value-added in the Australian economy.
Unfortunately we don’t have overall productivity data for the non-market industries, due to several statistical complications*. But we do have data for their labour productivity, and it reveals that something very strange happened over the last 18 months.
Labour productivity in both the market and non-market sectors followed roughly the same track during the pandemic – each getting an artificial boost due to public health restrictions, which fell back out in 2022. But since 2023, they have tracked in opposite directions. The market sector recovered and started increasing again, while the non-market sector has steadily continued to slide.
The main culprit is the healthcare & social industry, which has seen a precipitous productivity collapse. In the last 18 months its labour productivity has fallen by 13.5% - one of the steepest slides ever seen in an Australian industry. The reason is a massive expansion in the health and social workforce – with labour utilisation growing 28% in the last 18 months – without a proportionally matching increase in industry output.
This sudden decline in healthcare & social productivity is macroeconomically significant for Australia. It accounts for 9% of total industry output, making it second in size only to mining. Its slide has therefore placed a terrific drag on national productivity performance during a time when the economy can least afford it.
The key finding of this analysis is that Australia’s productivity challenge is very concentrated. While overall productivity gains have proven elusive since the pandemic, many industries are delivering solid uplifts. The difficulty has arisen because of a cluster of low-performing industries have dragged down the national result.
This finding is very important, because it points the way to the reforms which would most immediately pay dividends. Targeted efforts that aim to turn around declining productivity in the handful of low performing sectors would make an outsized impact on overall national performance.
For the struggling industrial sectors – utilities, manufacturing and construction – regulatory reform is an obvious answer. These are some of the most-regulated industries in Australia, with complex and overlapping permitting systems covering many aspects of their operations. They are also the industries where the productivity burden of regulation is likely to be the greatest. A focussed process of regulatory streamlining that includes productivity as an objective could capture the low-hanging fruit in these industries.
For the non-market sectors – particularly healthcare and social – governments have a powerful reform lever in the form of funding. In the absence of market mechanisms to drive productivity gains, such incentives need to instead come from funding arrangements. Both the federal and state governments have a role to play in mainstreaming productivity as an objective in the industries they shape.
Of course, increasing productivity is everyone’s business. No industry can afford to let productivity languish in a world facing increasing technological disruption. But targeted efforts to ‘lift from the base’ could go a long way to ensuring 2025-26 isn’t another lost year for Australia’s productivity agenda.
* Post-script for curious readers: To measure overall (multifactor) productivity, you have to estimate the contribution of both capital and labour inputs. However, this becomes very difficult for non-market sectors as many capital goods do not have a market price. For example, consider a public school: How do you know the value contribution from the school building, when public school buildings don’t have a price as they are rarely bought or sold? For this reason, the ABS only publishes multifactor estimates for market industries where reliable capital goods price estimates are available. A full, albeit very technical, ABS explainer can be found here.
Jeffrey Wilson is Head of Research and Economics at the Australian Industry Group.
He leads our economics team and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities.
Dr Wilson specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.
