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Grappling with the productivity slowdown

By Ssolbergj [ GFDL or CC-BY-SA-3.0] via Wikimedia Commons

The Productivity Commission (PC) recently released its latest Productivity Update, which provides a detailed analysis of Australia’s productivity performance in 2013‑14. The good news is that labour productivity and multifactor productivity (MFP) both increased in 2013‑14. However, as the PC’s Chairman Peter Harris warns Australia’s current productivity growth remains well below what is needed to ensure living standards will continue to increase as quickly as they have in the past. This comes at a time when a number of factors are weighing on Australia’s growth prospects including an ageing population and structural adjustment as the mining investment boom recedes. However, among the world’s economies, Australia has not been alone in facing a productivity slowdown in recent years.

The slowdown in productivity growth over the last decade has been a global phenomenon and pre-dates the global financial crisis (GFC). Earlier this year The Conference Board, which compiles and analyses international productivity data, released its Productivity Brief 2015. It found global labour productivity increased by 2.1 per cent in 2014 and shows no sign of strengthening back to a pre-crisis average of 2.6 per cent per annum (1999 to 2006). The results for total factor productivity (a synonym for MFP) were equally worrying:

‘An alarming result from this year’s estimates in The Conference Board Total Economy Database is that the growth rate of total factor productivity (TFP), which measures the productivity of labour and capital together, continues to hover around zero for the third year in a row, compared to an average rate of more than 1 per cent from 1999‑2006 and 0.5 per cent from 2007‑2012. The challenge on TFP growth is very widespread across the globe. Most mature economies including the United States, the Euro Area and Japan show near zero or even negative TFP growth. In China, TFP growth has turned negative, and in India it is just above zero, at 0.2 per cent. Both in Brazil and Mexico TFP growth continues to be negative, respectively at -2.3 and -1.7 per cent.’

There is no definitive explanation for the global productivity slowdown. Last year the Banque De France published an historical analysis of the productivity trends of 13 advanced economies including Australia from 1890 to 2012. The analysis reveals there have been general productivity breaks that affect all countries at specific moments (e.g. those caused by world wars, global supply shocks and global financial crises) and country specific productivity breaks reflecting both idiosyncratic shocks (e.g. the implementation of structural reforms) and technological ones (e.g. some countries being ahead of the pack in exploiting the productivity payoff from new technologies).

Possible explanations of a general nature include a slowdown in innovation (in particular a tailing off of the gains associated with the ICT revolution); measurement related problems (including the difficulty of measuring productivity in service industries); the effects of the GFC (including on growth in the capital stock and the ability of the financial sector to allocate finance to its most efficient use); weaknesses in relation to education and training and management; and a more general loss of market dynamism (reflected in institutional and regulatory impediments to innovation and rent-seeking behaviour).

Differences among the advanced economies in terms of the severity of the productivity slowdown and the sectors most affected, suggest country-specific factors are also at play (Carmody ). In a world in which history matters, countries face their own particular constraints. The range of possible country-specific factors include: the macroeconomic environment; the extent to which a country’s institutions and regulatory environment support or impede innovation; the quality of a country’s past investment decisions; and whether it has the social capability needed to make the most of new knowledge and technologies.

In Australia’s case the range of possible explanations for the productivity slowdown has included perverse productivity trends in particular sectors (most notably mining; electricity, gas, water and waste services; and agriculture); productivity-stifling regulation and legislation; a sense of complacency about the need for further reform; and skill shortages and infrastructure bottlenecks (Eslake and Walsh).

At least some of these explanations suggest the slowdown in Australia’s productivity growth may in part be temporary. More worrying is the possibility of systemic problems such as the dynamics of innovation in Australia. In its 2014 Australian Innovation System Report the Department of Industry observed:

‘Despite generally positive business conditions for innovation and evidence of the benefits of innovation to business performance, the report shows that Australian exporters are, on average, not high performers of innovation by OECD standards. Our large businesses account for around 66% of investment in research and development (R&D), 44% of industry value-added and around 95% of exports. However, Australian large businesses rank 21st out of 32 OECD countries on the proportion of businesses innovating, and are well below other less developed resource-exporting countries like Brazil and South Africa.’

In terms of public policy the PC has provided a useful framework for thinking about the ways governments can influence productivity. This emphasises the importance of incentives (the external pressures and disciplines on firms to perform well); capabilities (including the human resources and knowledge systems, institutions and infrastructure needed to underpin successful innovation) and flexibility (ensuring firms have the scope to make productivity enhancing changes).

Tags: Productivity
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