Context

Productivity measures how efficiently inputs (such as capital and labour) are used to produce outputs (goods and services). Productivity growth occurs when an economy produces more output with the same input, maintains output levels using fewer inputs, or a combination of both.

Labour productivity has accounted for over 70% of Australia’s per capita economic growth over the past 40 years. Australia’s strong productivity performance in the late 20th century was driven by major economic reforms.

The Productivity Commission (PC) proposed comprehensive reform agendas in its 2017 and 2023 reviews. Successive governments have not made formal responses to the specific review recommendations. The PC is working on 5 ‘productivity pillar’ inquiries, with reports due to be delivered to the Government in late 2025.

The main driver of economic growth

Increasing population, workforce participation and productivity drive economic growth. In Australia, productivity has historically been the main driver and key determinant of rising per capita incomes and living standards. This is achieved through:

• cheaper goods and services
• improved quality of goods and services
• new goods and services which provide a benefit

According to the Treasury’s Intergenerational Report 2023 (2023 IGR), over the past 40 years labour productivity per hour worked accounted for over 70% of the real GDP growth per person  (Figure 1 below). However, average productivity growth over the decade to 2020 was the slowest in 60 years (2023 IGR, p. 81). Other advanced economies have also experienced falling productivity growth, with the 2023 IGR suggesting there are shared causal factors such as:

• reduced competition
• slow uptake of technology adoption
• growing service sectors and
• low human capital accumulation.

Figure 1             Drivers of real GDP per person growth past 40 years to 2023

Source: Treasury, Intergenerational report 2023: Australia’s future to 2063, p. 25.

How is productivity measured?

Box 1 below outlines some key productivity measurement concepts.

According to annual ‘market sector’ LP and MFP changes since 1995–96 (Figure 2), labour productivity grew 1.1% and MFP rose 0.1% in 2023–24.

Figure 2             Market sector, productivity growth – hours worked basis 

Source: ABS, Estimates of Industry Multifactor Productivity, 2023–24, released 22 January 2025.

While productivity measures would ideally cover all economic activities, they currently incorporate only three‑quarters of the economy. Sectors with measurement limitations comprise the ‘non‑market’ sectors and ownership of dwellings.

‘Non‑market’ sectors provide government-funded outputs to consumers free of charge or at non‑market prices. Examples include Public Administration and Safety, Education and Training, and Health Care and Social Assistance. Without meaningful price signals, measuring MFP is very difficult and so the Australian Bureau of Statistics (ABS) does not produce MFP data for these sectors. Ownership of dwellings is also excluded because no employment is associated with it.

Importantly, cyclical factors can cause large year‑to‑year productivity changes. For example, in economic downturns firms tend to retain skilled labour they will still need in the future. Such labour (and related capital) may only be partially utilised, reducing annual productivity. Accordingly, changes in productivity growth are best observed over longer ‘growth cycles’ rather than through annual movements.

Productivity growth in Australia has slowed

Since reaching 3% in the growth cycles spanning the late 1980s to early 2000s, Australia’s aggregate LP growth has consistently been below 2% and was just 1.1% in the latest cycle (Figure 3). While capital deepening has continued to grow at a reasonable rate, MFP growth is now lower, and in 2003–04 to 2009–10 actually went backwards.

Figure 3             Market sector labour productivity decomposition – average growth per cycle

Source: ABS, Estimates of Industry Multifactor Productivity, 2023–24, released 22 January 2025.

According to the PC, some of the weakness during this time is explained by the mining boom, which led to lower measured productivity growth in 2 ways:

• Substantial infrastructure (and therefore a lengthy construction period) was required before materials were mined. The multiple-year lag meant that capital and labour were being used without immediately generating materials that could be sold, lowering measured productivity.
• High commodity prices meant it become profitable to mine poorer quality reserves, that required more capital and labour for a given amount of mined material.

For the more recent growth cycles, the 2023 IGR has similarly cited declining competition, economic dynamism and regulatory reform as structural causes for the productivity growth slowdown.

The COVID-19 pandemic was also significant, leading to Government policy responses including:

• the JobKeeper scheme (which maintained employees’ attachment to their jobs) and
• changes to insolvency laws (which assisted temporarily illiquid businesses to stay afloat).

While such policies protected jobs and businesses, as the economy recovered these measures impeded potentially more productive workforce changes. Consequently, through prioritising job security and business continuity, government policy responses may have reduced potential productivity growth.

How can Australia improve its labour productivity?

What has helped previously

The superior productivity performance from the late 1980s through to the early 2000s is widely attributed to successive governments’ microeconomic and macroeconomic reforms prior to and during this period. These reforms included:

• movement towards medium‑term monetary and fiscal policy frameworks (targeting inflation and a balanced budget over the economic cycle)
• floating the exchange rate, liberalising capital markets and removing interest rate controls
• reduced industry assistance measures and tariffs
• taxation reform
• privatising government business enterprises
• moving from centralised wage determination to enterprise bargaining
• establishing the National Competition Policy.

These reforms opened the economy to foreign competition, increased capital flows, improved the efficiency and flexibility of domestic markets and delivered greater macroeconomic stability.

Looking to the future

More recently, the Productivity Commission has released two 5-year Productivity Reviews; the first in 2017 and the second in 2023.

The Productivity Commission’s first review, Shifting the dial, recommended several options for how governments can positively influence labour productivity growth, including:

• making Australia’s health system more outcome-oriented, rather than paying for services
• creating a high quality and adaptive education and training system and ensuring a
  well-functioning labour market
• improving town and city functionality through improved public infrastructure, road funding and investment, planning and land use policies, and access to housing
• improving market efficiency through improved competition and regulatory frameworks
• better intergovernmental relations and public finance management to develop stronger policy development and delivery capabilities.

Although the Australian Government customarily responds to Productivity Commission recommendations, this did not occur for this inquiry.

The Commission’s second 5-year Productivity Inquiry included 71 recommendations, within 5 ‘reform pillars’.

While the Australian Government has not issued a formal response to the specific recommendations, the Treasurer did publish a media release discussing generalities. He then commissioned the Productivity Commission to undertake a series of inquiries into how to boost productivity across the 5 ‘reform pillars’:

• building an adaptable workforce to supply skilled workers for the future economy
• harnessing data, digital technology and diffusion to capture the dividend of new ideas
• creating a more dynamic economy through fostering competition, efficiency and contestability in markets
• lifting productivity in the non-market sector to deliver high quality services at the lowest cost
• securing net-zero at least cost to limit climate change’s impact on productivity.

The terms of reference for the inquiries noted they should ‘identify the highest priority reform areas under each of the five pillars’ and emphasise regulatory reform. The interim reports for these inquiries are expected to be released in July or August 2025.

Improved productivity growth has the starkest impact when looking at the long‑term implications. For example, The 2023 IGR assumed productivity growth of 1.2%; however, just a 0.3% increase to this would create a projected 9.5% lift to GDP in 2062–63 (p. 23).

Conclusion

The Productivity Commission is currently working on further inquiries to assist with productivity, including workforce adaptability, digital innovation, market dynamism, non-market sector efficiency, and cost-effective climate transition. The government’s response to these recommendations will be critical to reversing the productivity slowdown.

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