Australia's Productivity Plunge: Should We Be Concerned? Insights from the Reserve Bank

The productivity of Australian workers has experienced a significant decline, raising concerns among experts and prompting the Reserve Bank of Australia (RBA) to closely monitor wage increases that may fuel inflation. The recent drop in productivity has prompted Guardian Australia to delve into the key issues surrounding this concerning trend.

Productivity, as defined by the Productivity Commission, refers to the ability to produce more goods and services with the same amount of inputs, ultimately contributing to an improved material standard of living. However, a recent report from the commission revealed that annual productivity growth in Australia during the decade leading up to 2020 was a mere 1.1%. This sluggish pace means it would take 64 years to double output, compared to the average rate of improvement recorded in the previous six decades, which would have achieved the same outcome in just 39 years.

The decline in productivity is especially notable in sectors such as agriculture, mining, and manufacturing, which are more susceptible to automation. These sectors are experiencing a diminishing share of Australia's economy, while the service sector, known for its difficulty in achieving productivity gains, continues to expand.

The RBA governor, Philip Lowe, has recently emphasized the issue of subdued productivity growth. In fact, during the RBA's latest interest rate hike, Lowe cited the sluggish productivity growth and rising unit labor costs as factors that could impede the desired pace of inflation reduction. Furthermore, recent national accounts figures from the Australian Bureau of Statistics revealed a sharp decline of 4.6% in productivity, as measured by GDP per hour worked, from the previous year.

The exact causes of this productivity downturn remain unclear, as Lowe himself stated that they are not well understood. The pandemic may have exacerbated the situation, as many firms focused on survival rather than growth, supply chains were disrupted, labor shortages occurred, and investment was delayed. Additionally, the shift to remote work may have impacted productivity levels, with anecdotal evidence suggesting that some individuals are less efficient while working from home.

While interpreting productivity data can be challenging, given the need to account for technical change, scale, and cyclical effects, it is crucial to analyze the market sector and industry trends cautiously. Baseline effects and statistical anomalies can amplify the size of recent movements, making accurate interpretations difficult.

Although the decline in productivity raises concerns, there are factors that may mitigate the potential negative impact. The drop in the jobless rate to record lows in recent years allowed employers to hire individuals who previously struggled to find work. As the jobless rate starts to rise again, less productive workers may be let go, potentially improving the average output of remaining staff.

Employer groups may highlight the lack of productivity gains to resist wage increases. However, the impact on workers' wages and the distribution of productivity gains are also critical considerations. While wage growth without corresponding productivity improvements may delay the path to lower interest rates, inflation and housing price surges are among the other concerns highlighted by the RBA.

The decline in productivity is a significant challenge that Australia faces. It requires careful analysis, collaboration between policymakers and industry stakeholders, and targeted efforts to boost productivity in key sectors. By addressing this issue, Australia can enhance its economic resilience and improve its material standard of living over the long term.