Australia Sees Slight Increase in Productivity, But Long-Term Growth Remains Elusive
Australia’s productivity returning to 2019 levels is no cause for complacency, according to the Productivity Commission.
The recent increase in Australia’s labor productivity is positive news, but the Productivity Commission remains cautious given the country’s nearly year-long period of low productivity.
According to the Productivity Commission’s Dec. 20 bulletin, labor productivity increased by 0.9 percent in the September quarter, marking the first increase since March 2022.
However, labor productivity was down by 2.1 percent over the 12 months leading up to September 2023.
The increase in productivity has been attributed to a 0.7 percent decline in hours worked, as well as a slight 0.2 percent growth in GDP during the September quarter.
“The amount of hours worked has increased every month since September 2021. Now that growth in hours worked appears to have peaked without an accompanying decline in output, productivity has slightly recovered,” said the Commission’s Deputy Chair Alex Robson.
However, the slight increase only brought productivity back to 2019 levels, reflecting inflation and the end of the “pandemic bubble” as workers returned to “low productivity” sectors such as hospitality following the easing of pandemic measures.
“In the wake of this, we are only now seeing labor productivity approach pre-COVID levels,” Mr. Robson said.
He also stated that the recovery is unlikely to signal the start of a return to healthy long-term productivity growth.
Mr. Robson warned that Australia’s productivity reaching 2019 levels is no excuse for complacency, as that level was reached after a decade of relatively weak productivity growth.
He emphasized that achieving sustainable long-term productivity growth in Australia will require the type of policy reforms highlighted in the Commission’s Advancing Prosperity inquiry report.
Productivity Returns to Pre-Pandemic Levels, But the Economy Has Changed
According to the Productivity Commission, Australia experienced a record high labor force participation rate and low unemployment, bringing previously marginalized workers—such as younger workers and those with lower education levels—into the workforce, thus alleviating pressure on productivity.
“Ultimately, more people in jobs is a positive economic and social outcome. As these new workers gain experience, their impact on aggregate productivity will also improve,” the bulletin states.
Despite less experienced workers entering the labor market, investment increased enough to bring capital-labor ratios back to pre-pandemic levels.
“This rise in investment is welcome, as non-mining investment was weak before the pandemic, leading to a slowdown in capital deepening and even capital shallowing from 2018,” the bulletin states.
However, the Productivity Commission noted that weak productivity growth experienced before the pandemic has persisted as Australia recovers from the pandemic.
RBA’s Prescription for Improving Growth
According to the Reserve Bank of Australia (RBA), Australia’s post-pandemic productivity performance depended on the slowing growth of global trade, the slowing of knowledge spillovers, climate change and natural disasters, the transition to renewables, the impact of COVID-era technologies, and demographic changes.
“Currently, wages growth forecasts are consistent with inflation returning to the Reserve Bank’s target band if productivity growth returns to its pre-pandemic trend,” the RBA said in a September report.
“Recent productivity outcomes have been weaker than this, and continued weakness is a key risk to the economic outlook.”
In March, federal Treasurer Jim Chalmers said that Australians will need to work two extra hours in the future while earning 40 percent less if the country wanted to improve productivity levels.
Productivity is defined as a measure of the rate at which output of goods and services are produced per unit of input, such as labor, capital, and raw materials.
Factors that affect productivity growth include technological improvements, the scale and scope of economies, workforce skills, management practices, capital, competitive pressures, and the stage of the business cycle.
