A recent uptick in Australia’s labour productivity has been welcomed, but the Productivity Commission is still cautious given the country has endured nearly a year of low productivity.
However, labour productivity was still down overall by 2.1 percent through the 12 months to September 2023.
The increase in productivity has been attributed to a 0.7 percent decline in hours worked, along with a slight growth of 0.2 percent 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,” the Commission’s Deputy Chair Alex Robson said.
However, the slight spike has only raised productivity back to 2019 levels, which reflects inflation and the bursting of the “pandemic bubble” as workers returned to “low productivity” sectors such as hospitality amid the easing of pandemic measures.
“In the wake of this, we are only now seeing labour productivity approach pre-COVID levels,” Mr. Robson said.
Mr. Robson said that the recovery is unlikely to reflect the beginning of a return to healthy long-term productivity growth.
“Australia’s productivity returning to 2019 levels is no cause for complacency, as that level came at the end of a decade of relatively weak productivity growth,” he said.
Productivity Returns to Pre-Pandemic Levels, But the Economy Has Changed
According to the Productivity Commission, Australia had a record high labour force participation rate and low unemployment, meaning previously marginal workers—such as younger workers and those with lower levels of education—are now active in the workforce, thereby easing pressure on productivity.“Ultimately, more people in jobs is a positive economic and social outcome. As these new workers gain experience, their effect on aggregate productivity will also improve,” the bulletin states.
Yet despite less experienced workers having entered the labour market, investment increased sufficiently to return capital-labour ratios 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.
“This slowdown weakened labour productivity which was mostly stagnant between 2015 and 2019.
“Encouragingly, the increase in investment since 2021 is not driven entirely by mining investment, as was often the case before the pandemic, with agriculture, manufacturing, electricity services and other services all experiencing an increase in investment.”
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 labour, capital, and raw materials.
Factors that affect productivity growth include technological improvements, scale and scope of economies, workforce skills, management practices, capital, competitive pressures, and the stage of the business cycle.
