Australia s productivity performance Seminar Presentation to Australian Treasury Canberra, 22 nd September 2010 Saul Eslake Grattan Institute
Australia s productivity growth has slowed over the last five years, after 15 years of above average growth Labour productivity Multi-factor productivity 4.0 % growth p.a. (5 year rolling av. year end) 2.5 % growth p.a. (5 year rolling av. year end) 3.5 2.0 3.0 1.5 2.5 1.0 2.0 1.5 0.5 1.0 0.0 0.5-0.5 0.0-1.0-0.5 1988-89 1993-94 1998-99 2003-04 2008-09 -1.5 1988-89 1993-94 1998-99 2003-04 2008-09 Source: Australian Bureau of Statistics. Av. 1973-74 to 2008-09 2
Productivity growth has slowed in most OECD countries, but the slowdown has been more marked in Australia 3.0 % pa (5 year rolling average) Labour productivity 2.5 2.0 1.5 Australia Av. 1973-74 to 2008-09 OECD (30 countries) 1.0 0.5 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: OECD 3
Relative to the US, Australian labour productivity is back to where it was in 1990 Australian labour productivity as a percentage of the US 96 % 94 92 90 Australian GDP per hour worked as a p.c. of US 88 86 84 82 80 85 90 95 00 05 10 Sources: The Conference Board Total Economy Database 2010; Grattan Institute. 4
Real GDP growth has become increasingly reliant on population growth and rising workforce participation av. % growth p.a. over cycle Sources of real GDP growth (1988-89 to 2008-09) 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 Sources: ABS, Grattan Institute. P 5
while real income growth has become increasingly dependent on favourable shifts in the terms of trade av. % growth p.a. over cycle Sources of real GDI growth (1988-89 to 2008-09) 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 Note: Real GDI (gross domestic income) is real GDP adjusted for changes in the terms of trade (the ratio of export to import prices). Labour supply is total hours worked (ie population x participation rate x (1 unemployment rate) x average hours worked). Sources: ABS, Grattan Institute. P 6
Labour productivity growth has in turn become wholly dependent on capital deepening 3.5 3.0 2.5 av. % growth p.a. over cycle Components of labour productivity growth Capital deepening 2.0 1.5 1.0 Multi-factor productivity 0.5 0.0-0.5-1.0 1981-82 to 1984-85 1984-85 to 1988-89 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 Sources: Australian Bureau of Statistics; Grattan Institute. 7
In the mining sector, substantial increases in factor inputs are yet to be reflected in commensurate output gains Mining sector factor inputs and outputs Mining sector productivity 140 Index 2007-08 = 100 160 Index 2007-08 = 100 120 150 100 Output 140 130 Multi-factor Labour 80 120 60 Labour 110 100 40 20 Capital 90 80 70 0 1988-89 1993-94 1998-99 2003-04 2008-09 60 1988-89 1993-94 1998-99 2003-04 2008-09 Note: inputs are hours worked and capital services; output is chain-volume gross value added. Source: Australian Bureau of Statistics. 8
and for different reasons much the same has occurred in the utilities sector Utilities sector factor inputs and outputs Utilities sector productivity 120 Index 2007-08 = 100 150 Index 2007-08 = 100 110 Output 140 130 Labour 100 120 Multi-factor 90 110 80 Capital 100 70 Labour 90 80 60 70 50 1988-89 1993-94 1998-99 2003-04 2008-09 60 1988-89 1993-94 1998-99 2003-04 2008-09 Note: utilities sector is electricity, gas, water and waste services. Source: Australian Bureau of Statistics. 9
Slow growth in public sector productivity partly reflects difficulty in measuring output Inputs and outputs Productivity 300 Index 1989-90 = 100 220 Index 1989-90 = 100 200 250 180 200 160 140 150 Output 120 Labour 100 Hours 100 80 50 1988-89 1993-94 1998-99 2003-04 2008-09 60 1988-89 1993-94 1998-99 2003-04 2008-09 In many parts of the public sector, perceptions of service quality are inversely related to conventional measures of labour productivity Source: Australian Bureau of Statistics. 10
ABS national accounts & hours worked data can be used to construct additive measures of labour productivity Estimates of the dollar value of output per hour worked, 2008-09 Electricity gas & water Rental, hiring & real estate Information, media & telecoms Wholesale trade All industries Manufacturing Admin & support services Transport, postal & warehousing services Public adminstration & safety Professional, scientific & technical services Construction Agriculture, forestry & fishing Health care & social assistance Education & training Art & recreation services Retail trade Accommodation and food services Finance & insurance $ per hour Mining 0 50 100 150 200 250 Note: Aggregate hours worked for each sector derived by grossing up estimates of average hours worked in the survey week for the middle month of each quarter in 2008-09. Output is gross value added. Sources: Australian Bureau of Statistics; Grattan Institute. 11
These estimates produce quite similar estimates of aggregate productivity growth to those compiled by ABS Estimates of market sector labour productivity compared 105 Index (2007-08=100) 100 95 90 $-value productivity measure converted to index ABS index measure 85 80 75 70 65 1988-89 1993-94 1998-99 2003-04 2008-09 Grattan is GVA (val. add.) per hour worked (weighted by industry excl. taxes & dwellings ). ABS from Cat. 5260.0. Differences stem from excluding dwellings and internal ABS revision of selected industry hours worked data. Sources: Australian Bureau of Statistics and Grattan 12
It s also possible to construct estimates of MFP for most industries Productivity Levels of Australian Industries % market sector av. 2008-09 375% Note: MFP industry levels = GVA per hour of labour and capital, where capital hours equals hours worked times the capital and labour income shares ratio (implicitly assumes equivalence of an hour worked in each industry). This data is not available for some industries. Sources: Australian Bureau of Statistics and Grattan 13
Labour productivity growth has slowed significantly even after excluding mining, utilities and non-market sectors 3.5% % growth p.a. (5 year rolling av. year ending) Labour productivity 3.0% Market excl. utilities & mining 2.5% 2.0% 1.5% Market Total economy* 1.0% 0.5% 0.0% -0.5% 1990-91 1993-94 1996-97 1999-00 2002-03 2005-06 2008-09 Sources: Australian Bureau of Statistics and Grattan * GDP per hour worked 14
Labour productivity growth has slowed significantly even after excluding mining, utilities and non-market sectors Total economy Market economy 3 av. % p.a 3 av. % p.a 2 2 1 1 0 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 0 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 Market economy (excl. mining & utilities) Services 3 av. % p.a 3 av. % p.a 2 2 1 1 0 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 0 1988-89 to 1993-94 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 Sources: : Australian Bureau of Statistics Av. 1973-74 to 2008-09 15 NB: All charts exclude. taxes & dwellings
Labour productivity gains in the 1990s were largely the result of improvements in sector-specific productivity Contributions of industry-mix and industry-specific productivity performance to labour productivity growth (1988-89 to 1998-99) Contribution of change in industry mix Rental, hiring & real estate Arts & recreation Admin support services Hospitality Public admin. & safety Transport, postal & warehousing Other services Education & training Construction Health care etc. Prof & tech services Agriculture etc. Retailing IT Electricity gas & water Wholesaling Manufacturing Finance & insurance Mining Contribution of change in industry specific productivity Sources: Australian Bureau of Statistics and Grattan Institute calculations.
whereas in the past decade sector-specific productivity slowdowns have offset the impact of structural change Contributions of industry-mix and industry-specific productivity performance to labour productivity growth (1998-99 to 2008-09) Mining Hospitality Contribution of change in industry mix Public admin. & safety Electricity gas & water Education & training Rental, hiring & real estate Arts & recreation Construction Other services IT Agriculture etc. Admin support services Retailing Manufacturing Finance Prof & tech & insurance services Wholesaling Transport etc Health care etc. Sources: Australian Bureau of Statistics and Grattan Institute calculations. Contribution of change in industry specific productivity
The same methodology can also be used to derives estimates of State and Territory labour productivity Labour productivity (gross product per hour worked), 2008-09 80 2007-08 $ per hour 75 70 65 National average 60 55 50 NSW Vic Qld SA WA Tas NT ACT Sources: Australian Bureau of Statistics; Grattan Institute. 18
which in turn explain a large part of the variation in per capita income among the States and Territories 50 40 30 Sources of difference between per State or Territory GSP per capita and the national average, 2008-09 % point contribution to difference in GSP per head from national average 20 10 0-10 -20-30 NSW Vic Qld SA WA Tas NT ACT Employment (as p.c. of population) Average hours worked (per person employed) Labour productivity (gross product per hour worked) Residual Source: ABS State Accounts (5220.0) 2008-09, and Grattan Institute calculations.
and some of the variations in State and Territory economic growth in recent years Contributors to growth in real gross State product, 2003-04 through 2008-09 6.0 % pa 5.0 4.0 3.0 2.0 1.0 0.0-1.0 NSW Vic Qld SA WA Tas NT ACT Australia Population Participation Average hours worked Labour productivity Residual Real gross State product Source: ABS State Accounts (5220.0) 2008-09,
There s a positive association between capital investment and labour productivity across States and Territories Non-residential investment and labour productivity by State and Territory Gross product per hour worked 2008-09 80 75 70 65 60 55 50 $ NSW SA Tas Vic ACT 16 18 20 22 24 26 28 30 Business and public fixed capital expenditure as a p.c. of gross State product 2004-05 through 2008-09 Qld WA NT % Source: ABS State Accounts (5220.0) 2008-09; and Grattan Institute calculations.
and between educational attainment and labour productivity Labour productivity and educational attainment, 2008-09 Gross product per hour worked 2008-09 80 75 70 65 60 55 50 $ Tas SA WA Qld NT Vic NSW 50 55 60 65 70 75 P.c. of persons aged 25-64 with post- or non-school qualifications 2008 ACT % Source: ABS State Accounts (5220.0) 2008-09; Survey of Education and Work (6227.0) May 2009.
Differences in productivity reflect differences in sector composition and in sectoral productivity performance Proportion of total gross value added derived from high productivity industries Proportion of total gross value added derived from industries where productivity exceeds the national average for that industry 50 45 % of total industry gross value added 100 90 % of total industry gross value added 40 35 National average 80 70 30 60 25 50 20 40 15 30 10 20 5 10 0 NSW Vic Qld SA WA Tas NT ACT 0 NSW Vic Qld SA WA Tas NT ACT Sources: ABS State Accounts (5220.0) 2008-09; and The Labour Force, Australia, Detailed, Quarterly (6291.0.55.003); and Grattan Institute calculations. High productivity industries are mining, finance & insurance, electricity gas & water, rental hiring & real estate services, information media & telecommunications services, and wholesale trade.
And there are considerable differences in productivity in the same industries in different States Labour productivity of sectors in which productivity was above the corresponding national average in 2008-09 Labour productivity of sectors in which productivity was below the corresponding national average in 2008-09 170 160 % of corresponding national average 100 % of total industry gross value added 150 95 140 90 130 120 85 110 80 100 90 75 80 NSW Vic Qld SA WA Tas NT ACT 70 NSW Vic Qld SA WA Tas NT ACT Sources: ABS State Accounts (5220.0) 2008-09; and The Labour Force, Australia, Detailed, Quarterly (6291.0.55.003); and Grattan Institute calculations. High productivity industries are mining, finance & insurance, electricity gas & water, rental hiring & real estate services, information media & telecommunications services, and wholesale trade.
Note that the slowdown in productivity growth over the past 5 years has been broadly based across the nation Labour productivity (GSP per hour worked) growth, 1993-94 to 2008-09 4.0 % per annum 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 NSW Vic Qld SA WA Tas NT ACT Australia 1993-94 to 1998-99 1998-99 to 2003-04 2003-04 to 2008-09 Source: ABS State Accounts (5220.0) 2008-09 and Grattan Institute calculations.
What could explain the slowdown in labour productivity growth over the past decade? As the Australian economy moved closer to full employment (prior to the recent slowdown), additional labour and capital inputs are likely to have been increasingly less productive and labour hoarding during the recent downturn probably further detracted from productivity (a reminder, perhaps, that productivity isn t everything ) Capacity constraints shortages of skilled labour, infrastructure bottlenecks etc. resulted in increasing amounts of down time detracting from productivity Generally buoyant corporate profitability may have diminished the importance to management of seeking out productivity improvements according to a survey by Telstra, only 42% of Australian organizations measure productivity, have a target for it and know what it is Dearth of productivity-enhancing micro-economic reforms since around 2000 most of the low hanging fruit have been picked, and the political appetite for reform has faded Instead there s been an increase in regulation directed at, eg national security and corporate governance, which has adversely affected productivity There s been some slowing in the rate of diffusion of productivity-enhancing technologies since the late 1990s and Australia doesn t rank as highly on these measures as it did at that time
What could be done to improve Australia s productivity performance? Re-invigorated commitment to productivity-enhancing reforms some sectors have previously been exempted from such reforms (health insurance, international aviation, agricultural marketing, pharmacies, newspaper distribution) Taxation reform with a view to reducing the extent to which provisions in the tax system distort decision-making Further promotion of education and skills acquisition focussing in particular on engineering and science, skilled trades and on students from lower socio-economic backgrounds, and on young people in neither employment nor training may require significant reform of vocational education system and funding Targeted infrastructure investment need mechanisms to ensure the right infrastructure in the right places with sensible pricing and access Serious effort to improve Australia s innovation effort not simply about R&D spending but about access to risk finance, linkages with research institutions, relevant skills and commercialization Greater awareness of productivity impact of policies pursued with other objectives in mind
Possible productivity-enhancing reforms identified by the Productivity Commission and COAG Gains from various reforms (PC estimated gains, various reforms) Recommendation Impact* Year Competition and regulation reforms COAG NRA), including Regulatory compliance costs Competition in electricity and gas Improved ports, road rail infrastructure Education and training (COAG NRA), including: Transitions from school Literacy and numeracy Adult learning Participation (from above) 2.0% GDP($17bn in 2005-06 $). 1.1% ~2.4% GDP (by 2030), including: 0.45% 0.27% 0.43% 0.69% 2007 2007 Health Services (COAG NRA) 0.4% GDP ($4bn in 2005-06 $) 2007 TCF assistance Current assistance reduction plan $70 million (p.a till 2015 ) 2008 Auto assistance Removing all forms of current assistance 0.2% GDP 2008 Other Taxation reform Improved consumer protection policies Not provided Various Source: Productivity Commission reports. * Modeling of some reforms do not fully capture costs P 28
Australia s innovation rankings are below those on other competitiveness factors Australia s global competitiveness rankings (2010-11) Source: World Economic Forum Global Competitiveness Report Worse than overall ranking Worse than overall ranking P 29
Australian firms have relatively low levels of R&D spending, collaboration & commercialisation Source: OECD, Science, Technology and Industry Outlook 2008, Australia country notes P 30