Jul 14, 2014

The statistical struggle to get productivity right

The ABS is moving to revise how we understand productivity in one crucial industry, illustrating how complex this important debate really is, Glenn Dyer and Bernard Keane write.

Productivity has emerged as probably the totemic issue of the Australian economy in recent years. Many in business, academia, politics and the media believe that the country has fallen behind competitors, that our workers are high cost and unproductive and that our industrial relations laws prevent business from fixing that. We need to fix productivity, they say, or our recent rise in living standards will come to a halt.

Some of us have taken issue with some or all of these arguments, arguing that productivity has been better than believed, or that our performance in the 1990s and 2000s was poorer than we thought, or that the reasons for poor productivity growth are one-offs, such as the huge mining investment boom, and that it will recover as mining production ramps up as a consequence of new investment. Moreover, one area of productivity has been improving. The national accounts for the March quarter showed that productivity (GDP per hour worked) rose 2.1% in the 12 months to March, and gross value added (another measure) was up a solid 2.4%. Both were much stronger than the figures for the 2013 calendar year of 1.7% and 1.8% respectively. A policymaker who has previously argued for the importance of productivity growth, Reserve Bank governor Glenn Stevens, acknowledged the recent rebound in his big speech in Hobart at the start of this month.

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3 thoughts on “The statistical struggle to get productivity right

  1. David Hand

    Labour productivity and multifactor productivity are two quite different things – especially from a social policy point of view. Increasing labour productivity generates the opportunity for real wages to rise as output per hour goes up. We may use capital to do it, such as technology so MFP may not improve but people are still likely to be better off.

    We may also blow an enormous lump of capital on completely useless projects such as the NBN (from financial point of view) but labour productivity should go up markedly as the impact of broadband has an effect.

    Driving up labour productivity is a good thing. It is the key to Australia’s future prosperity.

  2. Jimmyhaz

    “Wage rises would not add to inflationary pressures”

    The belief that wage increases cause inflation is honestly my biggest pet peeve with the current economic mainstream. Increasing wages will never place inflationary pressure upon the system, as no new money is entering it.
    What it does do of course, is eat into corporate profits, hence the sustained vocal opposition to wage growth.

  3. David Hand

    Not quite right Jimmy.
    You are technically correct that most people accept that a change in the consumer price index is the same as inflation when it is not.

    But as wages rise, driving up business costs which then drive up prices, it has a positive impact on demand for a while. To cope with this, companies seek more credit which is genuinely inflation as the money supply increases.

    Wage growth is best achieved through improved productivity. More revenue per hour worked releases more money for wage rises. If the same revenue per hour worked comes with increased wage costs, the risk is that businesses become less competitive. Then there is competition from other businesses and if there are overseas competitors, there is a call for tariffs, another favoured tool of the union movement.

    Before you know it we are back in 1982 and believe me, we don’t want to experience that again.

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