Australia’s productivity predicament

Every five years the Productivity Commission releases an inquiry into Australia’s productivity, with their latest five-year report released just last week. In it, they outline the case for advancing prosperity through building an adaptable workforce and creating a more dynamic economy.

But Australia is facing a number of productivity challenges in an uncertain world, which may hamper our economic growth in the years to come.

Listen to host Kat Clay, in conversation with Grattan’s CEO, Danielle Wood, on why productivity matters.

Read the report

Transcript

Kat Clay: Every five years, the Productivity Commission releases an inquiry into Australia’s productivity. With their latest 5 year report released just last week. In it, they outline the case for advancing prosperity through building an adaptable workforce and creating a more dynamic economy, just to name a few.

But Australia is facing a number of productivity challenges in the face of an uncertain world, which may hamper our economic growth in the years to come. While we won’t make you read all nine volumes, Grattan CEO, Danielle Wood joins us to discuss why productivity matters and what to make of the report.

I’m Kat Clay and welcome to the Grattan podcast. Dani, I found one of the phrases in this report intriguing. Australia has a productivity predicament. What’s the problem?

Danielle Wood: Yeah. Love a little bit of alliteration there, Kat. really the predicament that the productivity commission is talking about is the fact that we’ve seen a slowing of productivity growth across the Australian economy.

In the last decade, it’s actually been the slowest that it has been 60 years. So if we think of that decade kind of sandwiched really between the GFC and COVID, productivity growth was about 1. 1 percent a year that compares to an average of about 1. 8 percent a year on average over, over the prior 60 years.

So that’s quite big and it really matters for, for living standards. So we should think of that as mattering for the amount of goods and services that we are able to consume. it matters for our capacity to reduce our working hours. and there’s various ways that the PC tries to illustrate it. One way is kind of forward looking, which says productivity growth now is projected to be about 1. 2 percent over coming decades down from what we used to be the, the expectation that would run at 1. 5%. The difference between those two, once you get out to 2060 is that our incomes will be 40 percent lower than they would have been if it stayed at 1. 5 percent and our working week would be 5 percent longer.

So it gives you a sense of why that matters. And to really bring it home, I mean, the way I think about it, if we go back to that decade again, that decade between the GFC and COVID, we saw really sluggish wages growth, people will remember, not just because of productivity growth, but it was an important factor.

And we saw that that particularly impacted people at the fringes. of the labor market. That was a period in which incomes for young people actually went backwards. So if you took an average 25 to 34 year old in 2018, they earned less than an average 25 to 34 year old in 2008. So we had that sort of expectation of generation on generation progress turned on its head.

So that is why this matters. Ultimately, it’s about our living standards, our capacity to grow our incomes, grow our consumption, and hopefully reduce our working hours over time.

Kat Clay: The report makes the point that Australia is not alone in that productivity is slowing around the developed world. What’s going on here?

Danielle Wood: But that’s a really important point, Kat. You know, this isn’t just an Australian phenomenon, you know, really that decade post the GFC, we saw a slower growth across much of the industrialized world. What’s going on, I think, is there’s a set of factors that explain that slower productivity growth that are common across nations.

so a critical one is technology, you know, that is innovation and technological adoption is the most important driver of productivity growth over time. And the recent wave of technological change just hasn’t unleashed growth in the same way that the previous ones have. so one school of thought is that, you know, maybe this time, you know, internet digital age is just less transformative than previous waves.

You know, things like railroads and, and indoor plumbing that just massively transformed the way we live and work. Another view is it just, you know, it just takes us a while to work out how to harness new technologies. and the potential of, of digital technologies, things like AI are advancing incredibly quickly.

So it, it may be that we are actually about to unleash the next wave of economic growth. We need to make sure that we. Have the enablers set up to encourage this diffusion for us to get the most out of it. So I was really delighted to see this report focus on technology and in particular, the uptake of digital technology.

As a crucial driver of productivity growth going forward. The second thing that we have in common with other advanced nations, which has been dragging on our growth is the shift in economic activity towards the services sector. Australia has followed the same trajectory as all countries do as they get richer.

We see jobs and economic activity moving away from sectors like agriculture and manufacturing towards services. That reflects both the fact that technological change has driven people out of agriculture and manufacturing, you’ve replaced labor with capital. We’ve seen globalization, which has also shifted activity in those sectors to other nations, and we see a shift in consumption patterns.

As people get richer, they tend to spend a shrinking share of their wallet. On goods, stuff you can drop on your foot as economists will often define it and a rising share on services. Those factors have led to a world where, where services are now 80 percent of our economy by value, 90 percent of total jobs in Australia in the services sector, that feeds through into weaker productivity growth.

Because on average, productivity growth tends to be lower in services than it is in, in goods. So in, in things like manufacturing and agriculture, you know, I’m really glad the report acknowledges that this isn’t something government should attempt to do just to try and get productivity numbers up again.

you know, that reflects our preferences. But what we should do is think about opportunities to boost productivity in the services sector. And you know, technology creates those opportunities in, in a number of areas. However, there are some areas like caring services where that’s probably just not going to be possible.

You know, labor really is the product in those service areas. So unless we’re happy with robots caring for our elderly or our children. you know, those are sectors where they’re just isn’t going to be the same scope for productivity gains through replacing labor with capital. Australians value these services.

in fact, increasingly, we want more of them as we get better off as a nation. So the way I think about that really is we need to invest some of the dividend from growth. Elsewhere in the economy into delivering these services. so that’s really something the Productivity Commission talks about as one of the headwinds to productivity growth.

The other headwinds that I think are just worth touching on are, combating climate change and the costs of doing so. and indeed, actually, I would argue the impacts of climate change through things like extreme weather events and impacts on agricultural productivity will be a drag going forward.

The other one is geopolitical tensions. So in a more fractious world, we are seeing a push towards de globalization, reinsertion of trade barriers, a push to try and pull apart, globally integrated supply chains. So we’re hearing a lot of talk about on shoring and friend shoring. Those things would, would all be very economically costly.

And, and if we proceed further down that route. that will very much create a drag on the Australian economy.

Kat Clay: And we’ll talk a little bit about climate change later on in the podcast, but first I want to ask, what can governments do that could make a difference to this productivity predicament?

Danielle Wood: I’m glad you asked it like that, Kat.

you know, it is worth reminding people, I think that there’s a lot outside of government’s control. So I think sometimes if you just kind of picked up and read the media discussion on productivity, you might get the impression, you know, like if the government would just do tax reform, we’re going to return to the productivity levels of the 1990s.

That’s just not how it works. There are big structural forces at play and we’ve just touched on some of those. And there’s also groups outside of, of governments. And I just want to get this point in because, you know, the other critically important group of business, and PC makes the report when we’re, when we’re talking about some of those productivity enhancing technological changes, things like adoption of data analytics, AI, we’re actually lagging most of the industrialized world.

and one contributor to that is poor management performance. We sit behind the best practice frontier, particularly when it comes to tech. Australian managers are just less confident in identifying the technologies that would make a difference to their business processes, and much less confident in their capability to roll out major digital transformation.

So that in itself is a handbrake on productivity growth. All of that said, there is very clearly an important role for government here and governments should absolutely be doing what they can. The PC review set out kind of five, what they call priority areas, which I think are the right ones. So they talk about, you know, adaptable workforce through building skills in the economy, harnessing data and digital technology and the diffusion of those technologies, which we’ve just touched on.

more broadly creating more dynamism in the economy, supporting competition and efficiency and, and removing unnecessary barriers to the movement of goods and services. They talk about, opportunities to lift productivity in the non market sector, areas like health and education, and, and climate and the kind of the least cost path to net zero.

So that’s at a very high level. To go more granular, they’ve got 29 high level reform directions. 71 specific recommendations. so I don’t propose going through all of those, Kat. I’m sure everyone will be very relieved to hear. I do want to touch on a few, but, you know, the fact, I think in itself that this is a very long list is a useful reminder here, actually, that, Gains are made in inches.

You know, there is not a single thing governments can do that will be transformative here. It is, it is making progress on a range of different fronts, which is, it was going to make the best difference in the long term.

Kat Clay: You know, there’s just a few recommendations here, but there are some of the recommendations that actually, we’ve done significant research in, especially in migration and education.

Do you mind just chatting us through, those recommendations right now?

Danielle Wood: Absolutely. you know, I was really delighted to see those. held up as important areas. so migration, you know, is an area where we’ve been working at Grattan for a couple of years now. Frankly, you don’t get much low hanging fruit in the policy world, but I think making our skilled migration system work better, really is an example of low hanging fruit.

and there we saw Productivity Commissioners picked up a number of key recommendations. really it’s about overall trying to build a program that focuses on building Australia’s human capital, our skills and potential, over time. So things like abolishing visas that are not doing a good job at picking high skilled migrants that add the most value to the Australian economy.

So they’ve recommended, getting rid of the business investment visa. Essentially, it’s become a way to buy a visa and it’s not, Bringing in the, the high school workers we really need, that’s consistent, with something that Granton has been saying for a while now, they recommend wage thresholds for employer sponsored visas.

Essentially, that means getting rid of skill shortages lists. They are, cumbersome, slow moving bureaucratic documents that they have become increasingly politicized. And using instead a simple threshold, you know, will the person be paid more than the, this amount that allows us actually to better select migrants are going to most add value to the Australian economy and strips out red tape and allows faster processing times, greater certainty for, for businesses and greater certainty for, for potential visa applicants, which is really important when we’re trying to, you know, we’re in global competition for these highly skilled workers.

So that was, you know, one area that I was really delighted to see that the PC focus and there’s a number of other recommendations on migration as well. You mentioned education, clearly critical for long run productivity. We absolutely need to be bolstering both our school system and our post school education system.

I know you’ve had discussion in the past on this podcast, Kat, about. Some of the really concerning results we’ve seen in declining literacy and numeracy results in Australian schools. There are things we can do to turn that around. I’m really delighted to see the PC pick up some of what I think are the very practical recommendations we’ve made around these things.

Creating. teacher career paths to help attract and retain high achievers in teaching, and then using high performing teachers in the professional development of other teachers. Use of high quality, evidence based curriculum resources endorsed by governments. Grattan’s recent work, as you know, showed only 15 percent of teachers have access to those types of materials at the moment.

and that puts us in the crazy world where, where teachers are reinventing the wheel on Instagram at 11 o’clock at night before they have to deliver a lesson the next day. You know, not a great use of teachers time and expertise, and we end up with very variable quality lesson plans for, for students.

So, again, there are a number of different fronts we need to move, but we can make a real difference. Also on education, I’ll just do a little plug in the higher education system, a support for a return to the demand driven system of Commonwealth supported places, something that our, former higher education program director, Andrew Norton has, has advocated for given the, the benefits, that higher education provides, to students in terms of their future opportunities.

There’s also, a lot of recommendations you won’t be surprised to hear on vocational education training, things around lifelong learning, all about. boosting the skills potential of the Australian population.

Kat Clay: Now, I hadn’t known much about productivity before reading this report, but the report also suggests improvements to the non market sector, which I learned that these are the free or below cost services such as healthcare and government funded services.

Where do you see the key opportunities for productivity growth here?

Danielle Wood: Look, this is really, you know, I think we should think about it as the frontier of boosting productivity. and what it means essentially is, you know, how do we boost the productivity of the way we deliver those services in areas like education and health?

This is a high degree of difficulty. I think it’s worth noting, you know, these are complex. systems, but you actually get a double kicker in terms of productivity. so these things are a big share of the economy themselves. so if you start delivering education and health more efficiently, you boost productivity.

The other way is, you know, if you’re able to improve education outcomes, as we just talked about. if you can improve people’s health, that in itself makes them more productive and delivers a longer term dividend. Health is another area, frankly, where there is, you know, huge scope to do things better.

One great example is primary care reform. You know, we have a system that was designed four decades ago. It just has not kept pace. With shifting disease burden, the big rise in chronic conditions, that means we just have so many people slipping through the gaps and ending up in hospital, where it’s just far more costly to treat them, and obviously much less desirable from the patient perspective as well.

So again, you know, I think Peter Brayton and Grattan’s health team has done some fantastic work about what this might look like. and we did see the PC pick up a number of these themes, for example, greater use of team based care. Drawing in, professionals like nurses and physios and pharmacists, working under the leadership of the GPs, taking pressure off the GPs and having them concentrate on the things that only they can do.

Changes in funding models to support care for chronic conditions, rather than simply kind of paying per visit. Giving funding models that provide incentives for, for health providers to manage those patients conditions. And hopefully we end up with less patients, being, being treated in our, in our costly hospital system.

So, you know, those are the kind of things you can do in health that make a difference to both the efficiency of how we provide the services and the outcomes for, for Australian people. so as I said, you know, this is a really important frontier when we’re talking about productivity.

Kat Clay: We mentioned climate change at the start of the podcast, and it’s often these natural disasters are things out of our control.

But one of the things we’ve talked with our energy team previously about is that the longer we take to act to meet net zero emissions goals, the more expensive it will be. And it seems to be reflected here in the PC report that achieving net zero emissions will affect productivity, at least in the near future.

Danielle Wood: Yeah, that’s right. And I think, you know, really, the message of the report is We need to do this, but we need to be doing it in the lowest possible cost way, and, you know, frankly, I think that’s pretty hard to disagree with. Many of us, including our friends at the PC, clearly feel frustrated that carbon price was taken off the table as an option.

We are in a second best world. And the PC really says, you know, we should be looking for mechanisms to support market signals to help emissions reduction. So they recommend an expansion of the safeguard mechanism to areas like electricity and transport. There are some complications in using that mechanism, and, you know, perhaps we can get the the energy and climate team to do a podcast on this. But certainly I would, would agree with the broad message that getting market prices in there is critically important. And at the very least, you know, we should be thinking about the, the cost effectiveness of different interventions we put forward.

There is a really interesting table in the report, where they compare the cost per volume of CO2. Reduced from different interventions, notably the exemption of EVs from fringe benefit tax with an extraordinarily high cost. I think it was something like a 1000 to 20, 000 per ton reduction. So we should have much less of those types of high cost interventions.

much more serious move to, to, to reduce emissions using broader market signals. So I think it was a really important intervention from the PC. you know, it was noted that in the last time they did this review, they didn’t really say much about climate change. but it will be, it will be critical actually for our economic success over the next decade to do this right.

Kat Clay: So we’ve talked through a lot of the recommendations report, but I’d like to know what you think government should be prioritizing to improve productivity for the next five years.

Danielle Wood: Well, if they’re not going to do all 79, and you know, the good news is I think actually you can run on, on a lot of these things at once.

so it’s, it’s not a matter of choosing one, but look, I would. Pick the low hanging fruit, always, and that, that is migration reform. I think that process is already underway. There’s a migration review task force. And I hopefully we see some, some of the very sensible recommendations picked up. I would try and start pushing into the areas that have potentially big payoffs.

Things like some of the school education and health changes that, that we’ve been talking about. And again, I think there’s some evidence that the government’s shown appetite to pick up some of those things. I would be looking to the states to start moving on some of the ones that are harder for them.

Really delighted to see planning and zoning reforms picked out by the Productivity Commission, really important levers for, for boosting productivity, better use of infrastructure through things like congestion pricing. That’s something that, that, that Grattan’s Marion Terrill has, has done some work on what that might look like.

So I think, you know, getting the states on board to progress some of those things that are hard, but big should also be a priority. And finally, climate has to be on any list of priorities. As you said before, Kat, the longer we wait, the more expensive it gets, but we need to be focusing on the least cost ways to drive serious emissions reductions over the next decade.

Kat Clay: Thank you so much, Dani. It’s always great to have your insights, especially on productivity on the podcast. If you’d like to read more about any of the topics we’ve talked about today, we have significant levels of research available for free on our website at granton. edu. I’ve also included a link to the Productivity Commission’s report in our show notes.

If you’d like to check that out as well for yourself, warning, it is a thousand pages long, but the overview is a really helpful look at the topics we’ve discussed today. If you’d like to follow us on social media, please find us on Twitter at Grattan Inst and all other social media channels at Grattan Institute.

As always, please do take care and thanks so much for listening.