Why Productivity Is Like The Weather

In some ways, the debate about productivity is like discussing the weather: everyone agrees it’s a problem, but nobody does anything about it.

In theory, productivity is simple: it is a measure of the rate at which goods and services are produced per unit of input (labour, capital, raw materials, etc.)

Growth in productivity is important; it’s what drives long-term improvement in living standards. As productivity improves, working hours fall, leisure time increases and goods become cheaper and better quality.

The Productivity Commission says the average Australian worker produces about as much in one hour today as it took a full day’s work to produce at Federation in 1901.

It gives the example of a bicycle which, in 1901, would have required several months of work to afford but now requires less than a day of work (for a basic model). Moreover, even the lowest quality new bicycles are much safer and easier to use than those produced then.

The problem is, productivity needs to constantly increase, yet growth in productivity in Australia has been low for at least two decades and may even have been zero in the last few years.

Both sides of politics know this and periodically declare they intend to do something about it. But when they discover what that means in practice, they find it a lot easier to just talk. 

There are various factors that affect productivity growth: technological improvements, economies of scale and scope, workforce skills, management practices, changes in other inputs (such as capital), competitive pressures and the stage of the business cycle.

The two big ones are technology and labour. Personal computers, for example, gave productivity a boost because it transformed office work. The productivity of the wharves was raised when Patricks was able to implement labour reforms in 1998.

Changes like these are few and far between. Far more often, governments adopt policies that stifle productivity. There are many examples.

When the ACCC blocks the takeover of one firm by another on the grounds that it might lessen competition, this usually also prevents a productivity boost. If the takeover occurred, the firm would shed surplus staff and assets; those staff would be redeployed (ie hired by someone else), and the assets would have a new owner and be used more productively.

It is the same when the government props-up firms through tariffs, import restrictions, subsidies, soft loans, extended tax payment terms, and the like. Firms that would otherwise go out of business or change what they are doing are kept going, soaking-up capital and labour while blocking the growth of more innovative and nimble firms.

Governments also constantly raise the cost of doing business. A good example – the increasing cost of electricity. From dairy farms to tattoo parlours, prices must increase or profitability fall.  Higher interest rates have the same effect. And reporting to the government on workplace gender pay, anti-slavery and emissions reductions does nothing for the business. Indeed, the whole ESG charade is a net cost.

Productivity would increase considerably
if businesses could adjust their workforce to suit variations in conditions.

But with complex awards and enterprise agreements, unfair dismissal laws, bogus harassment claims and go away money, it is anything but efficient. Many use contractors and labour hire to meet variable needs, but the Government’s attack on contractors and ‘gig’ workers, the so-called “same job same pay” legislation, will severely restrict that. Then there are restrictions on workforce participation due to barriers to work, which also inhibit productivity.

The growth of credentialism, with qualifications required for almost everything, is yet another factor. A certificate is needed even for serving alcohol in a bar. All of this contributes to a decline in business dynamism (as evidenced by a decline in firm entry and exit rates), which slows the rate of innovation and technology adoption by firms and inhibits the reallocation of resources to the most productive firms.

When it comes to the public sector, productivity is rarely considered. The growth in public servant numbers diverts resources from the private sector, which has a negative impact. And although service delivery is increasingly online, which might slightly help, this is rarely accompanied by a reduction in public servant numbers or an overall reduction in red tape.

Once understood, it is easy to see why governments prefer to talk about productivity than act. It is not easy to fix within the constraints of existing policies, particularly on labour. That explains why they periodically decide the solution lies in technology and will throw taxpayers’ money at a new idea that takes their fancy. Of course, that rarely ends well.

But despite their similarities, the weather and productivity are quite different. So far, the Government has not found a way to make the weather worse. 

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