Improving the economy’s productivity is so central to lifting our material standard of living that politicians and big business people talk about it unceasingly. But the funny thing is, most of what they say makes little sense.
But first, let’s be sure we know what “productivity” means. It may be that politicians and business people get away with talking so much nonsense on the subject because so many of us aren’t sure.
A lot of people assume “productivity” is just a flash way of saying “production”. Wrong. It’s also possible people – particularly business people – think it means the same thing as profit, competitiveness or effort.
Wrong again. As Dr Richard Denniss and Matt Saunders, of the Australia Institute, say in a new paper, “while cutting the wages of a worker may lead to an increase in profit, and potentially improve the competitiveness of one firm compared to another, wage reductions do not result in an increase in productivity.
“Indeed, lowering wages may lead to a reduction in productivity if it dissuades firms from investing in labour-saving technology.”
The productivity of a business (or an economy) is the quantity of its output – production – of goods and services compared with the quantity of its inputs of raw materials, labour and physical capital.
It’s most commonly measured by dividing output by the quantity of usually the most expensive input, labour, to get output per hour worked.
The great achievement of capitalist economies is that they’ve been able to extract a bit more output from the average hour worked almost every year for the past two centuries.
It’s this improved productivity that almost wholly explains why the developed countries’ material living standards have got a bit better almost every year.
But how on earth has it been done? Mainly by advances in technology. Continuously since the Industrial Revolution, we’ve been inventing machines that allow us to produce goods using fewer and fewer workers.
This has greatly reduced the proportion of the workforce needed to work in farming, mining and manufacturing, but made it possible to afford far more people delivering services ranging from doctors and professors to people working in aged care, disability care and child care. Over the decades, total unemployment has been little changed by labour-saving technology.
The productivity of labour has been improved also by better education and training of workers, and by improvements in the way businesses are managed.
Now, as discussed last week, Australia’s rate of productivity improvement has slowed markedly since the global financial crisis. And, to be fair, we should remember that much the same has happened in the other rich economies.
But that’s no reason why the government shouldn’t be doing what it can to turn this around. And there’s been no shortage of talk about all the things the Coalition is doing to improve our productivity. What’s missing are signs that all this professed effort is doing much good.
It’s clear Scott Morrison hates being held accountable, but Denniss and Saunders have gathered a remarkable list of the claims he’s made, particularly while he was treasurer, to be working wonders on the productivity front.
In 2016, he claimed the creation of the Australian Building and Construction Commission was “an important reform . . . that will drive productivity, that will support wages growth, that will support increases in profits of small businesses so they can grow and expand”.
The same year he claimed the alleged “free-trade agreements” that the government had been making with other countries would “increase Australia’s productivity and contribute to higher growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation”.
That’s a claim the Productivity Commission and many economists would strongly dispute.
Treasurer Morrison also claimed “the government is implementing a $50 billion national infrastructure plan to unlock our productive capacity, generate jobs, and expand business and labour market opportunities”. Train station car parks, for instance?
Other ministers have made similar claims, including Christian Porter’s assertion that his reform of wage-fixing rules would “make the bargaining system . . . more efficient and, most importantly, capable of delivering those twin goals of productivity and higher wages”.
This is not to mention the various tax cuts – in the rate of company tax for small business; the three-stage cuts in income tax, including the last stage, in 2024, which will give huge tax cuts to high income-earners despite adding $17 billion a year to an already swollen budget deficit – which are always justified as encouraging more effort, innovation and investment.
Trouble is, all this supposed achievement did nothing to encourage the authors of last week’s intergenerational report to raise their assumed rate of annual productivity improvement over the next 40 years.
Indeed, they cut the rate a fraction to 1.5 per cent a year. They said nothing about any of the above “reforms” helping to justify even that lower assumption, which is actually much higher than the 0.7 per cent average annual improvement achieved over the five years before the coronacession.
What’s more, both the report and Treasurer Josh Frydenberg acknowledge that it will take a lot more reform to get the rate of productivity improvement up to 1.5 per cent a year. What they don’t do is say what reforms they have in mind. Maybe we’ll be told after next year’s election. Or maybe it’ll just be more of the same sort of “reforms” Morrison has assured us are doing so much good.
In former times, big business worthies and conservative politicians used to tell us our goal must be to increase the size of the pie for everyone (which is what improved productivity does), not fight over the size of my slice of the pie compared to yours.
Maybe they’ve stopped saying this because, if we looked too hard at all the changes they assure us will improve productivity, we’d notice they’re aimed at increasing the slice of pie going to business owners and high income-earners.
