Are we really a nation of bludgers?

By Ian Verrender

Our GDP growth figures look healthy, but buried among the data is our abysmal productivity. You can expect this to feature heavily in the upcoming election campaign, writes Ian Verrender.

“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.” – Paul Krugman.

Are we really a nation of bludgers?

There are many who would argue that, yes indeed, Australians have had it so good for so long, that they have yet to realise the impending dangers posed by the forces of globalisation.

As for evidence, you need look no further than economic growth statistics produced a fortnight ago.

True, the raw numbers showed the economy was booming. Gross Domestic Product surged to 3 per cent, way above the expectations of pretty much all the experts, and far better than our own recently downgraded long-term expectations for 2.5 per cent.

But buried in among all the data was the continuing tale of our abysmal productivity. GDP per hours worked rose just 0.2 per cent in the December quarter, in trend terms, and 0.4 per cent for the year.

Image via iStock.

As the yet-to-be-announced federal election campaign grinds on for the next few months, our declining productivity is likely to feature heavily in the ensuing debate.


Everyone will be in furious agreement. Our productivity is a disgrace. It needs to rise if we are to maintain our standard of living as the population ages.

And the general consensus from our captains of industry and much of the political elite will be that the answer to our problem is simple; wages need to fall, and our outmoded working conditions need to be overhauled.

Just one tiny problem. That easy fix solution won't help our productivity problem. Arguably, it could make it worse because enthusiasm for an employer tends to wane if there's a pay cut on the table.

Think about this: If lower pay does indeed lead to improved productivity, why is it that our business leaders insist on multi-million dollar bonuses in their remuneration packages? Surely, they and their companies would be more productive without them.

The truth is that pay is only tangentially related to productivity. Those who argue the connection usually confuse two very different concepts: profitability and productivity.

This may come as a shock. But when it comes to Australia, labour has performed reasonably well. Our big problem, since about 1995, has been a huge underperformance in capital productivity.

A recent study from KPMG observed just that. Labour productivity has easily outstripped capital productivity for the past two decades, and always by a wide margin. The report noted:

Over this period, labour productivity growth has dipped into negative territory on just two occasions while small positives were recorded for capital productivity growth on just three occasions.

Before the union movement raises a victory salute over this stunning outperformance - Workers 1, Bosses Nil - it's worth bearing in mind that labour and capital don't operate in separate universes.

Improvements in labour productivity often rely heavily on capital investment. When a business invests in the latest technology, output per worker generally rises.

And truth be known, no one is really certain as to exactly why labour productivity soared back in the late '90s and early part of this century.

Some economists reckon it was because of micro-economic reform along with the increased competition that arose from deregulation and lower protection. Others think it was the adoption of advanced technology that resulted from the internet revolution.

One thing is certain, those changes can't be endlessly replicated. When you remove regulations and free up capital, you get an instant boost. But that growth hit doesn't last forever. Within a few years, the gains start to taper. So maybe we are being unrealistic to expect and demand constantly rising productivity.


In any case, we are not unique. Almost every developed nation is facing exactly the same problem.

A possible reason for our poor capital performance since the turn of the century has been the huge investment in our resources industries. During the decade that it took to build and expand the mines and gas plants, they weren't producing. So clearly, they weren't very productive in that period.

Since about 2012, however, that's begun to change. Capital productivity has staged a comeback, moving from about minus 3 per cent to about minus 1.5 per cent last financial year.

It might be improving but it is still a major drag on our overall productivity. And it may reverse if it turns out that a great deal of that investment was wasted, poured into projects that don't survive the great commodity price collapse.

If there is a flashing red light over our future right now, it is the reluctance of business to reinvest, to tip cash back into the business. That, in turn, is a direct result of the emergency measures that followed the financial crisis.

Ultra low interest rates were supposed to boost investment. Instead, they've boosted speculation in property and shares.

Investors seeking yield have piled into stocks that pay good dividends. And company executives have responded, opting to spend corporate earnings on ever bigger dividend payouts in an effort to attract investors rather than reinvesting in their own operations.

It's equally true that infrastructure investment has failed to keep pace with our rapidly expanding population.

Our governments have been eager to accept the plaudits from the economic growth resulting from all that immigration. But they've been loath to accept the responsibility of spending adequately on our infrastructure to ensure that a bigger population can work efficiently.

None of the above will enter the political debate in the months ahead. No one will point out the real reason for our poor performance or that it is a global phenomenon.

Prepare for the usual mindless, simplistic, ill-informed and deliberately misleading debate, all based purely on self interest. Not sure about you, but I can't wait.

Ian Verrender is the ABC's business editor and writes a weekly column for The Drum.

This post originally appeared on the ABC.
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