The productivity problem

The productivity problem

Treasury has just released a document that looks ahead to what Australia might be like in 2066. It’s created a bunch of different news stories - trying to work out what things will be like 40 years from now is an interesting project. But one key word that keeps coming up in the coverage, and in economic news more broadly, is productivity. So we thought we’d explore:

• Exactly what productivity is

• How it affects our economy

• And why everyone’s talking about it

🙋🏻‍♀️ This newsletter was written by Andrew Williams

Prefer this in your ears?

Listen to our podcast 🎧

Listen time: 12 minutes

Squiz the Shortcut

Let’s start with the basics… What exactly is productivity?
It’s a key metric of almost any workplace, but it can be tricky to measure. You’ve probably worked with people who seem extremely productive - they’re always busy and they always seem to have something to do - but trying to get a handle on what they’ve actually done is a bit trickier. 

So, being busy isn’t necessarily the same as being productive?
Exactly… It’s not about hours worked, it’s about the amount of stuff you get done in those hours, and the quality of that work. Higher productivity is generally considered good for the country - if we’re doing more quality work in less time, it’s good for our economy. 

Give me an example…
Let’s take a baker who can make 10 loaves of sourdough an hour. If they buy a better oven that lets them turn out 15 loaves in the same hour, their productivity would increase by 50%. It means they can sell more bread without working more hours. So productivity is about working smarter, or faster, but not longer…

Why are we having a national conversation about it?
Because productivity is linked to wages growth - basically, if the baker sells more bread, they make more money (so their income increases). You might have noticed that inflation - the rate at which things are getting more expensive - is outpacing wage growth. The reason that cost of living comes up so much in the news is because at the moment, broadly, stuff is getting more expensive compared to the amount of money we make. That puts pressure on the government, and improving productivity is a way to fix it… 

So it’s a high priority for the government…
Sure is… It’s such an important economic marker that there’s a whole government body created to look at it - the Productivity Commission. And for much of Australia’s modern history, from the 1960s onwards, productivity has only gone up, and things have become cheaper to buy, even if they might not feel like it. That’s why higher productivity is good. And for a long time, Australia was doing very well on the productivity measure… 

And now?
Not so good… Chair of the Productivity Commission Danielle Wood says that the reason productivity is such a significant problem now is that for the first time, people who entered the workforce in the last decade and a half are showing very little progress on their income. 

What’s the fallout for the Federal Government? 
The cost of living is pretty much the most important issue in any Australian election, so groceries, housing, power and other essentials being more expensive is a growing problem for this Labor government. It won a second term with a record margin last year, but as One Nation continues to rise in the polls - driven, in part, by cost-of-living concerns - the Albanese Government needs a fix. It even hosted a big economic reform roundtable last year to tackle the issue…  

Remind me about that?
It brought together a select group of politicians as well as business leaders, unions and experts in Canberra over 3 days to brainstorm ideas for boosting productivity in Oz. But there hasn’t been much progress on that so far when it comes to our actual productivity number, which is still struggling.

What’s the outlook?
It’s often said that the responsibility of any generation is to try and leave things better off for the next one. And with the release of the intergenerational report - and the slowdown in productivity we’ve outlined - questions are now being asked as to whether that’s likely or not in the future. 

Tell me about the report…
It began under the Coalition Howard Government when Peter Costello was Treasurer. We produce one at least every 5 years, and the reason it began is because it became clear in the 90s that our ageing population was going to present some challenges. That was a big theme in the latest report, released on Monday.

What’s in the latest one?
Basically, the forecast is that we’re getting older and having fewer children. Treasury reckons that the number of Aussies over pension age will double to around 9 million people by 2066 - though it also noted that the percentage of those receiving pensions will go down, thanks to strong superannuation numbers in Australia. But either way, an ageing population puts pressure on the budget. And one of the key factors it looks at is how productive we are - which is a way to reduce that pressure…

Just explain that a bit more…
Well, if we have more people of retirement age and fewer people working, it’ll be manageable if the people still working are much more productive.

How is productivity measured?
When you hear people talk about our rate of productivity growth, they’re referring to our Gross Domestic Product (everything we produce as a country) divided by the hours we work to produce it. That ends up being a dollar figure. 

Hit me with an example…
Let’s say for 2025, it was $100. So we produced $100 worth of stuff for each hour we worked. And then in 2026, we produced $101 worth of stuff. That means our rate of productivity grew by $1, or 1%. Even that would be an improvement on where we’re at right now…

Where are we at?
The average over the past decade has been 0.3%. But in order to confront the challenges that this intergenerational report has laid out, the government needs that number to be higher. The intergenerational report assumed it would be at 1.2%, but we’re nowhere near that. At the moment, our economy is growing (slightly) - but the concern is that it’s getting bigger because we’re working longer, not smarter, harder or more efficiently.

That’s no fun…
Nope… As for why that is, economists - and that includes the Reserve Bank of Australia - point to a few things: businesses aren’t investing in updated/upgraded equipment and technology, the economy generally becoming quite static, and a lack of technological innovation in Australia. And it’s not just us - lots of developed countries have had similar productivity slowdowns.

What’s happened since the government’s Economic Roundtable?
On the Productivity Commission’s recommendation, the government has scrapped a bunch of tariffs. It’s asked federal regulators to consider productivity in their decision-making, and they’re trying to make it easier for people in some occupations, like engineers, to work in different states.

Anything else?
Yep… The Productivity Commission has some other reforms on the table, including a company tax cut (but the government isn’t looking at this at the moment) and investment write-offs. The thinking is that it might help businesses with buying upgraded equipment and tech that we mentioned. It also wants a focus on education - our scores in things like maths and literacy have been sliding since the year 2000, which has a domino effect.

Does the Coalition have any suggestions?
Coalition leader Angus Taylor says high taxes and steep energy costs are contributing to the pressure on businesses in Oz, as well as too much regulation. He reckons all of that is stopping businesses from investing, and it’s flattening productivity. The Coalition has regularly pointed out that productivity has gone backwards for most of Labor's time in power.

What is Treasurer Jim Chalmers’ take on things?
He says productivity has been a problem across multiple governments, including when the Coalition has been in power. He says it’s a long-term challenge, and that the most recent budget made progress on those areas the Coalition raised. And Treasury has touted artificial intelligence as a possible game changer for productivity in Australia…

How does AI come into the picture?
The general idea - and PM Anthony Albanese has spoken about this - is that AI helps to take all of the busywork off our plates and allows us to be generally more productive and get more done in less time. But if there has been a benefit in AI so far, it’s yet to be seen in any official numbers, and some economists say you can’t make that assumption without the numbers to back it up. 

What are some economists saying?
Independent economist Chris Richardson, said AI was “a terrible toupee to try to hide the ever-larger bald spots”. And HSBC’s Paul Bloxham said that housing and energy are significantly hampering productivity, and he says it’s hard to see how AI will help those. 

So productivity’s an ongoing challenge?
Yep… A big one. And we’re still working out how AI can be put to use safely and effectively in Oz without costing jobs, upsetting creatives and sacrificing the environment. So whether the government can pull it off remains to be seen.

Onto our Recommendations

Reading: This explainer from the ABC on what productivity actually is - it’s really good on why the jobs in health, education and care are so hard to measure, which is a big part of this puzzle.

Reading: This piece from UNSW that breaks the 2023 Intergenerational Report down into 7 charts. It shows just how much that one productivity assumption changes the picture over 40 years - it’s a good way to see why economists are arguing about it.

Bonus points before the holidays

Flights add up over the holidays, and every point helps. From 1 October, new rules are landing that could see banks change how their rewards points work. If you're a Velocity member with ANZ, MyCard, NAB, AMEX or BOQ you can earn bonus points until 30 September before those changes kick in. If your bank's not on that list, it's still worth watching the wider changes. Learn more about what it all might mean for you (and your summer travel plans) here.

Recent Shortcuts