Stagnant productivity has been the elephant in the room of nearly all economic discussions over the best part of a decade, and especially since the Covid era.

Put simply, Australians are working more but they're producing less; in fact, overall productivity in Australia has floundered for the past eight years.

So, what's going on? 

Are workers still in a post-pandemic funk? Is our tech just not cutting it? Has Australian business lost its edge?

In a quirk of statistics, Australia's productivity rose during the pandemic when a number of lower-productivity sectors were effectively shut down, such as retail, food, and community services.

But when life returned to normal, productivity didn't get a reboot - in fact, it declined.

The 2022-23 financial year recorded the biggest fall in productivity on record, as the economy struggled with pandemic hangovers such as supply chain issues and labour shortages.

But then 2023-24 also brought no overall growth.

In fact, the last productivity reading for the fourth quarter of 2024 showed output per hour worked fell an annualised 1.2%.

Hear HSBC chief economist of Australia, New Zealand and global commodities Paul Bloxham on the April cash rate decision and productivity on the Savings Tip Jar podcast.

Tale of many sectors

But that's not to say all industries have been stagnating.

The higher-performing sectors of information and communications technology, media, telecoms, professional services, accommodation and food, and admin services have shown a strong uptick.

But overall productivity has been dragged down by the lesser performers, including some of the big guns: utilities, arts and recreation, manufacturing, and construction.

And outside of market-driven industries, we have the non-market sector - the public service, education, healthcare and social - all largely linked to government and government funding.

It seems here is where the real productivity drag is occurring, particularly in the healthcare and social services industry.

The sector has seen a massive expansion in its workforce - around 28% in the past 18 months - but without a proportional rise in output.

This may be because the sector is highly labour intensive, requiring personal interactions and time-sucking manual processes which can't be readily streamlined or automated.

So, funnily enough, the robust jobs market has led to lower productivity, because the jobs added have been in lower productivity areas. 

'Output' is also hard to measure and within the care economy, which is less subject to market-driven competition and pricing, there may be little incentive for innovation.

Governments can try to drive cost-containment and efficiencies but with an aging population, the sector continues to be under pressure.

Put simply, it may be up to other sectors to carry the can, at least for now.

How can Australia improve productivity?

HSBC chief economist for Australia, New Zealand, and global commodities Paul Bloxham says Australia's productivity is not just a cyclical problem, but a structural one.

"What we want is for businesses to innovate and become more efficient," he told the Savings Tip Jar podcast.

"We want them to invest and find new ways to do things, or maybe invent new things or apply new technologies."

But he said it's critical for policy makers to take action that will motivate business to do that.

He said there are three key things governments need to focus on:

  • making the market more competitive
  • tax reform
  • changing the regulatory environment 

"These three elements are the key you need to focus on and I don't see a lot of signs that that's actually the primary focus," Mr Bloxham said.

What's in it for wage earners?

Quite a lot actually. The case for 'real' wage growth in Australia (as opposed to just keeping pace with inflation) is generally linked to productivity gains.

On Wednesday, the Albanese government said it would be pushing for an above-inflation 3% increase for three million workers on the minimum wage.

It marks the first time in the past four years the government has asked the Fair Work Commission annual wage review for the minimum wage to rise above inflation.

In Tuesday's Reserve Bank of Australia decision to hold the cash rate, governor Michele Bullock warned against the inflationary effects of wage increases with no productivity growth.

"If productivity [doesn't] pick up, then that means the rate of nominal wages growth that can be sustained and be in line with the inflation target is lower," she said. 

In simple terms, raising wages without productivity growth pushes up inflation which will make it more difficult for the RBA to make interest rate cuts.

On Tuesday, the RBA said part of reason it held back on an April rate cut was because "productivity growth has not picked up and growth in unit labour costs remains high".

Essentially, getting paid extra for not producing any more is bad because it's inflationary with no meaningful growth.

If the RBA is happy about productivity then it could ease the cash rate to reduce friction in further business investment. 

The Fair Work Commission will announce its annual wage review decision in June.


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