In the IGR series, Public Accountant is taking a deep dive into the sixth Intergenerational Report.
Released twice each decade since their production was legislated in the late ’90s, Australia’s Intergenerational Reports offer 40-year fiscal projections. IGR6 forecasts the demands on Australia’s budgets to 2063.
This article looks at forecast productivity growth (or lack thereof) and its impact on living standards. Over the remainder of this series, we examine:
- Aged care demand and costs
- Labour force participation (forthcoming)
- Commonwealth budgets and taxation (forthcoming)
Labour productivity on a national scale, as measured and reported in such documents as the Intergenerational Report 2023, measures output per worker.
An example to illustrate the definition of labour productivity: Each person produced 100 of a given item, say plates, last year. If this year they produce 105 plates each, then for the same number of workers, productivity has risen by 5%.
If productivity per worker grows, average productivity grows. In a perfect world, all incomes grow with productivity. As a result, confidence rises, spending goes up, the economy grows and everybody is happy. Quality of life constantly improves.
In an environment of high cost of living, high interest rates, high inflation and low consumer confidence, the logic above – where worker productivity leads to economic growth and improved quality of life – becomes very important.
That logic means a 20% drop in the productivity growth rate – as forecast in the latest Intergenerational Report – would represent a cut to quality of life.
Understanding productivity
The ‘perfect world’ discussion of productivity above was deliberately simplistic – there’s more to unpack.
“First of all, it’s not necessarily true that as productivity rises, workers will be better off,” Matt Grudnoff, Senior Economist at The Australia Institute, says.
“If some of those gains flow to workers, they will be better off. But that doesn’t always happen.”
Second, Grudnoff says, a slow-down in productivity growth doesn’t necessarily mean people are worse off.
“What’s happening is that productivity is growing more slowly, but it’s still growing. So therefore, real incomes of Australians are still going up, just not as fast as they were,” Grudnoff says.
“The third thing is that productivity is often misunderstood. It’s not about how profitable firms are. For example, the last Blockbuster Video to shut down was probably the most productive Blockbuster Video out there. It must have done really well to survive that long. But it was in a shrinking market and, therefore, eventually it had to shut down.”
Grudnoff cites the noughties mining boom as a local illustration of the difference between profitability and productivity. As the price of minerals rose, mining companies explored further from their home bases. This meant productivity fell.
“They had to go to more effort to dig up the same amount of ore,” Grudnoff says.
“But their profits were spectacular, because it was about price. The price rises made it profitable for them to dig in unproductive places.”
A highly productive firm can lose money, and an unproductive one can be profitable.
Productivity is related to quality of life
Imagine the plate example above, where workers make 100 plates each per year. Now, Grudnoff says, imagine this country has no inflation and no population growth. All that matters is productivity.
When workers produce 100 of an item one year and 105 the next, productivity has grown by 5%. Businesses make 5% greater profit. Worker wages rise by 5%. Shareholders experience a 5% gain in the value of their stock. Everyone can now spend more.
“Essentially, what productivity does is increase the average, per-person income so that you can buy more stuff,” he says. “Whether more stuff, like GDP, is a valuable measure of wellbeing is for another discussion.”
Of course, such issues as inflation and the resulting increased cost of living, as well as population growth and other variables, all affect the final outcome.
Who can influence productivity?
If we want productivity to pick up, who can make it happen?
Typically, it’s seen as a worker problem related to skills, training and engagement, or a government problem related to regulation, education and infrastructure.
But the group with the biggest influence on productivity, Grudnoff says, is the one that enters the productivity discussion the least.
“The group that we don’t hear from in this productivity debate is businesses,” he says.
“I think the reason we’ve seen a slowdown in productivity in Australia is because we’re seeing a lack of competition in the Australian economy. Australia has turned into a country of big oligopolies.”
Consider that local hardware stores were once independently owned. Now there is only Bunnings and Mitre 10.
The same can be said for sports stores, supermarkets, veterinarians, funeral homes, pet supply stores, office supply stores and so many other sectors that have been corporatised.
“What does that mean? Well, if you’re a big oligopoly, all you’re really interested in doing is managing, and making sure to keep your shareholders happy as your profit slowly grows,” Grudnoff says.
“What you’re not doing necessarily is taking big risks, because if you take a risk and it doesn’t pay off, your shareholders are going to kick you out. I think that’s what is happening in Australia. We’re less competitive as a country and that is making us less productive.”
Grudnoff agrees here with insights Australian Competition and Consumer Commission Chair Gina Cass-Gottlieb shared at the National Press Club in April, citing the late Professor Maureen Brunt, the first woman Professorial Chair in Economics in Australia.
“As we know, concentrated markets are generally not good for consumers – or indeed for economic growth and productivity. Companies operating in concentrated markets tend to charge higher price markups over costs for their goods and services, and often have less incentive to innovate in ways that benefit consumers. In short – to paraphrase a Professor Brunt quote – these players can give less, and charge more, but retain their grip on the market,” Cass-Gottlieb said at the time.
“The problem of concentration is a growing one in Australia. A 2021 Treasury Working Paper by Jonathan Hambur suggests that higher markups in the Australian economy are more likely to be caused by a decline in competition than the increased stature of more productive firms.”
Cass-Gottlieb further suggested that the ACCC would be hamstrung in its efforts to prevent the concentration that stifles innovation and productivity if it was not resourced adequately.
The Intergenerational Report, too, puts some responsibility for increasing competition and innovation back on government, saying, “Policy can support productivity by promoting investment in people, capital and innovation. It can facilitate the diffusion of new technologies and ideas, and provide efficient infrastructure. Competition-enhancing policies can help underpin this, bolstering business incentives to invest and enabling the most productive businesses to grow.”
Where do we look for best practice around productivity?
Best practice productivity is typically found in the territories also known for deep innovation.
Where once this might have been the United States, particularly around Silicon Valley, Grudnoff says the growth of very large tech companies has dramatically slowed that region’s innovation.
Instead, we must look to smaller territories including Latvia and Lithuania – environments where productivity is nurtured.
“The shrinking competition I talked about in Australia is occurring globally. We’re seeing productivity slow around the world,” he says.
“Because of this, it’s very difficult for individual countries to turn around. It can feel as if the only way to tackle these problems is at an international level, and that’s a lot more tricky.”
