Australia Experiences Modest Increase in Productivity, But Continues to Struggle with Long-Term Growth

Australia’s recently improved labor productivity has been a welcome news for the country, but the Productivity Commission remains cautious due to nearly a year of low productivity. According to the Productivity Commission’s Dec. 20 bulletin, labor productivity increased by 0.9 percent in the September quarter, the first growth since March 2022. However, over the 12 months to September 2023, labor productivity was still down by 2.1 percent.

The increase in productivity has been attributed to a 0.7 percent decline in hours worked, along with a slight 0.2 percent increase in GDP during the September quarter. This growth in productivity has helped in labor productivity slightly recovering. However, it has only raised productivity back to 2019 levels, reflecting inflation and the bursting of the “pandemic bubble” as workers returned to “low productivity” sectors such as hospitality after the easing of pandemic measures.

The Commission’s Deputy Chair Alex Robson stated that the slight spike in productivity does not signal a return to healthy long-term productivity growth, with Australia’s productivity returning to 2019 levels not being a cause for complacency. The recovery is a further sign that sustainable long-term productivity growth requires policy reforms to address the underlying weaknesses.

According to the Productivity Commission, Australia had a record high labor force participation rate and low unemployment, leading to previously marginal workers entering the workforce, and easing pressure on productivity. Investment increased sufficiently to return capital-labor ratios to pre-pandemic levels, which is a welcome development as weak productivity growth before the pandemic has continued as Australia recovers from the pandemic.

The Reserve Bank of Australia (RBA) highlighted that Australia’s post-pandemic productivity performance depended on various factors such as slowing global trade growth, the slowing of knowledge spillovers, climate change, natural disasters, transition to renewables, the impact of COVID-era technologies, and demographic changes. The RBA also mentioned that wages growth forecasts are consistent with inflation returning to the RBA’s target band if productivity growth returns to its pre-pandemic trend. However, recent productivity outcomes have been weaker than this, posing a key risk to the economic outlook.

In March, federal Treasurer Jim Chalmers stated that Australians would need to work two extra hours in the future while earning 40 percent less if the country wanted to improve productivity levels. Productivity is a measure of the rate at which output of goods and services is produced per unit of input, such as labor, capital, and raw materials. Factors affecting productivity growth include technological improvements, economies of scale, workforce skills, management practices, capital, competitive pressures, and the stage of the business cycle. These factors will need to be addressed in order to achieve sustainable and healthy long-term productivity growth in Australia.


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