multi-factor productivity in australia

What has happened to

Australia’s productivity

levels?

A’Ohlin Commercial Insights © 2013

Is Multi-Factor Productivity important?


Multi-Factor Productivity (MFP)– a lost decade

A’Ohlin Commercial Insightswww.aohlininsights.com

authors: Rebecca Chong & Anna Searle

31 May 2013

http://www.aohlininsights.com/

• better access to better healthcare services and education

• better environmental outcomes

• more time for friends and play

• more support for the disadvantaged

• lower cost, higher quality and new versions of food, clothing, housing and other consumables

The majority of Australians would prefer higher living standards


Ultimately, someone must produce the additional and better goods and services.

Productivity growth, or producing more with less, is the only sustainable way for Australians as a country and as individuals to provide the expected increases in living standards

If productivity growth goes backwards – or slows down – so too will our standard of living

Multi-Factor Productivity (MFP) measures how efficiently we produce these goods and services



Over the past decade to 2010/11, Australia’s Multi-Factor Productivity growth has shrunk…


Since about 2000, the rising living standards of Australians has been supported primarily by: 1

• a near doubling of the terms of trade, or the quantity of goods and services we can import per unit of goods and services we export

Productivity growth has been negligible,and well below the rates achieved in thepreceding 50 years

Yet our standard of living has increased – how can this be?

1. David Gruen, address to the Economic Society of Australia, July 2012


• Almost certain fall in the terms of trade

• Continuation of the poor productivity of the 2000’s

• Our expectations for rising living standardswill not be met

What can be expected over the next decade?

• Highly dependent on resources boom for our positive terms of trade– 35% of income growth came from resources

• Problems are expected once resource boom falls away– 58% of income growth since 2005 has been driven by temporary boom factors

• Low productivity levels– 0.7% decline in productivity between 2005 and 2011

• compared to the 2.4% increase from 1993 to 1999– Before the resources boom, productivity delivered at least half of Australia’s

income growth


Our 2 speed economy has helped us navigate the turbulent waters of the Global Financial Crisis (GFC)


• Income growth could potentially drop to 0.5% – If the boom slows and productivity does not improve

• $16 billion in income is estimated to have been lost economy-wide since 2005 due to– higher costs– inefficiencies

• Capital productivity is actually negative

Productivity levels must be improved to soften the fall when the resources boom slows


• Only 4 out of 25 OECD countries (with estimates available from 1990) experienced faster labour productivity growth in the 2000’s compared to the 1990s– Israel, Switzerland, Turkey and the USA

Australian labour productivity growth• 1990’s

– In line with the un-weighted OECD average• 2000’s

– 0.5 percentage points BELOW the un-weighted OECD average– 0.2 percentage points BELOW the weighted OECD average

Australia was not the only country to have experienced a slowdown in growth in the last decade


• Australian productivity declined against US productivity

• The decline in Australian multifactor productivity was more than double the un-weighted average of the 28 OECD countries for which total factor productivity was available

Australia’s productivity ranking declined to 17th place in the first decade of 2000 down from 11th highest (out of 25 countries) in 1990’s


Productivity in Australia’s Mining and Utilities sectors declined dramatically


• Mining sector– In order to meet a huge expansion in demand for energy and minerals from China

and India, the number of hours worked in mining more than doubled and the real value of the sector’s productive capital stock increased by almost 80% BUT the output (gross value added) only rose by 37%

– The low levels of productivity are likely to continue as long as there is high demand

• Utilities sector– Having to replace ageing transmission infrastructure as well as having to meet

government-mandated renewable energy targets has meant significant investment but relatively little change in output

– Work hours increased by 73% and the real value of capital stock has increased by 35% but output has only risen by 15%

Productivity in Australia’s Mining and Utilities sectors declined dramatically (continued)


Labour Productivity is limited• The typical Australian worker has 25% more physical capital available per

hour worked than in 2005

Multi-Factor Productivity measures the growth in output above that explained by growth in measured capital and labour inputs • Improvement in productivity in the manufacturing sector will depend on

three factors: 1. Further cost efficiencies in subsectors that compete primarily on price

• with particular focus on the neglected area of management quality

2. Higher labour mobility within the manufacturing sector3. More supportive ecosystem for innovative manufacturing

The key to improving productivity lies in an examination of Multi-Factor Productivity, rather than simply Labour Productivity


Efficiency incentives• Increase incentives to make productivity-enhancing changes including

– the types of goods and services being produced– the methods of producing the goods and services

• Outsourcing inefficient production• Specialisation into areas where we are more efficient and into growing sectors

Regulation reform• Reduce regulation to allow greater workplace flexibility so that employers and employees can work

together to deliver the required productivity improvements• Australia’s barriers to foreign direct investment are the 7th highest in the OECD

Taxation reform

Skills• Poorly targeted investment in skills formation and in infrastructure• It is not clear that the quality of Australian human capital has increased significantly

– Despite a continuing upward trend in the proportion of the Australian working-age population with formal education qualifications

Issues to be tackled if productivity growth is to be improved

• Australia’s infrastructure is inadequate– Invest more on infrastructure– Make better use of existing infrastructure as well

• Infrastructure improvements will see:– Improved efficiency in transporting goods– Increased mobility of factors of production– Faster access and processing times via the National Broadband Network (NBN)

• Environmental issues:– Environmental planning, sustainable development– Introduction of the carbon tax means that Australian producers will need to

become more efficient and improve productivity in order to remain competitive with imports


Infrastructure and Environmental issues must be addressed


Australia’s ranking of innovation is quite low - compared to other OECD countries

sources: Saul Eslake, Productivity – the lost decade


• There is a lot of potential for Australia to improve its productivity

• Some issues inhibiting innovation– Australian competition laws– Taxation system– Intellectual property rights

• BUT too much investment could lead to over-capitalisation

Investment in innovation is also key to lifting productivity


• Australian businesses (as compare to OECD countries)– had high rates of use of internet and broadband as inputs– BUT had low rates of contributing to the digital economy or using it as a business

output suggests that Australian businesses are not harnessing the full efficiency and productivity benefits of the digital economy relative to their international counterparts (may lead to loss of global competitiveness)

• Pace of technological change means– Australia must ensure a strong innovation system that gives the capacity to match

and adapt the innovation of others a strong innovation system will ensure we produce internationally competitive products and services of high demand


Technological advancements are being made but are not being effectively integrated into business


• Transform existing industries

• Drive efficiency and productivity

• Give rise to entirely new industries


Australia has the potential to greatly benefit from an innovation-driven digital economy


Key sources:

Australia’s digital economy: future directions

McKinsey Global Institute, Beyond the boom: Australia’s productivity imperative

Saul Eslake, Productivity: the lost decade


Multi-Factor Productivity (MFP)– a lost decade

A’Ohlin Commercial Insightswww.aohlininsights.com

authors: Rebecca Chong & Anna Searle

31 May 2013

http://www.aohlininsights.com/

multi-factor productivity in australia

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