The Productivity Commission has released a massive report today on productivity in the manufacturing industry, which the Commission found declined by 1.4% per annum between 2003-04 and 2007-08, versus productivity growth of 1.3% per annum experienced between 1998-99 and 2003-04; although it found no specific reason why:
MFP [multifactor productivity] has been declining since 2003-04. This has been one of the main contributors to the recent flat to declining productivity of the whole market sector of the Australian economy…
This study finds that almost two-thirds of the decline in Manufacturing’s MFP growth, from its average rate in cycle 3 to its average rate in cycle 4, is accounted for by three of the eight subsectors: Petroleum and chemicals; Food and beverages; and Metal products…
The influences on the productivity of manufacturers are diverse and vary over time. There is no single factor that explains the decline in Manufacturing MFP. In the subsectors examined in detail some of the varying factors were: the lead time between investment in new capital and associated output; unmeasured increases in output quality, in some cases in response to regulation; lower rates of capacity utilisation; and change in the composition of output demanded by consumers into products with higher labour-intensity and lower levels of measured productivity. Some of these factors are temporary in nature and the result of adjustment to changing competitive conditions and no simple policy inference can be drawn..
There was a shift in Manufacturing MFP and its proximate causes in the most recent complete productivity cycle (cycle 4), compared with trends going back to 1985-86 (figure 1).
Manufacturing’s trend of positive MFP growth turned negative in cycle 4.
The long-term upward trend in value added became relatively flat during cycle 4 (and the current incomplete cycle3).
The ongoing growth in capital inputs accelerated over cycle 4, before slowing more recently.
Hours worked stabilised over cycle 4, after a downward trend, but the decline resumed more recently…
Manufacturing is a significant part of the market sector (averaging 18 per cent of market sector value added over cycle 4). Accordingly, the turnaround in Manufacturing’s MFP growth rate by 2.7 percentage points between cycles 3 and 4 (figure 2) had a considerable influence on the slowdown of MFP growth for the market sector overall…
The decline of 2.7 percentage points in the average annual rate of MFP growth between cycles 3 and 4 was associated with nearly equal parts of: a decline in value added growth; an increase in growth in capital services; and a reversal in the decline of hours worked (figure 3).
I have noted previously how Australia’s manufacturing sector appears to be in terminal decline, with the employment share at record lows and capital expenditures in the gutter (see below charts).
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For a variety of reasons, including the high Australian dollar and excessive labour/land costs, Australian industry is uncompetitive, which requires a widespread program of micro-economic (structural) reform aimed at boosting productivity.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
