The Productivity Commission (PC) has released its interim report on its 5 Year Productivity Inquiry, which shows that Australia’s productivity growth rate has fallen to its lowest level in 60 years.
It also shows that Australia’s labour productivity ranking has fallen ten places, from 6th in the OECD to 16th, with Australia only maintaining its high living standards by working hard.
The PC also finds that the service sector’s high share of the economy is hindering Australia’s productivity growth, since these sectors are typically not exposed to global competition.
Below are key extracts from the PC’s report summarising Australia’s productivity performance:
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Despite its strong income and consumption performance, Australia’s productivity growth has slowed significantly in the past decade, falling to its lowest rate since the 1970s (figure 2.2). To put this in perspective, if, over the decade, productivity had instead grown at an annual rate consistent with the average over the past 60 years (1.7 per cent compared to 1.1 per cent), gross national income per person would have been around $4 600 higher (6 per cent) in 2020 (ABS 2021a).
Australia’s performance should be placed in a global context. There has been a widespread and sizable slowdown in productivity growth across most advanced economies recently.12 For example, average productivity growth among OECD economies since 2005 was about one percentage point per annum below the historical average (figure 2.3).
Despite maintaining a high income ranking since the 1970s, there has been a long term decline in Australia’s relative labour productivity growth performance; labour productivity has not recovered after falling behind in the three decades to 2000. Between 1970 and 2020, Australia’s labour productivity ranking fell ten places from sixth in the OECD, to sixteenth (figure 2.4).
Australia’s productivity is now about 22 per cent lower than that of the US — a country typically acknowledged as the ‘global frontier’ economy.
An important reason that the living standards of Australians have remained among the top tier advanced economies despite our middling productivity growth, is that a higher-than-average proportion of Australians work, and they work relatively long hours (figure 2.5).
Insight 2.2 – The increasing share of people in the workforce has shielded Australia from some of the effects of slowing productivity growth, but sustaining an ever-increasing share of people in the workforce (and maintaining their income levels), is neither possible nor desirable.
Australia’s employment to population ratio has increased since 1970, from around 42 per cent to 51 per cent, moving from below the average to above the average in the OECD. (This is primarily due to a substantial increase in Australia’s female participation rate over the past 40 years… Although average working hours in Australia fell by around 10 per cent, or about 4 hours in the 5 decades to 2019, average hours amongst OECD peers fell more…
On a per capita basis, Australians work longer hours than about 60 per cent of their OECD peers. This maintains a relatively high level of GDP per capita (figure 2.6).
Australia’s goods sector has performed relatively well over the past two decades when compared to European countries, the United States and Japan (figure 2.7).15 The relative performance of the services sector is less impressive, but both sub-sectors (non-market and market) are steadily improving…
As Australia continues to become a more service-centric economy, real wages and national welfare will be increasingly dependent on service-sector productivity. But driving productivity growth in (at least parts of) the services sector has, on average, been more difficult compared to the goods sector, which includes agriculture, manufacturing and mining.
If Big Australia lobbies like the Grattan Institute were correct in arguing that mass immigration improves productivity, then why did Australia’s productivity collapse after immigration was more than doubled in the mid-2000s? Something doesn’t add up.
First, the massive rise in population growth created chronic infrastructure bottlenecks across capital cities, driving up congestion costs.
The infrastructure investment required to keep pace with population growth is much more expensive than in the past, due to diseconomies of scale (e.g. tunnelling and land buy-backs). This means that every additional unit of infrastructure increases average costs across the economy, acting as a productivity drain.
Second, while migrants typically have high levels of labour force participation, the migrants that Australia imports are typically less productive, as evidenced by them earning lower than median wages and suffering higher unemployment than the general population.
Third, the increased labour supply and downward pressure on wages caused by mass immigration necessarily disincentivises employers from investing in labour-saving technologies and automation to lift productivity (see here and here). After all, why invest in these productivity enhancements when you can instead bring in low cost workers to do the task?
There are also broader macroeconomic arguments suggesting that strong immigration suppressed Australia’s productivity growth, mainly by diverting resources (eg, capital and labour) from the tradable to non-tradable sectors.
Australia has held the pillow over its globally exposed manufacturing and replaced its employment with careers in a never ending housing construction sector that never provides enough homes for Australian housing to become cheaper for Australians. Australia has also turned its once well respected university sector into a lower quality, casualised conduit for more immigrants, who are prepared to pay top dollar for degrees primarily because they enable migration to Australia.
Tradable goods and services are those that can be sold at locations other than at the place of production (i.e. can be exported overseas). Non-tradable products are those than can only be sold at the place of production (eg, coffees, personal training and haircuts). As noted above by the PC, tradable firms are typically more productive than other businesses because they benefit from economies of scale and must be competitive against firms both nationally and internationally.
Thus, the diversion of resources resulting from mass immigration encourages growth in low productivity ‘people-servicing’ industries, alongside diverting the nation’s productive effort into houses and infrastructure.
Australia’s economic performance over the pre-pandemic years are consistent with this argument given the fall in both productivity and non-mining business investment as the Australian economy became increasingly concentrated on ‘people servicing’.
Australia is also unique in that it pays its way in the world mostly by selling its fixed endowment of minerals. Thus, importing a bigger population via immigration necessarily dilutes this mineral wealth among more people, resulting in lower wealth per capita (other things equal).
In short, the planned reboot of the ‘Big Australia’ mass immigration model is very likely to achieve exactly the same result as last decade: sluggish productivity and per capita GDP growth, low wage/income growth, and overall falling livability as both housing and infrastructure are crush-loaded.
It is a recipe to enrich those that have already hoarded assets and capital, namely the already entrenched, wealthy and corporate interests such as Big Business, Big Property, and the education-migration lobby.
Sadly, those are also the groups that pull our policy makers’ strings, cheered on by the likes of the Grattan Institute, CEDA and their ilk.
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.
