Productivity dampened by inefficiency, failure to innovate: Productivity Commission
A Productivity Commission report has found that Australia’s slumping productivity has been caused by creeping inefficiency and a failure to push the boundaries of innovation.
The Productivity Commission’s annual productivity bulletin has found that multifactor productivity (MFP) growth rose by 0.1 per cent between 2022–23 and 2023–24, below the 20-year average rate of 0.3 per cent and much lower than the 1.6 per cent annual rate recorded between 1994–95 to 2003–24.
This “almost non-existent growth”, as the report said, had been worsened by the fact that Australia has not found new and better ways of using inputs, and has not made the best use of new ideas.
“The research shows that creeping inefficiency over the past two decades or so has sapped our productivity performance,” Alex Robson, deputy chair at the Productivity Commission, said.
“This is a great reminder that multifactor productivity isn’t always all about cutting-edge innovation – applying new ideas and doing more with what we have also matters.”
Because productivity was related to wage growth in the long term, Australia’s poor productivity performance was bad news for workers, according to the RBA.
“Over the longer run, labour productivity and real wages – as measured by average earnings from the national accounts – also tend to move together,” Michael Plumb, head of economic analysis at the RBA, said in a speech on Thursday.
“Higher productivity not only benefits firms, it also benefits workers by increasing their purchasing power.”
According to Plumb, Australia’s declining economic dynamism was one culprit behind the country's falling productivity.
“The decline in economic dynamism relates to declining competition in the economy. Regulatory barriers also appear to have played a role in Australia, notably in the construction industry. Other explanations include slowing human capital accumulation, declining trade integration, and mismeasurement,” Plumb said.
Productivity Commission economists explained that MFP has been sluggish for two reasons. Firstly, innovation lessened, meaning fewer new and better ways to organise capital and labour inputs.
Secondly, resources have not been used effectively, meaning innovations have not been applied in practice.
“Inefficiency can occur because new technology makes old capital obsolete, but firms do not dispose of the capital and so it goes underutilised,” the PC report said.
“More stringent regulation is another possible driver, as regulation can prevent firms adopting new technologies and using resources efficiently.”
“Even well-designed regulation might reduce MFP in pursuit of other social, environmental or economic goals that are not captured by output.”
The RBA said it expected productivity to increase but warned that its projections contained a lot of uncertainty.
“Ultimately it’s about how efficiently capital and labour are employed across the economy to produce goods and services,” Plumb said.
“Productivity is not about working harder, but working smarter. Many of the biggest productivity improvements have come from things that have made our lives easier, like computers, robots, the internet and smartphones.”
