Australians are working more and producing less, research finds
Without substantial productivity gains, continuing to work more hours will unlikely drive wage growth, the Productivity Commission says.
Last financial year, labour productivity fell by 3.7 per cent as employers failed to extract more value from an unprecedented rise in hours worked across the country.
Australia recorded the greatest increase in hours worked (at 6.9 per cent) on record in the 2022–23 financial year. The next-highest increase recorded in the country was only 4.3 per cent in 1988–89.
Deputy chair of the Productivity Commission, Alex Robson, said its Annual Productivity Bulletin provides the “most complete picture to date” of the mechanics behind last financial year's productivity declines.
The report reinforced the idea that productivity growth is the product of working “smarter, not harder or longer,” said Robson.
Across the 2022–23 financial year, productivity increased at approximately half the rate of hours worked - at 3 per cent for the whole economy and 3.8 per cent for the market sector.
In June 2023, the yearly change in employment was recorded at 3.1 per cent, meaning 422,300 people were employed in the year leading. Productivity failed to keep up with this growth.
“Given our labour force participation rate is near its historical high, we won’t be able to rely on working harder or longer as a source of income growth moving forward,” said Robson.
Indeed, the Productivity Commission said productivity growth is the “main driver” of long-term income growth, meaning the increase in take-home wages last financial year might be an exception.
“What’s worse, we know nominal wage growth without productivity growth can fuel inflation,” he added.
According to Robson, more sustainable, longer-term wage growth is only possible when complemented with productivity gains.
The capital-labour ratio – the amount of capital stock relative to labour inputs – declined by 4.9 per cent, making it the single greatest decline in recorded history.
In other words, the productivity decline was partly due to a failure to extract more value from labour through complementary capital, such as equipment or technology investments.
Generally, labour productivity scales with capital investments as technologies help to get more out of every hour worked – although there can be a lag time.
“While a number of Australians had jobs, employers didn’t invest in the equipment, tools, and resources that are needed to make the most of employees’ skills and talents,” said Robson.
The slump in labour productivity reversed gains made earlier in the COVID-19 pandemic years, when productivity “rose rapidly.” This growth “disappeared” last financial year, said the Productivity Commission. The productivity hikes during COVID-19 were predominantly caused by more hours being worked in more productive industries and fewer in less productive industries.
Productivity decreases were frequent but not unanimous as 11 of 16 market sector industries suffered declines.
The single greatest decline was recorded in the wholesale trade industry which recorded a 15.7 per cent increase in hours worked while output grew by only 2.4 per cent. Together with the accommodation and food services industry, the two accounted for more than half of the overall productivity declines.
