Thoughtful analysis of productivity from the Opposition

The Opposition in the Australian Federal Parliament that is.

In my post yesterday, I noted  that Simon Bridges’s latest speech continued the pattern in which our Opposition pretends there is no real structural problem in the New Zealand economy: no decades of productivity underperformance, no near-complete absence of any productivity growth in the last several years (whether under National or Labour).

And so it was some mix of refreshing and depressing (would that it were so in our country) to yesterday read a new paper by the Australian Shadow Assistant Minister for Treaasury on “tackling Australia’s productivity crisis”.  No doubt it helps that the Shadow Assistant Minister was previously a professor of economics at the Australian National University (I wrote about a paper he gave in New Zealand last year here).   And perhaps the political context is different: it is now six years since the ALP was in (federal) office and it is three years until the next election.  And Leigh isn’t the highest profile ALP politician.  Nonetheless, a moderately senior figure in the main opposition party actually went to the effort of writing a serious paper on productivity failures in Australia (not even engaging mainly in gotcha politics –  all the fault of the other lot).   Would that it were so here.  If National doesn’t have any former professors of economics, I’m sure there must be some serious economists around who would be National supporters and might be happy to help, were the party to be seriously interested in addressing –  rather than avoiding –  the issue.

And I don’t say any of this because I agree with Andrew Leigh’s prescriptions.  Mostly I don’t –  in fact, to a first approximation I think he has the wrong mental model of the Australian economy –  but he is a politician showing every sign of trying to take the issue seriously.  Productivity growth is what underpins any long-term sustainable improvement in material living standards.  As he puts it (with his particular left-wing emphases)

Too often, Australians see productivity as a dirty word — synonymous with working harder, rather than working smarter. But productivity should lead to a better quality of life, in which people have more choices in the workplace and more opportunities to spend time with friends and family. The path towards higher productivity should also allow us to live in a cleaner environment, and to be more generous to the needy. Tackling major challenges, from gender equity to traffic congestion, is easier in a highly productive economy.

Here is how Leigh introduces his article

At the start of June, the Productivity Commission quietly dropped a bombshell. Australia’s productivity growth had basically stalled. Labour productivity — output per hour worked — was more or less flatlining. After a generation in which labour productivity had grown at almost 2 per cent a year, it had tumbled to just 0.2 per cent.

The commission called the results “mediocre” and “troubling,” but for some sectors they were downright appalling. In farming, mining, construction, transport and retail, labour productivity went backwards. In other words, workers in those sectors were producing less per hour than they had the year before. The latest numbers continued a trend of weakening productivity growth that the commission dates back to 2013.

To understand why Australia’s productivity crisis is so serious, it’s worth recognising why productivity matters. Through Australia’s history, our economy has become massively more productive. Australian workers today produce nearly four times as much output every hour than in the 1960s. This has been a central driver of rising living standards.

Productivity measures how efficiently the economy turns labour and capital into goods and services. When the Australian economy becomes more productive, we are producing more output from a given level of inputs. Higher productivity creates the potential for household incomes to rise faster than the rate of inflation. A more productive economy can be more generous to the disadvantaged, can reduce its impact on the natural environment, and can play a bigger role in international affairs.

Productivity doesn’t automatically bring fairness: in recent times, workers haven’t received their fair share of the modest productivity growth delivered by the economy. But without rising productivity, wages will eventually stagnate and living standards will stop increasing. Whether your priority is longer lifespans or lower taxes, raising Newstart or building motorways, you should be in favour of productivity growth. Productivity is the engine of the economy, and right now, that engine is making a nasty rattling noise.

Note that in the final paragraph of that extract is one difference between Australia and New Zealand.    In New Zealand wage growth has outstripped growth in nominal GDP per hour worked (ie the combination of terms of trade and productivity) for some time, but this is the Australian version of that chart

wages in aus

There is a variety of possible explanations, but the comparable New Zealand chart slopes upwards, not downwards.

But how does the aggregate productivity picture look for Australia?  This is quarterly ABS series of real GDP per hour worked.

aus prod.png

In the last two or three years, the picture is quite as bad (no growth at all) as in New Zealand –  bearing in mind that the average level of productivity in Australia is far higher than in New Zealand.

Leigh makes a lot of an asserted relative deterioration in Australia’s position this century.  In doing so he relies on a recent speech from a senior Australian Treasury official on productivity (another contrast to New Zealand), reporting some research work Treasury had done.

For Australia, the most hard-hitting presentation came from Treasury’s Meghan Quinn, who revealed that researchers in her department, led by Dan Andrews, had been investing in a new analysis that links together workers and firms, and delving deeply into fresh data about the dynamics of the Australian economy. Since 2002, Quinn showed, the most productive Australian firms (the top 5 per cent) had not kept pace with the most productive firms globally. In fact, Australia’s “productivity frontier” has slipped back by about one-third. The best of “Made in Australia” hasn’t kept pace with the best of “Made in Germany,” “Made in the Netherlands” or even “Made in America.”

Go to Quinn’s speech and you find this chart (unfortunately a bit fuzzy)

quinn

The left hand panel is the point Leigh is making.  It doesn’t look very good.

On the other hand, the economywide cross-country comparisons really don’t look so bad at all (and being annual data you don’t see the recent flattening in the way the quarterly chart above shows).

In this chart, I’ve shown Australia’s real GDP per capita compared to an average for Leigh’s three countries (Germany, Netherlands, US) and to the median for the leading OECD bunch (as I’ve used in previous charts and tables for NZ comparisons: US, France, Belgium, Netherlands, Germany, Austria, Denmark, Sweden).

AUs prod 2

On these economywide measures, the 1970s and 1980s were a pretty bad time for Australia, in relative productivity performance terms.   Since then, a pessimist might say Australia has more or less flat-lined relative to these leading OECD economies, while an optimist might suggest some modest beginnings of a catch-up process at work.   It isn’t a good performance at all –  the leaders are almost 20 per cent ahead of Australia and if the gaps are closing, it is an incredibly slow process –  but it is a rather different emphasis than in the Federal Treasury chart Leigh draws on.

That idea that it isn’t a good performance at all is reinforced once one realises the extent to which Australia has been able to draw anew on nature’s bounty in the last ten to fifteen years –  all those newly developed iron ore and LNG exports.  There has been nothing comparable in most of the other OECD countries I’ve used in the chart above (oil in the US might be closest thing, but much smaller relative to the size of the economy).   I haven’t looked in detail at the Australian Treasury research (which is still described as “forthcoming”) but perhaps what is going on is that existing Australia firms haven’t done that well (and as Leigh highlights the rate of business start-ups etc is low), but that the economy as a whole just has a whole lot of newly-exploited natural resources it has been able to use to hold up overall economic performance  (well done them: I had an email yesterday from some NZ public and private sector group oncerned to stop the depletion of New Zealand’s natural resources, a cause with which –  in this context –  I could not sympathise).

And yet, despite that, Australia has made very little progress in closing the gaps to the OECD leaders.  Here is another comparison I’ve long found interesting, looking at real GDP per capita in Australia relative to that in Norway, the other advanced OECD country able to exploit an abundance of natural resources in recent decades.

aus norway

Australia –  still building up its fresh wave of resource exports –  has regained a little ground relative to Norway in the last fifteen years (oil exports from Norway are falling, and gas looks to have peaked) but it isn’t dramatic, and has been barely a thing at all in the last few years.  And yet these two countries were more or less level pegging fifty years ago.

There wasn’t much (any?) mention of resource exports in Andrew Leigh’s article.  There also wasn’t much (anything?) on the other big change in Australian policy in the last fifteen years or so, the marked increase in policy-led immigration to Australia.  My own story of Australia’s underperformance is much like that for New Zealand.   Remoteness and distance are huge issues –  perhaps even increasingly important globally –  and the fortunes of both countries depend very very heavily on natural resources (and the ability of talented people and decent institutions to facilitate their extraction and utilisation).  It isn’t just a matter of simple division –  but it is close to it, bearing in mind what else we know about the Australian economy –  to suggest that had Australia’s population not been supercharged again by policy (like New Zealand bipartisan policy) that the bounty from the natural resources newly exploited would have translated into higher living standards for the average Australian, higher economywide productivity.

There are lots of detailed points in Leigh’s article, some of which seem more compelling than others (I’m not persuaded that getting more people into tertiary education is likely to make much economywide difference, when the people not going now are likely to be those who would benefit least from doing so –  it hasn’t been worth their while to do so). And I’m not convinced he has the right model to think about Australia –  where the bigger issues seem more macro in nature – but it is just refreshing to see a moderately senior active politician actively engaging in thinking about, writing about, talking about, how productivity performance might be markedly improved.  Because, as he says, it really matters to all of us.

15 thoughts on “Thoughtful analysis of productivity from the Opposition

  1. Michael

    I sometimes wonder if our declining productivity is a civilisational issue, rather than some inherent flaw in our economic policies, or structures generally.

    Author and commentator Mark Steyn has long reflected on the relatively modern phenomena of extending the period of adolescence beyond the initial teenage years, well into the late 20’s, even 30’s and beyond. He opines on this with his usual wry humour here:

    https://www.steynonline.com/9579/intergenerational-welfare

    It’s bad enough to be ruled by children, but to be dependent upon them more generally to sustain a productive economy is something else again.

    Liked by 2 people

    • there may be something to that at a global/advanced-countries-as-a-group level, but it can’t really explain NZ’s relative decline, which has to be about things specific to us (whether policies or endowments).

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      • Perhaps.

        To be more specific, the percentage of working age New Zealanders who are in receipt of a benefit has hovered around 10% for some time now. That’s a significant drain on national productivity.

        https://www.msd.govt.nz/about-msd-and-our-work/publications-resources/statistics/benefit/latest-quarterly-results/all-main-benefits.html

        Compare this to the early 1970’s when I understand the number was closer to 2%. (cannot quickly find reliable source). What has happened in five decades? Have we become that much sicker, accident prone, unemployable or all of the above? Or do we just get more of the behaviours successive governments chose to reward?

        Either way, it would be interesting to know how that level of workforce non-participation compares with our more productive competing economies.

        I also suggest that it’s more than just our distance from major markets, it also has something to do with the size of our domestic economy, along with the scale of industry and investment that it is able to support / attract. It may also have something to do with individual aspirations. Most Kiwi business people, even those who are quite successful usually cannot be bothered with the additional drama of attempting to address international markets. There are exceptions of course, but if your local business generates more disposable income than you can reasonably spend, why bother? I appreciate this doesn’t speak directly to productivity, but it does to scale, and my sense is that they are connected.

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      • The labour force participation rate (and employment rate) in NZ is among the highest in the OECD, and we also have among the highest hours worked per capita.

        Re scale, my argument is that our extreme remoteness is such that we could not manage first world incomes here for a materially larger population. Also, note the various highly productive small advanced countries – incl one as tiny, and relatively remote, as Iceland. With able people – but not many – they play to their strengths (fish and electricity).

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  2. In terms of the causes I’d rank them as:
    – paucity of globally competitive exporting firms of the likes of BHP, CSL, Cochlear and Macquarie, which in turn is driven by a number of factors including Dutch Disease.
    – inhibited domestic competition
    – poorly functioning labour market where low-cost immigration has removed pressure on firms to upgrade skills and technology
    – cost of land.

    In terms of what I’d do about it:
    – a framework to create a more competitive exchange rate / exporting environment through a combination of savings/investment related reforms and a mechanism for saving the gains from resource booms.
    – greatly expanding scope, powers and ambition of national competition policy
    – reform of immigration to focus on high skill bucket (eg >$120k salary) and genuine humanitarian cases
    – comprehensive land use reform.

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    • Instinctive reaction: it will never happen because it is too sensible.
      My amendments would be
      – make your high skill immigration almost instantaneous – meaning employer posts a bond while all the medical and criminal stuff is completed. I’ve written too many anti-low wage immigration comments but the other side of immigration is also important: if a major project depends on a particular expertise and the person in place is unexpectedly unavailable then instant access to the best international replacement is essential.
      – reserve honours list titles to significant exporters – prefix ‘Bob Boot exporter of Kiwi processed timber’ with ‘Sir’ and it sounds better, especially in communist countries.

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  3. I disagree with the author. I was at the National Party Conference in Christchurch and there was much discussion on low New Zealand productivity and how to improve it, although not in Simon’s speech it was a feature.

    Liked by 1 person

  4. Do the various forms of productivity measurements include any environmental costs that might be incurred? For example if an increase in production per hour worked also entails an even greater relative carbon emission is this taken into account. If not, do you think it should be?

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    • If productivity is the difference between input (labour & capital) and output (value as judged by consumers) then CO2 emissions could be treated as capital. It does sound like experts imposing their values; should extra productivity by legal prostitution or gambling be treated differently to extra productivity manufacturing life saving drugs? Surely we leave it to our society. A current example would be the premium paid for free-range eggs – so in NZ there will be two chickens laying almost identical eggs but the consumer values one as double the other. Did you chose an electric car?

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  5. Two different things really aren’t they? In principle, I’m happy to see countries working towards internalising externalities – including emissions ones. I phrase it that way because (say) fully pricing methane emissions here when no one else does would leave us materially poorer and the world no better off. For Australia, the issue may be more one about demand than supply – if the world is going to consume coal or LNG, Australia might as well benefit from being the country to sell it. One could mount the same argument about oil and gas exploration in NZ (even more safely, since there is no chance of our supply materially affecting the world market price).

    And, of course, there is the consideration that had we – at the extreme – banned coal and oil 100 years ago, as far-seeing forecasters, recent generations, including our own, would have been much poorer, missing out of all sorts of stuff growth has brought about (from the trivial to the profound, through the merely comfortable and pleasant.)

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  6. A Leigh is like K Keneally. They look at the global social justice of unmoderated immigration, vs the local social injustice of crush-loading the cities, screwing their residents, and stiffing their wages.

    Effortlessly, they choose the former. With pals like these, ALP has no need for external enemies.

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