Posted: 29 Oct. 2019 5 min. read

Mind the gap - productivity

Weekly Economic Briefing

The ABS released its Annual National Accounts publication last week – the most detailed report card on Australia’s economic performance we will see for 2018-19.

And at least one key statistic provided serious, and troubling, food for thought. Australia’s labour productivity fell through 2018-19, having already eased over several years prior. In other words, compared to the previous year, there was less output created for every hour of work. It’s the first time this has occurred over the past 20 years, and it reflects some of the weakness in the Australian economy.

Chart: Australian labour productivity (market sector), annual growth

Mind the gap - productivity

Source: ABS Cat. no 5204, Table 13

So what’s driven this fall in labour productivity? In recent years, business investment has been weak, as conditions have pushed firms to delay spending or to move gains into profits rather than investment. This can be problematic, as the foregone investment means less new technology and equipment to complement workers’ development and innovation. In essence, it can make it harder for workers to continue to improve at their jobs.

Australia is not alone here – business investment has been weak globally, particularly as the trade and technology dispute between the US and China has intensified. An unstable political and economic environment means an abundance of caution – and businesses here and abroad have been putting investment plans on hold as result.

The other big driver of the fall in Australian labour productivity is businesses taking a quantity over quality approach. With persistently low wage growth, it’s become more economical for businesses to hire additional staff. So much so, that some businesses can get more bang for their buck via additional workers than they can via capital investment. That’s seen strong employment gains in recent years and pushed down the capital-labour ratio (the quantity of capital inputs used per unit of labour input).

Normally, the demand for extra workers would help to push wages up, but as the supply of labour has kept pace, there remains some spare capacity in the labour market. If that remains the case (which we expect it to), we’ll have to rely on a turnaround in productivity to see more substantive wage growth. That’s because more productive workers are more valuable to a company – and their wages need to reflect this.

Of course, businesses have a role to play in fostering an environment that allows for these productivity gains. And that brings us back to more investment as the necessary ingredient to amplify economic and wages growth – investment both in new technology and equipment, but also in the skill base of workers.

More about the authors

David Rumbens

David Rumbens

Partner, Deloitte Access Economics

David is a macro economist with extensive experience in applied economic and quantitative analysis of the Australian economy, along with considerable experience in labor market analysis.  David is a regular commentator on macroeconomic trends, and prepares a weekly economic briefing newsletter.

Harry Murphy Cruise

Harry Murphy Cruise

Senior Economist

Harry joined Deloitte Access Economics in January 2017 after completing a Bachelors of Arts and Commerce, with honours in Econometrics and Business Statistics from Monash University. Harry’s area of focus is data analytics and econometric modelling, having conducted a range of research surrounding mental health, prescription drug use, labour markets and ageing populations.