Low productivity growth bringing less bang for the buck

Australia’s insipid productivity growth is contributing to the soaring cost of living and an independent body is calling for immediate action.

Productivity Commission deputy chair Alex Robson says the challenge is urgent and he wants action on its five-yearly report into the matter.

The Labor government has accepted many of the March report’s 71 policy recommendations but Professor Robson says the commission still awaits a formal response from the Commonwealth.

Productivity grew at 1.1 per cent over the decade to 2020, its slowest pace in 60 years.

“Improving labour productivity growth is a key piece of the cost of living puzzle,” Prof Robson told a parliamentary hearing on Friday.

As an example, he said in 1901 it would have taken an Australian 473 hours of work to pay for a bicycle, but in 2019 it would have taken six hours.

“That’s close to an 8000 per cent increase in labour productivity, and a massive reduction in the cost of living expressed in terms of the purchasing power of a typical hour of work,” he said.

Prof Robson said slowing productivity growth on the global stage meant Australia could no longer coast off other countries’ efforts.

“In other words, rather than being an excuse for doing less, the global productivity slowdown likely means we need to do more,” he said.

Australia’s lacklustre productivity performance has come into focus over the past few months in the context of the Reserve Bank’s fight against rising inflation.

RBA governor Philip Lowe has been worrying about unit labour costs, or the difference between growth in nominal labour costs and productivity.

While Dr Lowe has stressed wages are still growing at a pace consistent with the inflation target, he says productivity will need to start lifting or unit labour costs will become too high.

The central bank has already lifted interest rates by 400 basis points and further tightening is on the table.

In an opening statement to a parliamentary hearing into the cost of living crisis, Prof Robson noted high inflation would itself exert downward pressure on productivity growth.

“Unanticipated inflation redistributes income and wealth, it distorts decisions to consume, borrow and save, and to the extent that it masks changes in relative prices, it distorts investment, production and consumption decisions,” he said.

The official also flagged a number of headwinds threatening Australia’s productivity performance including climate change and global trade barriers.