Australia's productivity trends: Details

Background

There are different ways to define and measure productivity. But we can put all that aside because policy-related discussions and assessments of Australia's productivity performance are based on one set of numbers. The Australian Bureau of Statistics (ABS) is the independent and authoritative source of productivity estimates for Australia.

The ABS defines and measures productivity as the ratio of the output of goods and services produced to the quantity of inputs used. Different types of input can be selected to form different productivity measures:
  • labour productivity -- the ratio of output produced to labour input used
  • capital productivity -- the ratio of output produced to capital input used
  • multifactor productivity (MFP) -- the ratio of output produced to the combined use of labour and capital.
For more detail on measurement, see Measurement of productivity.
For guidance on the meaning of the productivity measures, see Interpretation of measures.


The three productivity trends

We've got a small issue in discerning long-term trends. The 'headline' (or 'official' or 'go to') ABS estimates refer to productivity in a group of 16 industries that form the 'market sector' (mainly, the private sector of the economy). But these estimates only go back as far as 1994-95.

To discern long-term trends, we can pick up an alternative series for a sub-group of 12 industries -- what the ABS refers to as the 'selected industries' group. These estimates go back to 1973-74. (For details on the industries covered in the 16- and 12- industry groups, see Measurement of productivity.)

The market sector estimates are shown for completeness (Figure 1), but the assessment of long-term trends is based on the selected-industries estimates (Figure 2).

The figures show the course of multifactor productivity (MFP), which is the rate at which output is generated from the combined input of labour and capital. Because it includes both major inputs of labour capital, it is considered a more comprehensive measure of productivity than labour productivity or capital productivity. 

  
 Index, 1994-95 to 2014-15, 2013-14=100
Estimates are based on the hours worked measure of labour input and cover the 16-industry market sector
Numbers on the chart are annual average rates of growth (per cent per annum)
Source: ABS Cat. No. 5260.0.55.002
 Index, 1973-74 to 2014-15, 2013-14=100
Estimates are based on the hours worked measure of labour input and cover the 12 'selected industries' group
The numbers on the chart are annual average rates of growth. 1973-74, 1993-94 and 2003-04 are productivity peaks and so the rates of growth are calculated from one productivity peak to another productivity peak
Source: ABS Cat. No. 5260.0.55.002

Figure 2 reveals three main trends in Australia's productivity performance over the past four decades: 
  • a baseline period, 1973-74 to 1993-94, over which the rate of MFP growth averaged 0.6% per annum (pa) 
  • a surge period, 1993-94 to 2003-04, over which the rate of MFP growth lifted two and a half times to 1.8% pa
  • a slump period, from 2003-04, in which productivity has been flat overall, with some years of negative growth.
While productivity growth has been positive since 2011-12, the level of MFP is barely above where it was in 2003-04. The productivity slump is also clearly evident in the market sector series (Figure 1).

The surge and the slump are quite remarkable, but for very different reasons. 

MFP growth of 1.8% pa during the surge is extremely high, not only by historical standards but also by international standards. (At one point, it was as high as 2.5% per year -- see below). It is unusual for a developed economy to have a rate of productivity growth that high.

No overall MFP growth during the slump is also extraordinary. No MFP growth over a 10+ year period is unprecedented historically and internationally. Indeed, at face value, it does not make sense. There is always at least some productivity growth over such a long period due, if nothing else, to the march of technological progress. And advances in information and communications technologies, as a prime example, have continued to bring widespread and deep change over the 2000s.

Both the surge and the slump have warranted close examination. I provide summaries on other pages (take links from the Navigation box or at the bottom of this page). 


The complete picture

Just for completeness, here is the more-detailed picture on Australia's productivity trends as revealed in published ABS estimates. These estimates show underlying rates of productivity growth for shorter intervals within the three broad periods identified above. These periods are productivity cycles, as identified by the ABS. The average annual rates of growth over productivity cycles are part of the published productivity accounts.1

The MFP growth rates are shown in Figure 3 (16-industry market sector) and Figure 4 (12 selected industries group). 

The main point of note (from Figure 4) is that the surge period consists of a sub-period, from 1993-94 to 1998-99, with an extremely high MFP growth rate of 2.5% a year and another sub-period, from 1989-90 to 2003-04, with an MFP growth rate closer to the long-term average.2
 
 
Compound annual average rates of growth (per cent per annum)
(a) Incomplete cycle
Source: ABS Cat. No. 5260.0.55.002
Compound annual average rates of growth (per cent per annum)
(a) Incomplete cycle
Source: ABS Cat. No. 5260.0.55.002


Footnotes
  1. Productivity can be quite volatile from year to year, with sharp changes coming, especially, with business cycle variations. Year-to-year rates of productivity growth, in these circumstances, are quite misleading indicators of underlying rates of productivity growth. The ABS addresses this issue by calculating productivity growth rates from the same point in successive productivity cycles -- from one productivity peak to the next productivity peak. The growth rates over productivity cycles represent underlying rates of productivity growth. (For more details on calculating underlying rates of productivity growth and the ABS productivity cycle method, see Measurement of productivity.)
  2. The grounds for specifying the start and end of the productivity surge can be contested. Looking at Figure 4, the 1993-94 to 1998-99 cycle stands out clearly as a productivity surge period. I have also included the next cycle, 1998-99 to 2003-04, in the surge period mostly because it remains distinct from the two slump cycles that follow. But then the rate of growth in the cycle prior to 1993-94 differs little from the rate in the 1998-99 to 2003-04 cycle. However, the start of the productivity surge is clouded by the deep recession around 1990. I covered various views on the start and strength of the productivity surge in Appendix 1 of Parham (2004). The only conclusion that could be drawn with confidence was that the surge was clearly established by 1993-94. 

Key references
  • Parham, D. (2013),’Australia’s Productivity: Past, Present and Future’, Australian Economic Review, vol.46, no. 4, pp 462-72.
  • Parham, D. (2004), ‘Sources of Australia’s Productivity Revival’, The Economic Record, vol.80, no.249, pp.239-257.