The productivity estimates for the last six years show some positive signs, with the return of quite strong multifactor productivity (MFP) growth. Labour productivity (LP) growth, on the other hand, remains a little weak and by the last year (2017-18) has more or less disappeared.  

The acceleration in MFP growth has come about as input growth has been cutback more than the fall in output growth. This is in contrast to the MFP growth surge in the 1990s, when an acceleration in output growth was met with a smaller acceleration in input growth.

It appears there are two main things going on in recent times:

• There has been lingering adjustment after the construction phase of the mining boom.
• In the face of uncertainties and a slowing economy, businesses have slammed the brakes on further growth in capital and labour inputs. 

Signs of investments in new ways to lift productivity do not immediately stand out.

The recent decline in labour productivity is narrowly focused on the construction industry.

Without any substantial improvement in labour productivity growth to offset the income effects of the decline in the terms of trade, Australian living standards have stagnated.

The ABS annual productivity estimates reported here include the 2017-18 year¹. The estimates refer to the market sector of the economy, which encompasses 16 broad industry sectors. 

Figure 1 compares productivity growth in what is referred to as the 'recent period' (2011-12 to 2017-18) with productivity growth in the productivity slump period (2003-04 to 2011-12). 

Market-sector multifactor productivity (MFP) growth has increased from zero in the slump period to a solid 0.8% a year in the recent period. This is above the long-term average of 0.6% a year. 

These period averages, however, mask what has been happening from year to year in the recent period. 

Rather starkly, annual LP growth has fallen away from 3% to a paltry 0.4% in 2017-18 (Figure 2). In the 12 'selected industries' group, LP growth fared even worse, turning negative (-0.7%) in the last year. 

The average decline in KP growth over the recent period (Figure 1) mostly took place in the first two years of the period (Figure 2). The improvement in capital productivity growth came later, with either little change in capital productivity after 2013-14 or some small positive growth.

Growth accounting relationships are used to investigate input and output contributors to change in productivity growth.

Stronger output growth means stronger productivity growth (all other things being equal). But there has been no acceleration in output growth in the recent period. In fact, output growth has slowed to be about half a percentage point below its long-term average (Figure 3). 

Capital productivity growth improved because the fall in capital growth was much greater than the fall in output growth. 

We can look at the contributors to LP growth from another angle. Table 1 shows that LP growth can be decomposed into contributions from MFP growth and capital deepening (essentially increasing the ratio of capital to labour). [LP growth = MFP growth + capital deepening]

The course of change through the recent period is worth noting.

Figure 4 shows a slide in output growth from a little under 3% to 2.2% in 2016-17. It then strengthened to 2.7% in 2017-18. 

Input growth fell further -- from about 2.5% to below 1.5% -- in 2015-16. It then strengthened more than output growth in the last two years, but more noticeably in the last year. The pick-up in output growth in 2017-18 was met with a strong pick-up in input growth.

Capital shallowing is very unusual. In fact, it has not shown up in any other year on record for the market sector, going back to 1994-95 (or for the selected industries group going back to 1973-74).

Capital deepening is usually a major source of improvement in labour productivity. Capital deepening comes about by providing labour with more and better equipment, more-advanced technologies, increased mechanisation of routine processes and so on. It increases the amount of output that is produced per labour-hour -- that is labour productivity.

The brake on greater use of capital has been widespread (Figure 10). All industries, aside from mining, have contributed to the slowdown in use of capital in the recent period. RHRE stands out, taking out more than half a percentage point from the rate of market-sector growth in capital. Transport, utilities and manufacturing have also been major contributors to slower capital growth.

We can also look at the surge in output growth and labour growth in the last year. Figure 13 shows all industries, except agriculture, made a positive contribution to market sector output growth in 2017-18. The largest contributions came from construction and then finance, professional services and mining. The largest contribution to labour growth also came from construction and a number of industries that did not make strong output contributions. 

Construction took about half a percentage point of LP growth in the last year because its labour growth was so much stronger than output growth. Agriculture also took off about the same amount because it took on more labour, even though its output declined.

• The mining sector has combined stronger output growth with weaker input growth to make strong contributions to improved market sector MFP growth and, especially, to LP growth. 
• While it did not contribute to improved productivity, the construction industry had a marked decline in output growth, consistent with the tailing off in mining construction. 
• The rental, hiring and real estate industry, which made the strongest contribution to the MFP acceleration, made the strongest contribution to weaker capital growth. This could also be consistent, at least in part, with less growth in mining construction.

Australia's living standards have stagnated since 2011-12. They actually fell through to 2015-16, but have recovered in the last two years.

Gross Domestic Income (GDI) per person is used as the indicator of average living standards (Figure 15). GDI per person is GDP per person, adjusted to reflect the income effects of shifts in the terms of trade. GDP per person is often used as an indicator of living standards. But it is important to consider GDI per person because of the major shifts in the terms of trade over the past 25 years.

Figure 15 shows how GDI per person rose more rapidly than GDP per person through to 2011-12, as the terms of trade boom associated with the mining boom added further income gains. The opposite has been true of the recent period. A decline in the terms of trade has detracted from improvements in average living standards.

Figure 16 provides a decomposition of growth in GDI per person in the two periods. The average annual rate of growth in living standards was 2.7% in the productivity slump, of which the rising terms of trade contributed about half. The other half came from productivity (as measured by GDP per hour worked) and labour utilisation (the number of hours worked per head of population). (A rise in utilisation usually stems from an increase in labour force participation or a decline in unemployment.) 

The rate of growth in living standards in the recent period has been well down, at 0.3% a year. Productivity growth has picked up a little, but nowhere near enough to offset the fall in the terms of trade and lower labour utilisation.

That is why the signs of slower growth in LP and, in fact, its recent disappearance are of concern.

Footnote

1. The ABS establishes underlying trends in productivity as the average rate of growth between successive productivity peaks. However, the ABS has not yet declared a year to be     a productivity peak after 2011-12. Although not a productivity cycle, the period 2011-12 to 2017-18 can reasonably be taken to show recent underlying productivity trends.