Key points are made on this page. For further information and details, take the link here [The slump: Details] or at the bottom of the page.
The numbers
Productivity growth, in MFP form, essentially disappeared after 2003-04 (Figure 1). The annual growth rate fell from 1.8% in the surge to next to nothing in the slump (from 2003-04 to 2014-15).
Capital productivity showed the biggest turnaround, with a fall of well over 2 percentage points from its rate during the surge. The rate of labour productivity growth fell just over 1 percentage point.
Immediate contributors
A combination of slower output growth and more rapid input growth accounts for the disappearance of MFP growth. Figure 2 shows annual output growth fell from over 4.2% to 3.0%, while annual growth in combined inputs of labour and capital climbed from 2.4% to 3.0%. With the same growth in output and inputs during the slump period, MFP growth has fallen away entirely.
An acceleration in capital growth accounted for the more rapid growth in inputs. The capital contribution to input growth went from 1.8 percentage points during the surge to 2.5 pp in the slump (Figure 2). Labour's contribution declined marginally.
The combination of more rapid growth in capital and slower growth in output is the proximate reason for the steep fall in capital productivity.
 Annual average rate of growth (per cent per year) for the 12 selected industries group
The surge period is 1993-94 to 2003-04 and the slump period is 2003-04 to 2014-15Calculated as differences in logs Source: My calculations based on ABS Cat No.5260.0.55.002 This combination is the central puzzle about the slump. Why was the capital acceleration left unrequited by output growth? It is unusual for capital to accelerate strongly over a long period -- 11 years in this case -- without a broadly matching acceleration in output. At face value, it does not make sense. It implies that businesses continued to up their investment, while average output and income returns declined.
The industry dimension is crucial to solving the puzzle. It turns out the mining industry accounted for roughly 60 per cent of the fall in the rate of capital productivity growth from the surge to the slump (2.4 pp of annual growth, as shown in Figure 1). The remainder of the fall was spread across a range of industries.
Underlying reasons
The construction phase of the mining boom played a very large part in the fall in Australia's capital productivity. The first question is, 'How did this happen?' and the second question is, 'How big a problem has it been?'.
To state the obvious, the boom in commodity prices led to a boom in investment in new mining capacity as miners chased the expectation of larger financial returns. The rate of capital accumulation in the mining industry jumped from 3.9% a year during the surge to 11.0% a year during the slump.
It is very important to note that, for productivity measurement, mining output is the volume of production and not the value of production. While a tonne of iron ore became much more valuable, it remained one tonne in volume terms.
Mining volumes did not accelerate to the same extent as capital, for three reasons:
The 'dash for volume' also reduced average capital productivity in the short term. With expectations that commodity prices would only remain high in the short term, it made sense for miners to get as much volume of product to market as quickly as they could. Inefficiencies could be tolerated, so long as high returns persisted.
Even though it has been over an extended period of around 15 years, the decline in mining capital productivity can be seen in the main to be the result of a process of adjustment to a shift in demand, a new set of expected prices and changes in the costs of extraction of mining commodities. A stable level of capital productivity would signal the completion of the adjustment process.
[I will say more on mining productivity as one of the 'Productivity issues', when I start populating that part of the site.]
There have been other industry contributors to the decline in capital productivity at different times and to different extents. While these cases are swamped by the mining case, they are still important. They are covered on the 'Details' page.
Consequences for living standards
The second question is about the significance of the productivity outcomes for living standards.
You would think the lack of productivity growth would be disastrous
for growth in living standards. On its own, it would be. But there was something
else going on.
While productivity is definitely the key source of growth in living standards over the long term, there can be other sources in the short to medium term. Growth in Australia’s terms of trade – the ratio of export to import prices – filled the gap left by productivity in the 2000s. See Box 1 for an explanation of how. Australia’s terms of trade began to take off from 2002-03. As a result, Gross Domestic Income (GDI) began to depart from GDP (Figure 3). GDI is a measure of real income that adjusts GDP for movements in the terms of trade.  Indexes, 2003-04 =100 (GDP, GDI) and 2013-14 = 100 (terms of trade)
Data source: ABS Cat No 5204.0 Figure 4
tells the story. It shows the rate of growth in GDI per person in the slump (up
to 2011-12) at nearly four tenths of a percentage point behind the rate in the
surge. That relatively small difference aside, it is the difference in
composition that stands out. While labour productivity was the major source of
growth in living standards in the surge, the terms of trade was the major
source in the slump (up to 2011-12). In fact, the additional terms of trade
effect very nearly made up for the weaker productivity contribution.
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