The surge

Key points are made on this page. For further information and details, take the link here [The surge: Details] or at the bottom of the page.

The numbers

Australia's productivity growth surged over the period 1993-94 to 2003-04. Figure 1 shows the productivity growth rates in its various forms. 

(For guidance on the interpretation of the different measures, see 'Interpretation of measures'.)

 Average annual rates of growth (per cent per annum), 1993-94 to 2003-04
 Data source: ABS Cat. No.5260.0.55.002

The growth rates were:
  • 3.2% a year in labour productivity -- an increase of around 50% on the rate of growth in the baseline period
  • 0.1% a year in capital productivity -- a move away from negative growth in the baseline period 
  • 1.8% a year in multifactor productivity -- an increase of over 150% on the baseline rate.

Immediate contributors

The productivity surge was associated with a rapid acceleration in output growth (an additional 1.8 percentage points over the baseline rate of growth), but without the same requirement for increased input growth. 
  • That is, additional output growth was met with more rapid improvements in input efficiency.
  • There was greater acceleration in capital productivity than in labour productivity. 
Productivity growth was strong in agriculture and a number of services industries in the surge period -- higher than in manufacturing, traditionally regarded as the main source of productivity growth. 

The main industry contributors to the acceleration in productivity growth were:
  • wholesale trade (a stand-out contributor)
  • construction, manufacturing, agriculture (not necessarily in order).
 Manufacturing contributed through its relatively large size, rather than the absolute size of its productivity acceleration.

Underlying reasons

There is no definitive proof of what led to the productivity surge. Three main explanations have been put forward:
  • a series of microeconomic reforms that elevated the role of markets and reduced the negative effects of unnecessary government interventions on economic growth 
  • a technology 'shock' in the form of rapid advances in information and communications technologies (ICTs)
  • increased work intensity (people working harder and longer, but without registering as measured increases in hours worked).
There is a widespread view that microeconomic reforms were primarily, or perhaps even overwhelmingly, responsible. There is also quite a deal of support for the technology explanation. The work intensity explanation has been primarily associated with its proponent, John Quiggin.

I subscribe to the view that microeconomic reforms played some direct role but were also indirectly and jointly responsible with technology (ICTs). We needed both reform and technology to access the potential productivity gains from disruption to business models. Increased work intensity would also have played a role, but not in the way and to the extent that John Quiggin has asserted.

It's useful to view productivity gains coming about through a combination of driver(s) and enabler(s). Without drivers, producers do not have a strong motivation to improve productivity performance. They can, for example, satisfice and rely on market power for adequate returns. But, in addition to drivers, they need the means to improve performance -- adoption of new technologies, adequate communications and transport infrastructure, appropriate skills and so on.

Microeconomic reforms brought stronger productivity drivers in the form of sharpened competitive (market) pressures, which motivated producers to seek out productivity opportunities in order to survive or at least maintain market share and profitability. There was incentive for producers to reduce waste, to concentrate on what they could best and most-profitably produce and to adopt new technologies.

Reforms also brought greater flexibility in capital and labour markets. This enabled producers to adjust more readily -- changing what they produced and how they produced it. Labour and capital could move more freely to where it was better utilised. 

New technology (in the form of ICTs) was another enabler. However, while ICTs brought new opportunities for productivity gains, investing in ICTs on its own was not sufficient to realise potential gains. It required other investments in innovation and business re-engineering. That is, it was the introduction of new and innovative 'business models' based on the ICT platform that generated the strong productivity gains. For example, ICTs enabled better coordination of the wholesaling function, transforming it from a storage-based system to a fast production-to-retailer delivery system.

The stronger competitive pressures and greater flexibility, conveyed by reforms, were essential precursors to putting ICTs to full productive advantage. Stronger competition provided motivation (increased the benefits) and greater flexibility enabled easier adjustment (reduced the costs).

In short, the Australian economy would not have accessed the technology gains, as early and to the same extent, without the prior progress on reforms.

Consequently, while the ICT advance component fits the industry footprint of the productivity surge (in particular, the productivity gains in wholesale trade), reforms and technology provided joint explanation.

Increased work intensity would have made some contribution. But, in my view, it cannot provide sufficient explanation -- on its own -- for the size of the productivity acceleration. It is also hard to map increased work intensity to the industry footprint of the acceleration. Was increased work intensity focussed largely on wholesale trade?

Consequences for living standards

Productivity is not something that should be pursued for its own sake or at all costs. It has to serve a higher purpose. One higher purpose is to improve a country's general (material) living standards. The ultimate purpose is to raise community wellbeing (which is served in a number of ways.) For further explanation see the What, why and how of productivity.

Nevertheless, productivity growth is the major source of growth in living standards over the long term. 

Growth in living standards is usually gauged by growth in GDP per capita. While that measure has some well known weaknesses, it is nevertheless useful as a general indicator.

The productivity surge brought a strong lift in growth in Australia's GDP per capita. Figure 2 shows the growth rate in GDP capita lifted from 1.5% a year before 1993-94 to 2.6% a year in the surge period. It also shows that additional productivity growth accounted for the majority of the additional growth in living standards.

Figure 2 also shows that there was no tradeoff between productivity growth and jobs in the surge period. The rate of labour force participation and employment also lifted over that period.

Average annual rates of growth (% per annum) in GDP capita and percentage point contributions
from GDP per person and from hours per person
Growth rate and contributions calculated as differences in natural logs
Source: My calculations based on data from ABS Cat No 5204.0

Forward page links

For further information and details on the material on this page, go to The surge: Details

The two other topics discussed under 'Australia's productivity trends' are: