Last week the Reserve Bank of Australia (RBA) delivered Aussies with good news with the third rate cut of the year, but that came together with some not-so-good news… of a reduced productivity forecast. 

Yup, you might have thought productivity was just about how much life admin you could smash out on a random weeknight, but economists also measure Australia’s productivity.

For the RBA, productivity is about how much output (goods and services) can be produced with a given set of inputs (e.g. labour and capital). When more output is produced with the same or less amount of inputs, productivity increases!

Often, you’ll see two measures of productivity talked about the most. Labour productivity, which measures the amount of output per worker or per hour worked, and multifactor productivity (MFP), which measures the amount of output divided by a combination of inputs. 

Here’s how you might interpret productivity at a bakery 🥖

• Labour productivity 
  
  • Measures how many loaves of bread each worker can bake in an hour. 
  • E.g. If one worker can bake 10 loaves per hour and another worker can bake 15 loaves per hour, then the second worker is more productive. 
• Capital productivity 
  
  • Measures how efficiently the oven or baking machines are used. 
  • E.g. If there are two ovens but one is newer and can bake double bread loaves using the same amount of energy, then the new oven is more productive. 
• Multifactor productivity (MFP) 
  
  • MFP doesn’t just measure baker and machine efficiency, but how everything works together including team skills, workflow organisation, management, etc.
  • If the kitchen is reorganised and suddenly everyone can bake more loaves without needing new tools or working more hours then MFP is improved.

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‍So what’s up with Australia’s productivity growth? 

When times were good (late 1980s to early 2000s) Australia’s productivity growth peaked around 3% p.a. This means, productivity was improving year on year across multiple sectors and industries. 

Economists contribute these golden productivity years to a series of economic reforms like floating the exchange rate, privatising government businesses and establishing the National Competition Policy - all of which boosted competition in Australia. 

But in the past decade, Australia’s productivity growth has taken a massive nosedive - it’s now dipped below 1% p.a., and predicted to keep falling… 

Economists believe this is due to Australia’s transition towards more service-based industries (where it’s harder to measure productivity), fewer business innovations, and events like Covid which hit businesses & government spending hard.

If it makes you feel better…this isn’t just happening in Australia. Other advanced economies have seen similar downward trends in productivity growth in the past decade too…but that doesn’t mean it’s not a problem.

Why is productivity growth important? 

Economists aren’t going on and on about this for no reason - productivity growth is a key driver for improvements in Australia's standard of living.  

When productivity growth is strong:

• It enables businesses to increase wages for workers (and we desperately need wage growth to fight back the cost-of-living crisis)
• It allows businesses to pass on lower prices to consumers without reducing profits (gimme discount pls)
• It means businesses can use their increased profits to reinvest in the business (for even more productivity gains) or share the profits with shareholders

So when productivity growth is slow, it means we lose momentum on these positive changes in the economy. 

What now? 

Like with any challenge in the economy, everyone has a different opinion on how to make things better…but there’s no simple solution.

The government has acknowledged that Australia’s slow productivity growth is their next focus, and they’ve hosted a three day economic reform summit to think of ways to get Australia back on the productivity track!