ECONOMIC AFFAIRS: by Jeffry Babb News Weekly
What is productivity and why is it important?
, September 29, 2012
Anyone who even glances at the business pages of our daily newspapers will realise productivity is a perennial topic of discussion. Few people, however, can tell you what productivity is and why it is important.
In its simplest economic sense, productivity is defined as a measure of how efficiently and effectively the main factors of production — labour and capital — combine to generate output.
Economists often talk about factors of production. The two main factors of production involved in productivity growth are labour and capital. Labour — that is the workforce, you and me — determines what is produced. In advanced economies such as Australia, labour productivity is not so much a matter of working harder, but of working smarter.
The reason productivity growth is important is because when productivity grows, wages and salaries paid to the workforce can increase and a firm’s profits can increase without causing inflation. That means the nation’s standard of living will improve. When the nation’s standard of living improves due to improvements in productivity, the improvement is likely to be sustainable.
For those of us who have the misfortune of being an “underutilised resource”, improved productivity means we have at least a chance of some form of gainful employment because when labour is used more efficiently there are more employment opportunities.
Productivity can be measured in various ways, but it boils down to the same thing — getting more output out of the same input.
The benefits of increased productivity are wide and varied. Productivity growth means people’s real incomes increase so they can spend more on goods and services, have improved access to leisure time and have better housing and education.
Increased productivity means firms can increase the quality of their products and increase their competitiveness against other firms, including foreign firms. In other words, increased productivity means Australian firms can pay better wages and salaries and still stay competitive against imported goods and services. Improved productivity means the government can increase the services it provides without squeezing out the private sector.
By recent measures of productivity growth, Australia is not doing well. It was reported a few weeks ago: “Australia has been ranked second worst of 51 countries for productivity growth, according to a global survey that places the nation’s economic performance behind 33 countries, including New Zealand and Colombia.” (The Australian, August 1, 2012).
The Australian Human Relations Institute, commenting on the findings of the global reports, said: “The high ranking in operating environment is based on a strong educational foundation, improving workplace equity, enlightened telecommuting practices and moderately satisfactory childcare services.
“However, the flexibility rankings in the policy and regulatory framework and economic performance areas are both relatively poor and can be traceable in part to a legislative environment that emphasises access to employee-flexible work options at the expense of the economic need to have a flexible workforce.”
Many commentators trace the relative decline in Australia’s productivity growth to the federal Labor government’s Fair Work Act, especially with the national workplace relations tribunal, Fair Work Australia, yielding to union pressure for “employee flexible work options” over a “flexible workforce”.
However, not all employers see industrial relations as the sole answer to Australia’s productivity problems.
National Australia Bank boss Cameron Clyne said recently: “I’m not suggesting by any means that some form of industrial relations reform is not required, but it’s fair to state that productivity has declined over the last three or four industrial relations regimes. So it’s not just industrial relations. Productivity is a much broader issue.”
Treasurer Wayne Swan also took issue with the implication that lagging productivity growth was affecting Australia’s international competitiveness, saying that while Australia’s productivity growth had been on the decline, the nation’s productivity itself was actually amongst the highest in the world.
“Our productivity levels in this country are very high on international standards, the top dozen around the world,” Swan said.
“We have seen a decline in productivity growth, a structural decline in productivity growth over the last decade or so. But with productivity growth you just don’t flip a switch and see it change the next month or the next year. The government has got a very comprehensive productivity growth agenda, through our investment structure and regulatory reform.”
The Productivity Commission is one of the government’s main sources of policy advice in the battle to improve productivity.
The Productivity Commission is the direct descendant of the Tariff Board, which was established in the 1920s and became the Industries Assistance Commission in 1974. It became the Industry Commission in the late 1980s and the Productivity Commission in 1988.
The Industries Assistance Commission (IAC) was also referred to as the Industries Assassination Commission. The IAC was criticised by manufacturing interests for being too theoretical in its approach, biased towards outdated free trade views which failed to recognise the realities of international trade and having predetermined views that were prejudiced against those parties who did not accept its fundamental