Xero report reveals worrying trend in labour productivity

Small businesses are struggling to get the most out of their workers, according to a report from Xero, with productivity lagging behind pre-Covid levels.

Labour productivity across Australia’s small and medium-sized enterprises is keeping pace with big business but remains below pre-Covid levels, according to a new report from accounting software provider Xero.

Xero’s latest Small Business Insights report reveals there’s been a clear slowdown in small business labour productivity over the past year, piling more pressure on operators facing inflationary headwinds and a tight labour market.

According to data from more than 240,000 Xero small business customers, labour productivity - measured by comparing sales to hours worked - slipped to $100.30 per hour in December, down from its most recent peak of $110.40 in November 2022.

The measure generally tracked between $100 and $104 per hour in the three years prior to Covid-19, before plunging to as low as $89.90 in May 2020 amid the temporary business closures and disruptions that hit many small businesses during the depths of the pandemic.

Xero economist Louise Southall said the findings were a worry for the broader economy, with productivity declines likely adding to inflationary pressures and limiting economic growth.

“Xero’s data shows there’s been a distinct slowdown in productivity over the past year,” she said.

“This decline was likely driven by both a softer sales performance and, with the labour market still tight, small businesses wanting to keep the staff they’ve trained to avoid the skills shortages they had post-pandemic.

“This has likely put pressure on already struggling small businesses, making it harder to increase profits, lift wages for staff and to keep prices low for customers.”

According to Xero’s report, the labour productivity struggles facing small business operators are trending in line with the broader challenges facing big businesses and the broader Australian economy.

Last month, the Productivity Commission’s annual report found that a surge in employment combined with lagging investment by companies to improve output triggered a sharp drop in worker productivity, limiting prospects for income growth without fanning inflation.

Across the economy, productivity fell 3.7 per cent in 2022-23, as output growth failed to keep pace with a record 6.9 per cent increase in hours worked, the commission said.

Xero’s report compared the performance of Australia’s small businesses with their counterparts in New Zealand and the UK.

It found that for most of the past seven years, labour productivity across Australia’s small businesses was lower than New Zealand but higher than the UK.

Xero Australia and New Zealand managing director Anthony Drury said the findings underlined the importance of investing in new technologies.

“Small businesses are known as the engine room of our economy. They work hard, they are our nation’s biggest employer, and they drive connection in our communities,” he said.

“But Xero’s report shows that, since the pandemic, it’s getting harder to create the same amount of value for hours worked.

“We need small businesses to work smarter, not harder, and one action to improve productivity is to digitalise.

“Government can play a crucial role here by ensuring there are targeted incentives for businesses to digitalise and enabling them to embrace technology to drive efficiency.”