Record increase in working hours, but declining productivity

The Productivity Commission has warned that Australians are working more hours just to produce and buy the same amount of goods and services.

Australian Industry Group chief executive Innes Willox.

Australians are working harder than ever but getting nowhere, with a new report detailing how a collapse in productivity growth over the past year has left families “running to stand still”.

The Productivity Commission’s latest quarterly analysis highlighted how the economy had virtually stagnated in the three months to June, despite a record increase in working hours.

As Ai Group chief executive Innes Willox said the Albanese government’s proposed workplace reforms would hurt the nat­ional effort to make us more efficient and competitive, PC acting chairman Alex Robson said “productivity growth is about working smarter, not working longer or working harder”.

The PC estimated that labour productivity growth would fall from 1 per cent in 2021-22, to -3.25 per cent in the most recent financial year, against an average of just over 1 per cent through the 2010s.

“Negative productive growth means that on average, Australians worked more hours just to produce and buy the same amount of goods and services. In other words, Australians have been running to stand still,” Mr Robson said.

In an assessment of the government’s industrial relations shake-up, Mr Willox said Labor’s closing loopholes bill would fail to create a single job while fuelling workplace conflict.

Before a Senate committee on Tuesday, he said the proposed IR changes would upend the notion of who was an employee, when someone could be engaged as a casual, and when they should be eligible to convert to permanent work.

“The bill is entirely inconsistent with the government’s recently released Intergenerational Report and its employment white paper. Both point to the need to lift productivity and workforce participation,” Mr Willox said.

“It is therefore astonishing that this bill does nothing to improve our languishing workplace-based productivity growth and therefore does nothing to lift real wage rates. It focuses entirely on imposing new complexities, inflexibilities and compliance burdens on employers.”

Labour productivity contracted by 2 per cent in the June quarter, as the number of hours worked surged by 2.4 per cent but national output lifted 0.4 per cent.

The PC’s research found that 15 out of 19 industries experienced a decline in labour productivity over the June quarter.

The surge in hours worked during the June quarter was overwhelmingly a result of employed workers working longer hours rather than an influx of entrants.

The PC’s conclusions echo analysis from the Reserve Bank’s recently released Financial Stability Review, which revealed as many as one in eight mortgage holders were unable to make ends meet, despite a jump in workers’ incomes in the year to June.

The RBA’s report showed the income gains were greatest among the bottom fifth of workers, where climbing employment and the jump in working hours helped incomes jump by more than 15 per cent in the recent fin­ancial year – far outpacing the 6 per cent rate of inflation.

Mr Robson urged the government to pursue reforms to make the economy more competitive and efficient. “While demand for labour may taper off as interest rates rise and the economy slows, we can’t rely on short-term fluctuations in hours worked as a source of long-term productivity growth,” he said. “Our productivity challenge has been urgent for many years.

“We will only see sustainable, long-term productivity growth if we increase investment and innovation.”

To explain the jump in working hours, the PC report said Australians may have been working harder and longer to “maintain a reasonable standard of living” as the cost of living soared.

With unemployment at around 50-year lows, the tight ­labour market would have pulled more people into the workforce and generated opportunities to put in more hours.

“All else being equal, new entrants and more marginal workers would have – on average – lower skills and there would be on average less capital per worker, thereby reducing measured productivity, at least in the short term,” the report said.

Finally, “the decline in productivity since 2022 in part reflects an unwinding of the measured increase in productivity due to the Covid-19 ­pandemic”.

“However, with productivity now at its lowest level since March 2016, this can only be part of the explanation,” it said.