Work smarter, not harder, to solve productivity problem

Businesses need to boost investment and Australians have to work smarter in order to deliver safe wages growth, the Productivity Commission has warned.

Lifting the country out of the productivity doldrums is key to lifting living standards, the Productivity Commission says. Picture: NCA NewsWire / Jeremy Piper

Businesses need to boost investment and Australians have to work smarter to deliver strong pay growth without pushing inflation and interest rates higher, the Productivity Commission says.

As Westpac predicted that next week’s national accounts will show the economy stalled in the December quarter, the commission’s annual bulletin showed that productivity collapsed by 3.7 per cent through 2022-23 after a record jump in working hours coming out of the pandemic downturn was not matched with improved efficiency and more investment.

“We now have a clearer understanding of what’s behind Australia’s productivity slump,” commiss­ion deputy chair Alex Robson said. “Sharp increases in working hours have seen productivity decline, but this makes policies to boost productivity even more important.

“What’s worse, we know nominal wage growth without productivity growth can fuel inflation. Sustainable, long-term wage growth can only be realised by securing productivity gains,“ Dr Robson said.

Reserve Bank governor Michele Bullock has said strong wages growth of about 4 per cent is consistent with bringing inflation back into the 2-3 per cent target range, but only if productivity growth returns to around pre-pandemic levels.

Dr Robson said the “optimistic view” was that productivity would return to its pre-pandemic trend after the boom and bust of the past few years.

“The only way to have a sustainable productivity improvement is to have good policies in place,” he said. “There has been a bit of a turnaround in investment. But if that doesn’t continue, then things will stagnate rather than getting a sustained improvement, so it’s hard to forecast.”

The key ingredients to improving national efficiency were maintaining Australia’s openness, having sensible and stable regulatory settings, a skilled workforce, and a competitive tax system, Dr Robson said.

He would not be drawn on the productivity impact of Labor’s two rounds of workplace reforms, which many economists say will make the labour market less flexible.

“Australia’s economy is now 80 per cent services. And in many cases, labour is the service.

“That’s why it’s critical to have good ­labour market policies in place,” he said.

The employment boom of 2022-23 was not matched with a similar jump in business investment, with the country’s capital-to-labour ratio plunging by a record 4.9 per cent.

“So while a record number of Australians had jobs, employers didn’t invest in the equipment, tools and resources that are needed to make the most of employees’ skills and talents,” Dr Robson said.

Capital expenditure figures on Thursday showed a “healthy” investment pipeline from Australian businesses after almost a decade of stagnating spending in the lead-up to the health crisis.

CBA senior economist Belinda Allen said the latest data confirmed a two-to-three-year trend of rising non-mining investment.

“It looks like Australian businesses are starting to get future-ready after non-mining invest­ment stagnated through the 2010s. Low interest rates would have helped, but what we can’t dismiss is that we had labour shortages for so long through the pandemic, and businesses have turned to capital spending,” she said.

Ms Allen said the upgrades to firms’ capital spending intentions “boded well” for a productivity recovery in coming years.

Next Wednesday’s national accounts figures should show an improving productivity performance in the final quarter of 2023 as the growth in hours worked slowed, but Ms Allen warned against reading too much into short-term movements.