Productivity the only way forward

Is there a more misunderstood and abused term than ‘productivity’? We doubt it. Regardless of the various abuses, productivity has been pretty much the main driver of economic advancement for Australia, especially over the 20th Century. As the Productivity Commission has described in a recent and major report, it is the ‘Key to Prosperity’.

Terms like ‘productivity’ conjure up different images to different people. Such is the abuse of the term, that it has become polarising for many. A dirty word for some, even. So, what is it really?

The Productivity Commission (PC) describes productivity as:

“…the process by which we learn how to get more from less: more and better products — new solutions to meet human needs, produced with less hours of work, fewer resources and a lighter environmental impact.”

We will go with that (it’s in their name after all, so they ought to know, right?), but note that as with anything important, the definition changes as the context of its application changes. The reference to a lighter environmental impact is a modern addition.

So ultimately, growth in productivity means achieving more outputs from the same or fewer inputs, and as the PC puts it, this:

“…is the only sustainable driver of increasing living standards over the long term. While economic growth based solely on physical inputs cannot go on forever, human ingenuity is inexhaustible.”

We could say productivity means working smarter, not harder.

As the PC puts it, the main driver of productivity over the last 200 years has been technological improvements. That’s the working smarter piece and has been a big driver for shifting people from poverty by providing simple goods in mass volume at lower prices and ever-improving quality, for example.

The benefits extend, as again the PC puts it:

“As goods and services become more affordable, people can work fewer hours and consume more; over the past 120 years, the economic output of the average Australian is up 7-fold, while hours worked have consistently fallen.”

So, we are good with productivity as a concept then and we are benefitting from it now and into the future.

Why talk about productivity then?

Well, because as Ross Gittins observed in The Age, over the last sixty years, our productivity improved at an average rate of around 1.7% per annum but slowed over the last decade to 1.1% per annum. That is about the same for other advanced economies.

One element of the PC report that Gittins unpicks is that improved living standards and reduced labour in manufacturing things has increased, we have had the time and money to shift resources into services where we employ around 90% of the workforce and about 80% of everything is produced.

That makes increasing productivity difficult – at least by traditional means like improving the application of technology. Technology works well for manufacturing but is not as good at doing so in the services sector. At least, not yet!

Writing in the Australian Financial Review, Jon Davies, the CEO of the Australian Constructors Association advised that it was productivity more than migration and training that would make a difference to the future of building in Australia. He pointed to some ‘labour side’ factors that potentially fall more into the domain of industrial relations (not unrelated, but if the workforce is diminishing progressively, maybe not the main game). However, he also pointed to opportunities to improve project procurement and approval processes to avoid regulatory duplication.

That is an example of an opportunity to improve productivity that relies on using less resources by streamlining processes and doesn’t rely on technology. Davies does call on Government to take the lead on those improvements in its building procurement. Fair enough, there’s a role for government, but the hard yards will be done in the construction supply chain where the work actually gets done, we suspect.

The focus on supply chain improvements is important.

It is true, as Ronald Mizen alluded in the Australian Financial Review, that the focus of these reports is Government and public policy. The PC was commissioned by the Treasurer to report on productivity, so that seems sensible. Mizen quotes the Chair of the PC, Michael Brennan:

“We have to look for new opportunities to drive productivity growth, including reviewing our policy levers and the industries where we concentrate our efforts.”

Brennan’s signal is the emphasis will be on productivity in services.

This is the first in a series of reports from the Productivity Commission. If they are anything like the opening report, the coming reports will be very useful for the economy of the future.

The initial report can be downloaded here.