Economy

Productivity stalls as businesses turn to legal loopholes and blame the government

Really? Really? Business investment has been weak for a decade but, when you preached your last sermon on the need for greater productivity, you didn’t see a need to mention this small fact?

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There’s most of the problem right there. The productivity of labour hasn’t increased much because business hasn’t been spending much on labour-saving equipment. Mystery solved.

Almost to a person, economists are great believers in high rates of immigration. Immigration, they keep telling us, is great for economic growth. It’s true. There’s no easier way to grow an economy than to increase the number of people in it.

Businesses love high immigration because it gives them a bigger market to sell to. But whether that kind of economic growth leaves the rest of us better off is a different matter. As all the economists were taught at uni but keep forgetting to mention to the punters, the claim that immigration raises our material standard of living – which is the oft-stated benefit of economic growth – comes with a big proviso.

Which is? Productivity. If you get more people, but fail to provide them with the same capital equipment as the rest of us have – extra machines for the extra workers, extra houses for the extra families, and extra roads, public transport, schools and hospitals for the extra families – everyone’s standard of living goes down, not up.

In economists’ jargon, you have to ensure immigration doesn’t cause a decline in the “capital-to-labour ratio”. As well as the spending on “capital deepening” needed to raise our productivity, you also need spending on “capital widening” merely to stop our productivity worsening.

Guess what? We’ve had years of high immigration without the increased capital spending to go with it. Part of the problem is that the level of government with control over immigration, the feds, is not the level of government with responsibility for ensuring adequate additional investment in public infrastructure, the states.

KPMG’s data showed people from working-class families took longer to shift up a grade, compared with those from higher socio-economic backgrounds.Credit: Getty Images

As for the additional investment in machines to cover the needs of the bigger workforce, that’s down to the nation’s businesses. Guess what? They haven’t bothered. Our ratio of capital to labour is actually a little lower than it was a decade ago.

And surprise, surprise, we’ve had little improvement in productivity over the same period. Who knew? Why didn’t somebody tell me? Well, the business lobby was busy covering its backside by blaming it all on the government. And the economists have been so busy with their maths and models that they’ve got a bit rusty on the economic basics.

Rod Sims, former boss of the Australian Competition and Consumer Commission.

Rod Sims, former boss of the Australian Competition and Consumer Commission.Credit: Jamila Toderas

But here’s the news: last week, the econocrats got their act together and showered us with much-needed sensible analysis. The Reserve Bank’s Dr Michael Plumb gave the best-written and most informative speech to come out of the Reserve in yonks. He delivered it to a meeting of the Australian Business Economists, and boy did they need the tutorial. It’s required reading.

Plumb blamed the problem on the slow improvement in the amount of (physical) capital available to each worker and, to a lesser extent, little improvement in our firms’ ability to combine labour and capital more efficiently (known to economists as “multi-factor productivity”).

As well, the Productivity Commission issued a more technical paper by Lawson Ashburner and Vincent Wong examining multi-factor productivity, Learning but not always doing. Focusing on businesses, it found that “a creeping inefficiency and failure to push the boundaries of innovation has contributed to Australia’s poor productivity performance”.

So why have our businesses done so little to improve their productivity? Rod Sims, former boss of the Australian Competition and Consumer Commission, answers the last part of the puzzle.

He says that increasing productivity is just one way for a business to increase its profits. I think our guys have found it much easier to increase their profits by using legal loopholes such as casualisation and labour hire to screw down their wage costs.

Ross Gittins unpacks the economy in an exclusive subscriber-only newsletter. Sign up to receive it every Tuesday evening.

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  • Source of information and images “brisbanetimes”

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