Is There Really a Productivity Decline?
- Rowe Palmer
- Nov 27, 2023
- 3 min read
Productivity, the cornerstone of economic growth, has been a topic of concern in Australia for over 20 years. Recent reports from authoritative bodies like the Productivity Commission and the Reserve Bank of Australia (RBA) shed light on a worrying trend: a noticeable decline in productivity growth across key sectors, including mining, manufacturing and logistics. But what lies beneath these numbers, and why does this matter to us?
The ABS report on Estimates of Industry Multifactor Productivity (2023) shows that Labour Productivity growth in Australia has declined significantly over the last 25 years (see image 1). Multifactor Productivity, which combines labor and capital inputs, has stagnated during this period (see the image 1). Demonstrating that no significant improvement in how resources (like labour, capital, technology, etc.) are being combined and utilised. Excluding general volume efficiencies, we can observe that the same amount of input consistently generates the same amount of output.
Why would Labour Productivity growth be dropping and the use of capital be stagnating? A combination of a failure of our workforce’s skill and ability to keep up in an environment of growing business complexity, and a lack of successful innovation or technological advancement.
The RBA’s 2023 report confirms this trend across most sectors, as illustrated in image 2.
They characterised the decline by a significant annual drop in Gross Domestic Product (GDP) per hour worked, suggesting that despite longer working hours, our output per hour is diminishing. Business’ cannot sustainably grow if the cost of growth exceeds the return.
Breaking down Labour Productivity changes over the last 30 years paints the same stark picture (see image 2) with most sectors experiencing a long-standing growth decline. Mining sector's Multifactor Productivity growth has fallen by 25% since 1994-95, as stated in the Productivity Commission's 2020 report. The ABS report on Estimates of Industry Multifactor Productivity (2023) shows that including an additional 3 years makes the decline look less menacing (see image 4). The ABS (2023) shows an annual 3% decline in the mining sector’s Multifactor Productivity growth over the last two decades compared to the prior decade (see image 3). Even when we make allowances for lags in output from capital investment and depleted reserves, image 4 shows that multi-factor productivity growth is (at best) stagnant.
Consulting firms such as Ernst & Young have expressed similar findings (EY 2023/2017/2014). They describe the difficulty in maintaining productivity when expanding, the skills shortage, and the need for holistic solutions. Moving beyond traditional, unsuccessful approaches is necessary to manage and improve productivity. Operational excellence needs to be front and centre. Embedding sustainable productivity improvements needs to be mastered. Innovation and technology are crucial, but they cannot single handedly solve this problem.
A case in point is ABC Mining, which faced a crucial decision point when upgrading a poorly run mine. Management posed the question: Do we take this opportunity to improve how we operate, or do we invest in automation to achieve this outcome? Everyone agreed that automation would provide the ‘required progress’. Once commissioned, the mine ‘automatically’ ran poorly. This highlighted a critical issue.
Automation, or any new technology, is not a panacea. When implemented in a flawed system, it perpetuates inefficiency.
These findings compel us to question the underlying causes of the productivity problem. Why, despite advancements in technology and automation, are industries like mining, manufacturing, and logistics struggling to reverse the decay in productivity growth? What stops companies from adopting a unified and dedicated long-term approach to tackle this pervasive issue?
The Productivity Problem Part 1: Defining the Problem Series
References
Australian Bureau of Statistics. (2022-23). Estimates of Industry Multifactor Productivity. ABS. https://www.abs.gov.au/statistics/industry/industry-overview/estimates-industry-multifactor-productivity/latest-release (accessed 29 Dec 2023).
BREE (Bureau of Resource and Energy Economics), 2013, Productivity in the Australian Mining Sector, BREE Discussion Paper Series 13.01, March 2013, Canberra, https://coombs-forum.crawford.anu.edu.au/sites/default/files/publication/coombs_forum_crawford_anu_edu_au/2013-11/australian-mining-productivity-paper.pdf (accessed 29 Dec 2023)
EY (Ernst & Young)
2023, Top 10 business risks and opportunities for mining and metals in 2024, https://www.ey.com/en_au/mining-metals/risks-opportunities (accessed 29 Dec 2023).
2017, Productivity in Mining: Now Comes the Hard Part -A Global Survey, https://www.cubility.com.au/wp-content/uploads/2019/07/EY-Productivity-in-mining-now-comes-the-hard-part-Cubility-Perth-Australia.pdf (accessed Nov 2023).
2014, Productivity in Mining: A case for broad transformation, https://www.cubility.com.au/wp-content/uploads/2019/07/EY-Productivity-in-mining-now-comes-the-hard-part-Cubility-Perth-Australia.pdf (accessed Nov 2023).
PoA (Parliament of Australia), 2021, Australia’s Productivity Slowdown, Economic Policy, https://www.aph.gov.au/About_Parliament/Parliamentary_departments/Parliamentary_Library/pubs/BriefingBook47p/AustraliasProductivitySlowdown (accessed 2 Jan 2023).
PC (Productivity Commission),
2020, PC Productivity Insights: Australia’s long term productivity experience, Australia’s Long Term Productivity Experience, Canberra, November 2020, https://www.pc.gov.au/ongoing/productivity-insights/long-term/productivity-insights-2020-long-term.pdf (accessed 20 Dec 2023).
2013, On Productivity: The Influence of Natural Resource Inputs, Productivity Commission Staff Research Note, Canberra, https://www.pc.gov.au/research/supporting/natural-resource-inputs/natural-resource-inputs.pdf (accessed Nov 2023).
2008, Productivity in the Mining Industry: Measurement and Interpretation, Productivity Commission Staff Working Paper, December, Canberra, https://www.pc.gov.au/research/supporting/mining-productivity/mining-productivity.pdf (accessed 2 Jan 2023).
RBA (Reserve Bank of Australia), 2023. Recent Trends in Australian Productivity, RBA Bulletin, September 2023, https://www.rba.gov.au/publications/bulletin/2023/sep/recent-trends-in-australian-productivity.html (accessed 29 Dec 2023).
