Exchanges with Saul Eslake: The Productivity Problem

So Leslie, welcome to Exchanges.

What a time to be talking to you because as of this morning, actually, before I came on here, the Business Council of Australia has just released a pretty incredible report about productivity in this country, suggesting that the 2020s could be as bad as the 60s.

I just want to step back from that first with my first question to you.

We keep hearing and we have probably for the last almost 24 months now, the buzzword in this country is productivity, how we get more productive, how we actually drive ourselves forward.

I'd love to get your very good take on, first of all, what is productivity, but how we actually drive it forward so that even at the very granular level, at the household, at the worker level, they understand why getting productivity up is so beneficial, not just to their own personal wages, but the overall impact of the broader economy.

Well, thank you, and thank you for inviting me to be part of this conversation.

Productivity is defined as output, usually some measure of the volume or value of goods and services, per unit of input, which is most commonly labor measured by hours worked, although there are some measures of productivity that also take account of inputs of capital, be that machinery and equipment or buildings or intellectual property.

And in the case of agriculture, they also take into account inputs of land.

In fact, when farmers talk, for example, about yields of tonnes of wheat per hectare, that's a measure of the productivity of land.

But usually, and in the context that you're referring to, that report by the Business Council which came out this morning, we're talking about productivity per hour worked And that's important because there's an enormous amount of evidence to show that over long periods of time, the most important determinant of people's real wages, which is in turn the most important determinant of their living standards and how much they can afford to pay by way of tax to support those who are no longer working or who are unable to work through the government of the day, ultimately what drives that is labour productivity.

and how it's distributed between wages and profits by the tax system and the social welfare system.

And what the figures show is that over the first five years of this decade, real wages, real household disposable income per capita have grown more slowly over any five year period since the first half of the 1960s.

And I say the first half of the 1960s because the earliest data we have for household disposable income per head of population starts in 1959.

Based on other data, I'd argue that the growth in Average Australians' real incomes this decade has been slower than any time since the Great Depression of the 1930s, although that's hard to prove unequivocally, but I think it's right.

And the main reason, not the only reason, but the biggest single reason for that is that our productivity growth has by some measures gone down.

negative slightly, but has certainly slowed dramatically from the golden era of the second half of the 1990s and the early part of the 2000s.

Now, Australia is not unique in that respect.

Most other advanced economies, with the exception partially of the United States, have experienced something similar, and so too have a number of developing economies, including China.

So the solutions to our productivity problem can perhaps also be glimpsed by looking at what's going on in other countries, as well as identifying policy failures and other blockages to improve productivity here at home.