A top economist has argued that “fundamental economic reforms” are necessary in order to lift Australia’s productivity and quell the concerns held by the Reserve Bank of Australia (RBA).
The latest national accounts showed that productivity growth – measured by GDP per hour worked – fell by 2 per cent during the June quarter to be 3.6 per cent lower over the year.
The RBA has repeatedly indicated that the increase in wages seen over the past year is consistent with inflation returning to target, but only if productivity picks up.
In a recent note, AMP chief economist Shane Oliver said even though productivity growth is “unlikely to be as bad as it looks”, he still assessed it as being “a big concern”.
“We know productivity growth has been slowing for years for structural reasons but quite why productivity has fallen so badly over the last year is a bit unclear,” he noted.
“However, it may be related to a combination of the normal lag from a slowing economy to a slowing jobs market, labour hoarding, and the relative growth of the less productive services sector upon reopening. If so, we should expect some improvement ahead.
“But fundamental economic reforms (around tax, industrial relations, skills, etc) are required to get productivity growth back to the long-term norm of 1.5 per cent per annum.”
The importance of lifting productivity was a key theme of Philip Lowe’s final speech as RBA governor last week. He said that it is “central to our future prosperity”.
“It means rising living standards, higher real wages, a lift in our collective wealth, a bigger pie to help finance the public services the community values and less inflation pressure. It makes most things easier,” the outgoing RBA governor stated.
But Dr Lowe said that Australia’s recent productivity record “isn’t encouraging” in spite of investigations into the underlying causes of the problem and actions that can be taken.
“There is no shortage of ideas, including in the areas of tax, human capital accumulation, energy and infrastructure, the design of our cities, the approach to regulation and competition policy, industrial relations and the provision of government services. There are improvement opportunities in all these areas,” he continued.
“The problem is not a lack of ideas. Instead, it is in building the consensus within society to implement some of these ideas. This is, fundamentally, a political problem, and it is a major problem. If we can’t build a consensus for changes, the economy will drift and there is a material risk that our living standards will stagnate.”
Competition policy review
Last month, the federal government announced that it was undertaking a review of competition policy settings to increase productivity, reduce the cost of living, and boost wages.
In a recent interview on The Guardian’s Australian Politics podcast, Treasurer Jim Chalmers acknowledged he was responsible for getting broader competitive settings right and putting Australia on track to a more competitive, dynamic and productive economy.
“Our economy is not competitive enough. That means it’s not dynamic or productive enough. And that’s our starting point,” he said.
“We have unleashed Andrew Leigh, the really quite extraordinary expertise and enthusiasm that he has for competition policy, and that’s because we need to try and turn this ship around.
“It has implications for the cost of living, it has implications for our living standards more broadly, productivity in the economy, as we’ve said. And so we have kicked off a process of revisiting a lot of the competition settings in our economy.”
Among the areas the government has indicated it will focus on as part of the review are mergers and acquisitions as well as non-compete clauses when employees leave jobs.
“We do think there’s an opportunity to chip away at this competition challenge in our economy, and that’s what the work that Andrew and I will do,” Dr Chalmers said.
Lowe’s productivity message
While discussing the importance of boosting productivity in his final speech, Dr Lowe touched on the link between wages, inflation, and productivity growth.
“For inflation to average 2.5 per cent, we would expect that, on average, wages increase at the rate of productivity growth plus 2.5 per cent,” he explained.
“Given that the distribution of national income between wages and profits can and does vary, this relationship is not a hard and fast rule, but it is a reasonable benchmark.”
The situation Australia finds itself in now stands in contrast to the early stages of Dr Lowe’s seven-year term as governor, during which he said that wages growth of roughly 2 per cent was contributing to inflation sitting below target.
The outgoing RBA governor pointed out, at the time, that there were concerns about workers not getting their fair share of the benefits of productivity growth.
“We are now in an environment of stronger growth in nominal wages, which is positive,” Dr Lowe said.
“My recent focus has been the risk that the period of high inflation could lead to wages growth and profits running ahead of the rate that is consistent with a sustainable return of inflation to target.
“While recent data provide some comfort on this front, we need to remain alert to this risk for if it were to materialise, inflation would become sticky, which would require tighter monetary policy and more economic pain later on. A lift in productivity growth will certainly be helpful here, allowing stronger growth in nominal and real wages and profits.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.