Australia’s multi-factor productivity fell in 2024–25, PC analysis finds

Last Thursday (19 February), the Productivity Commission (PC) released its annual productivity bulletin, detailing Australia’s multi-factor productivity (MFP), a measurement of how well labour and capital combine to produce economic outputs.

In 2024–25, Australia’s MFP fell by 0.5 per cent, dipping below the 20-year average of 0.4 per cent per year. This was also “well below” Australia’s annual MFP growth over the decade from 1994 to 2004, at 1.6 per cent, the PC noted.

The commission said there were “many possible reasons” for Australia’s poor recent track record for MFP growth, such as a slowing accumulation of human capital or a lack of investment in the right type of assets.

However, without meaningful productivity growth, Australia's living standards are set to flatline, the PC has warned. Because of this, productivity has been declared as the government’s top economic priority in recent times.

In a feature article included in the commission’s annual bulletin, PC research economist Joseph Christensen found that Australia’s market sector capital productivity had decreased by over 18 per cent since 1995.

Christensen noted that decreasing capital productivity wasn’t necessarily a bad sign, in isolation; when investment ramps up, this is typically accompanied by a fall in capital productivity, due to diminishing returns.

However, it could also be a symptom that Australian firms were investing in unproductive capital or mismanaging the capital that it already had.

When compared to other countries, Christensen found that Australia was slightly better at effectively managing and allocating capital, given that it had lower capital intensity and higher labour productivity than other countries sampled.

Notably, both the US and the Netherlands outperformed Australia in these areas, meaning lessons could be learned from both countries in improving capital productivity.

Research has also indicated that Australian firms were innovating less than their global counterparts, and capital reallocation from less to more productive companies had slowed down over time.

“Recent research on innovation shows that very few Australian firms create new-to-world technologies, and the rate at which Australian firms are adopting cutting-edge technologies at the productivity frontier has slowed,” Christensen’s analysis read.

“Further research into firm practices and economic conditions in countries like the Netherlands and the United States could show how Australia can better use its capital to increase productivity and improve living standards.”