‘No shortcuts’ to sustainable productivity growth, says Productivity Commission
The ‘productivity bubble’ the Australian economy experienced during the pandemic was driven by temporary compositional workforce changes, the Productivity Commission has found.
Labour productivity spiked during the COVID-19 pandemic before spiralling back to pre-pandemic levels, dashing policymakers’ hopes that Australia’s sluggish productivity growth had begun to pick up.
“The COVID-19 pandemic was a rollercoaster for productivity, but we are now back to the stagnant status quo,” Productivity Commission deputy chair Dr Alex Robson said.
“The big lesson of the COVID productivity bubble is that there are no shortcuts to sustainable productivity growth. Tackling our productivity problem will require dedicated effort and reform from business and government.”
The Productivity Commission analysed the pandemic productivity bubble to better understand what super-charged Australia’s economy over that short period.
In the long run, labour productivity is important for improving living standards because it is inextricably linked to wage growth. A decline in annual productivity growth from 1.5 per cent to 1.2 per cent would reduce average income per capita by $11,000 over 40 years, the Productivity Commission forecasted.
As such, the Labor government has made productivity a high priority over its next term of government, in hopes of raising Australians’ living standards as cost pressures continue to weigh on households and businesses.
To better understand the productivity bubble, the Productivity Commission broke it down into three phases: reallocation, productivity gain, and productivity loss.
The first phase took place during the lockdowns from December 2019 to 2020. This saw labour temporarily allocated away from low-productivity industries such as the tourism and hospitality sectors, leading to an artificial spike in labour productivity.
During the ‘productivity gain’ phase, from December 2020 to March 2022, the economy experienced genuine, broad-based increases in productivity. Lockdowns were unwinding, economic activity was rebounding, and the labour market was slowly recovering.
Output rose faster than employment grew, creating a spike in productivity.
Finally, between June 2022 and June 2023, productivity spiralled back downwards to its pre-pandemic levels, erasing the gains made throughout the pandemic. The strong post-pandemic labour market sparked record-low levels of unemployment and steady growth in hours worked.
As employees worked more hours, capital stock was unable to keep pace, meaning workers’ output per hour dropped. More young and inexperienced workers entered the labour force as the pandemic restrictions unwound, leading to a temporary drop in the quality of the labour force as new workers learned the ropes.
The commission noted that productivity levels could see some potential upsides in coming years as workforce quality rises and capital stock catches up, normalising the capital-to-labour ratio.
They also found that hybrid work had a neutral to positive effect on productivity. Hybrid work could improve worker satisfaction and retention, studies indicated. It was also associated with higher quality and novelty of output compared to full-time or fully remote work.
The commission concluded that the productivity gains seen in the pandemic were simply a temporary spike that didn’t reflect a fundamental shift in Australia’s economy. Long-term productivity growth would call for structural changes, it said.
“We need to address the long-term drivers of the decline, such as the long-term decline in investment and business dynamism, and improving the diffusion of ideas and innovation to move all firms closer to the productivity frontier,” the commission said.
“There might be some grounds for optimism as new workers benefit from the on-the-job learning and firms invest to improve the capital available to workers, but there is still a lot of work to do.”
