Targeted reforms needed to boost stagnating productivity: Productivity Commission

The Productivity Commission’s quarterly report has highlighted a pressing issue: the pandemic-related spike in productivity was temporary, and Australia’s labour productivity has not improved in 10 years.

Labour productivity fell by 0.1 per cent in the December quarter and dropped by 1.2 per cent over the 12 months to December 2024, returning to pre-COVID-19 levels.

“The real issue is that Australia's labour productivity has not significantly improved in over 10 years. With global policy uncertainty again on the rise, addressing productivity directly via targeted reforms will be the best way to sustainably boost Australians’ living standards,” Dr Alex Robson, deputy chair of the Productivity Commission, said.

The commission urged policymakers to focus on boosting economic dynamism, building a skilled and adaptable workforce, harnessing technology, increasing productivity in the care sector, and investing in the net-zero transformation to address Australia’s lagging productivity performance.

The report said economic dynamism could be boosted by increasing competition within the economy, which is limited in industries dominated by large firms, such as the supermarket sector.

Australia also must invest in net-zero technology and adequately prepare for climate change risks, which have already inflicted notable costs on the economy, the report said.

Sustained productivity stagnation indicated that the productivity spikes seen throughout the pandemic were simply an aberration.

“Ultimately, the COVID productivity bubble was just that: a bubble. We saw a sharp rise in productivity driven by the lockdowns, which was wiped out as lockdowns ended and hours worked reached record highs,” Robson said.

During COVID-19, low-productivity industries, including accommodation, food services, and arts and recreation services, were most affected by shutdowns, leading to a productivity boost.

Between December 2020 and March 2022, labour productivity rose as lockdowns unwound and economic activity resumed. Output rose faster than employment, leading to a spike in labour productivity.

The productivity gains fell between March 2022 and June 2023, largely driven by an uptick in hours worked. When employees work more hours and produce the same output, this shows up in the data as a reduction in hourly labour productivity.

The labour market has remained tight post-COVID-19. According to the report, this meant that capital stock was unable to keep up with hours worked, meaning workers did not have the tools needed to boost their output while working additional hours.

Second, as younger and less experienced people joined the workforce, labour productivity dipped as new employees took time to match the output of more experienced colleagues.

These factors have meant some upside to Australia’s future productivity outlook, as firms could invest in more capital and up-skill their workers, the commission said.

Despite this, the Productivity Commission reiterated that Australia’s productivity challenge is sustained by pervasive structural issues.

“The data makes it clear that our productivity problem is not a flash in the pan – this is a long-term, structural challenge that requires dedicated attention from government and industry,” Robson said.