Friday, June 14, 2013

Productivity. We can't really measure it - Productivity Commission

But what we can measure, we don't like

Australia’s productivity growth is weak and likely to weaken further the Productivity Commission has found. But it says Australia isn’t alone.

In the first of what it intends to be a series of annual updates the Commission says in the four years since 2006 so-called multifactor productivity slipped by an average of 1.1 per cent per year. In the previous decade it had climbed by an average of 0.6 per cent per year.

While the update attempts to identify local causes of the downturn it says Australia is “not unique”.

France, Sweden, Ireland, the United Kingdom, the United States, Canada and New Zealand also moved from positive to negative productivity growth in the same timeframe (although in the case of the US from positive to zero growth).

It says the downturn began before the global financial crisis for reasons which are not clear. It quotes the New York-based Conference Board as finding that one of the reasons it is continuing is labour hoarding, “as businesses refrain from making significant cutbacks in resources in the hope of a recovery in global demand”.

Australian multifactor productivity climbed 0.1 per cent in 2011-12 after sliding of 1.2 per cent in 2010-11, a result still well down on the long-term growth rate of 0.8 per cent.

Labor productivity climbed by a much faster 3.4 per cent as more machinery was deployed per worker in a process known as capital deepening.

The Commission concedes that neither measure of productivity is particularly useful...

Productivity isn't calculated for the “non-market” industries of health, education, public administration and security. Health and social assistance  has become Australia’s biggest employer. And many of the outputs of the industries for which productivity are calculated are not measured, biasing down the published measures. As an example the Commission cites the electricity industry which has switched from stringing putting wires overhead to burying them underground “in response to concerns about visual amenity and safety”.

It says while the cost of putting the wires underground is counted on one side of the productivity equation, the extra benefit of putting them underground is not counted on the other.

Nevertheless the Commission reports woeful productivity performance in the mining and utilities industries with declines in 2011-12 of 10.5 per cent and 5.4 per cent per cent.

One immediate reason mining productivity is declining is a “mismatch” between inputs and outputs as money is spent developing new projects ahead of an expected payoff in production.

A longer-term reason is that easily obtained resources are becoming harder to find. High commodity prices have exacerbated the process, encouraging “even more rapid development of higher-cost less productive resource deposits than would otherwise be the case”. Improvements in mining technology have only partly offset the effect.

Productivity in the electricity industry is declining in part because of what the Commission suspects to have been “greater investment in distribution capacity than was socially optimal”. Productivity in the water industry is declining in part because Australians cut their use of water during the drought and have yet to lift it back to “pre-drought levels”.

In today's Sydney Morning Herald and Age

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