By Joe Montero

All the talk about productivity in the Australian economy and its association with interest rates has left most people none the wiser. The Reserve Bank sets the short-term interest rate, and in doing so, unleashed the new round of the productivity debate, by downgrading its productivity forecast. The assumption here is that in terms of its productivity the Australian economy is going backwards. Official growth is expected to be merely 0.7 percent over the next 2 to 5 years, and this will lead to economic growth of just 0.2 percent after 2027 according to the Reserve Bank.

Hang on here. What exactly does productivity mean? This is often explained as how much a worker produces over a certain number of hours performing their job. If we look at it this way, it can be seen that for decades Australia has performed well. The economy is highly capital intensive. This means advanced technology has replaced direct human labour. The introduction of computer technology and robotics has accelerated this. True, there has been slippage in recent years, as other countries forge ahead. But Australia remains part of the economically advanced world, and this would not be possible without a fairly high level of labour productivity.

In any case, much of the lamented fall in labour productivity since 2019 that the Reserve Banks talks about is accounted for by the Covid lock downs, the cut in mining exports to China, and the impact on agriculture caused by major bushfires and floods. When negative external factors impact on certain industries, their output falls, and therefore, so must their labour productivity.

There is another important and generally left out part of the productivity debate. This is that part of the economy involving what is often called the care industry. Don’t forget the contribution made by the army of volunteers working for no pay. While they are not technically part of productivity calculations, they still contribute enormously to the functioning of the economy and make an indirect contribution to rising labour productivity through enabling the participation of others.

Another way to look at productivity is to do it in an across the economy. This means considering investment in terms of economy wide in infrastructure, research and development, new emerging technologies, and new products, relative to what is invested in hiring labour. Australia’s score card is not so good.

Falling investment in the Australian economy is better seen with the graph below of the longer-term trend (less investment in mining) in public and private investment.

The distinction between the two ways of looking at productivity is important. Those who argue that labour productivity is the problem, insist that the solution must be that investors must spend less on wages and associated costs (variable capital) and more on the instruments of running a business (constant or fixed capital). Another way is to redirect the wages share downwards and the share going to investors upwards.

The means to achieve this is to keep wages down, destroy jobs and create core and peripheral workforces to drive down wages further, and to speed up the pace of work.

This is the approach that will be taken at the coming productivity summit underway now in Canberra. Australia needs a different approach.

If the question is considered from the viewpoint of how the different forms of investment play across the economy, the problem is one of underinvestment. More precisely, insufficient attention is put into building infrastructure, research and development, new emerging technologies, and new products.

The nest graph shows the capital to labour ratio, that is, the proportions between what is invested to hire labour and what is invested in the other means to operate a business has become less stable since 2020 and falling over time. Falling productivity correlates with falling investment. The low 0.7 percent growth predicted by the Reserve Bank for much of the rest of the decade represents the downward trend in investment into the Australian economy.

There is a good reason for this. Australia’s economy relies far too much on financial transactions and the creation of credit. This is where the investment money is going, instead of lifting the capacity of the economy.

Ultimately, the productivity problem is an investment one. If more as invested in ensuring the economy relies on making things again, this would strengthen foundation of the economy and allow real growth through increased investment in both variable and constant capital, in both wages, jobs, and the tools that allow us to perform our jobs.

Emerging economies on the global landscape are prospering because they are directing investment towards manufacturing, embracing leading technologies, building infrastructure, and creating new products, and they are doing it in ways that cannel into ensuring a greener economy. This is growth aimed at preserving the environment, taking on the threat of climate change, while making sure people have good jobs and are awarded justly for their contribution.

Success depends on not over relying on the market by ensuring adequate government intervention to direct investment to where it is needed to meet social goals. Key to this is a better economy to lift fairness and opportunity for a better quality of life for all. This would mean a fair sharing of the gains of the economy between labour and the investors and ensuring that all contribute according to their ability through their efforts, and obligations to society, including contributing by paying tax.

A market left to its own devices has proved incapable of properly channelling investment to where it is needed or creating the kind of economy that is needed. An added bonus of an economy of this sort, is that contributions made by those in the caring industry and those who volunteer their labour can be recognised as contributions to economic health and enablers of productivity growth.