Activity 10a: Productivity growth is essential for improved living standards in the future
- Productivity is a measure of the output that is generated from a given input. It can be measured in a number of ways but one of the most common ways is to divide the total production of an economy (or individual business) by the total hours worked (this gives a measure of labour productivity). Therefore it could be measured by real GDP per hour worked. [Capital productivity could also be used which would look at total output relative to the number of machine hours used. Economists are also interested in multi-factor productivity which shows how the combination of labour and capital can influence the amount produced per hour.]
- If productivity increases, then businesses are able to produce a greater volume of goods and services with existing resources. This means that their ability and willingness to supply can increase and the economy’s potential output can be expanded. To the extent that the benefits of higher productivity are passed on to workers in part or in full (e.g. via productivity bargaining at workplaces), the resulting higher wages will help to boost purchasing power and living standards of those employed. However, over time, productivity growth will typically be associated with falling unit costs provided that wages and other costs don’t increase by the same percentage. This can encourage firms to pass on the savings to consumers who (responding to the law of demand) may use their income to purchase a greater volume of goods and services. Lower production costs in Australia may also increase the international competitiveness of local firms and this might result in greater sales of exports and movement away from imports. Overall, productivity therefore helps to increase AD, real GDP, thereby boosting long term economic growth given that growth is low inflationary and therefore more sustainable. The living standards of Australians, on average, will be enhanced as incomes (and eventually wages) and purchasing power will be higher. In addition, these higher incomes leads to an increase in tax revenue and an enhanced capacity for the government to provide services to the community.
- As noted by the PC, labour productivity has been the most important source of income growth in Australia over the past 30 years, contributing over 80 per cent of growth in real gross national income per person and it is projected to remain the most important source of income growth in the future
- First, the increasing size of the services sector (relative to other sectors) over the past decade has meant that advances in productivity are less attainable compared to periods in the past. This is because the potential productivity improvements that can be found in the provision of services is significantly less than in the provision of physical goods, such as in mining and manufacturing which have been able to take advantage of the huge advances in technology (e.g. robotics). Second, the advances in educational attainment are less prolific today compared to periods in the past where the advances came from a low base.
- The $2 billion investment in the Research and Development Tax Incentive should encourage businesses to invest more in research and development initiatives that have the potential to speed up the pace of innovation. to the extent that this investment would not have taken place otherwise, then this initiative should help to boost the rate of productivity growth.
- The ‘pursuit of open and free trade’ via greater access to global markets will lead to an increase in competitive pressures that forces domestic businesses to become more responsive to market needs. It should lead to an increase in innovation and the uptake of new technologies as domestic businesses respond to the competitive threats posed by imports. not only will this lead to an increase in the rate of productivity growth but it will also mean that Australian businesses are more dynamic in the sense that they are in a better position to reallocate resources in a way that better responds to the demands of the market place.
- Greater investment in infrastructure (e.g. better transport infrastructure that connects regional areas to city areas) can lead to an increase in productivity to the extent that workers are better connected to workplaces and there is greater, or more efficient, access to regional and offshore markets. This should help to increase output per unit of input and lead to an increase in the capacity of Australian industries to produce goods and services.