Productivity Concepts and Policy
Directions
Stanislav Bucifal
Department of Industry, Innovation, Science, Research and Tertiary
Education
Working Paper 01-13
January 2013
Business Capabilities and Productivity Section
Industry Policy and Analysis Branch
Industry and Innovation Division
Department of Industry, Innovation, Science, Research and Tertiary Education (DIISRTE)
Canberra
With helpful guidance and valuable contributions from Richard Snabel, General Manager of the Industry
Policy and Analysis branch at DIISRTE, and Professor Quentin Grafton, Executive Director and Chief
Economist at the Bureau of Resources and Energy Economics (BREE).
The author would also like to thank Dean Parham in his capacity as Visiting Fellow Crawford School of
Public Policy at the Australian National University (ANU), Dr Christopher Vas from the HC Coombs
Policy Forum at the Crawford School of Public Policy at ANU, Dr Jianke Li from the Business
Capabilities and Productivity Section at DIISRTE, Lydia Ward from the Industry, Energy and
Environment Policy Section at DIISRTE, and other DIISRTE officers who provided valuable input,
comments and contributions.
Disclaimer: The views expressed in this paper are those of the author and not necessarily those of
DIISRTE, BREE or any agency of the Commonwealth Government.
Introduction
During the 1990s Australia and other major developed economies experienced strong growth in
measured productivity. In Australia’s case, this is often attributed to a combination of the microeconomic
reforms of the 1980s and 1990s and the rapid uptake of new enabling technologies—especially
information and communication technologies (ICT).1 Since the new millennium, however, measured
productivity growth in Australia and across the developed world has slowed markedly.
Since the new millennium Australian incomes have been boosted by the record-high terms of trade
associated with the once-in-a-generation mining boom (Figure 1). The ‘Millennium Mining Boom’ also
accelerated the structural change2 that was already under way across other sectors of the Australian
economy, especially in manufacturing. Despite this significant income boost, productivity remains the
single most important determinant of income over the long term.
Figure 1: Contributions to Average Incomes Growth
Source: Treasury, as cited in Green et al (2012). Note: GNI per person refers to gross national income divided into
total population. GNI is the gross domestic product adjusted for the terms of trade plus net foreign income flows.
In this paper we describe the concept of productivity in plain English and show how it relates to policy
directions in Australia. While the basic idea behind productivity is simple enough, the practical difficulties
in its measurement and in establishing the drivers behind measured productivity trends give rise to a
range of alternative interpretations. The relevant data and information are often limited or lacking. As a
result, there seems to be little agreement about what, if anything, should be done on the policy front
about the recent slowing of Australia’s measured productivity growth.
1
In the 1980s and 1990s the Hawke/Keating government oversaw the adoption of pro-market policies including trade
liberalisation, the privatisation and corporatisation of public assets, and the deregulation of the banking system (see
Forsyth 2000; Brennan and Pincus 2002). The significance of these reforms to Australia’s productivity growth during
the 1990s is contested (see Gruen 2001; Quiggin 2001).
2
Structural change is the movement of workers, capital and other production inputs between different industries as a
result of sustained or permanent changes in market conditions. For instance, the effect of Australia’s sustained
higher exchange rate has been felt across export-oriented industries and import-competing industries. This includes
not only Australian manufactures but also some tradeable services, such as tourism and education (Lowe 2012).
1
We hope to contribute to the productivity debate by making it more widely accessible to others who
could potentially provide much-needed contextual information and additional insights but who do not
necessarily have the background knowledge to enable them to engage effectively in the discussion. Our
main goal, therefore, is to educate and inform, and to promote an open discussion that reflects a variety
of views and contributes to policy development. We aim to achieve it by sharing our own understanding
and observations in this paper.
We begin by first introducing a conceptual framework for thinking about productivity as it relates to
policy before moving on to describe the nature of the current policy debate and finishing with some
concluding remarks. We specifically address the following questions:






What is productivity and why is it important?
Why productivity isn't everything
How is productivity measured?
What determines productivity growth?
What role do policy, institutions and social factors play?
What is the nature of the current policy debate around productivity?
Measurement issues are a particularly important consideration in the productivity debate. For readers
interested in learning more about productivity measurement, this paper is accompanied by a separate
working paper titled Introduction to Productivity Measurement Framework.
2
What is productivity and why is it important?
A key policy goal is the improvement of national living standards and wellbeing. This finds its practical
application in policies that support economic growth. Productivity growth is one of the most important
means to achieve sustainable, long-term economic growth. The words ‘sustainable’ and ‘long-term’ are
very important here, because, as will become clear, there are other means of achieving economic
growth—but not all of them are necessarily sustainable over the long-term.
Productivity is the amount of goods and services produced by an individual, a business or a whole
economy, relative to the amount of resources or inputs used in production. It measures how efficiently
those production inputs, such as labour and capital, are used to produce goods and services. 3 In other
words, productivity is the ratio of the volume of output produced to the volume of inputs used.
Productivi ty 
Volume of outputs produced
Volume of inputs used
At the national scale productivity refers to the total volume of all the goods and services a country
produces relative to inputs employed in production. These inputs include the total number of hours
worked, all the human effort, materials, energy and equipment and so on. Over the long-term horizon
this output-input ratio is closely linked to the nation’s overall material living standards.
Technological advance4 (or the application of new knowledge to production) is a key source of
productivity increases over time. Typically, policy makers are more interested in productivity growth,
rather than the actual level of productivity. The terms ‘productivity’ and ‘productivity growth’ are
sometimes used interchangeably in public discussions, but the distinction between them is important.
Namely:
Productivi ty growth  Output growth  Input growth
A sustained higher level of productivity generates a higher level of income over time, but higher
sustained productivity growth results in progressively higher income gains over time. A higher and
sustained productivity growth rate is more difficult to achieve than a permanently higher level of
productivity because it requires continuous improvements in the use of inputs to generate ongoing
increases in income. By contrast, a permanently higher level of productivity could arise from a one-off
improvement in productivity that may arise from the introduction of a new technology or production
process.5
3
Labour refers to the time and effort that people devote to producing the goods and services. Capital refers to all the
things people use as inputs to the production of other goods and services. This can be physical capital (such as
tools, factories, machines etc.), human capital (education, skills, knowledge, experience, etc.) or natural capital (land,
air, water, minerals, oil etc.).
4
In economics the term ‘technology’ is used in its broadest possible sense, encompassing the full spectrum of
human knowledge on how to organise the production and supply of goods and services, including tangible capital
(such as machines, robots, specialised equipment, etc.) and also intangible capital (such as blueprints, scientific
results, organisational techniques, management practices, etc.).
5
Productivity Commission (2009)
3
Figure 2 is a simple illustration of the links between productivity growth and living standards. There are
four main channels through which productivity growth can directly improve the material wellbeing of
individuals, as well as the competitiveness and profitability of businesses:6




lower relative prices for consumers which effectively increase purchasing power;
higher real wages for workers;
lower unit costs and higher profits for business; and
higher tax revenues for governments which can be spent on government services.
Figure 2: The links between productivity growth and material wellbeing
Source: Adapted from Kaci (2006).
In the long term, the incomes and living standards of a nation or an economy are ultimately determined
by the volume of goods and services produced by its citizens over a given period. Living standards are
commonly expressed in terms of real gross domestic product (GDP) per capita. The more GDP or
output that is generated per person, the higher the national average income. Growth in GDP per capita
is generally supported by increasing the number of hours we work (labour utilisation), or by improving
the efficiency with which we work (labour productivity). These can be unpacked into three distinct
sources:



the size of the working age population, relative to total population;
the rate at which workers participate in the labour force; and
the productivity of that labour force.
The relationship between these three sources and growth in per capita GDP has been popularised in
the ‘three Ps’ analytical framework, as espoused in a number of key publications produced by the
Treasury, for instance the 2003-04 Budget Papers (Figure 3).7 The three Ps framework clearly shows
that a nation’s material living standards can be improved through growth in any of these three sources.
6
Kaci (2006)
7
Commonwealth of Australia (2003). The three Ps framework is a central feature of the Intergenerational Report
series.
4
Figure 3: The three Ps framework
Source: Adapted from 2003-04 Budget Papers, Budget Paper No. 1
Since there are three sources of growth in per capita GDP, not just one, it is possible for output per
capita to increase even if one or both of the other two sources slow down or decline. This could occur if,
for instance, accelerating growth in the working age population participating in production outweighed a
slowing in productivity growth.8 A lift in the participation rate was a major contributor to Australia’s
economic growth during the mid-to-late 1980s, when it increased permanently from around 61 to 63 per
cent, and again between 2004 and 2008, when it rose to more than 65 per cent.9 Similarly, the
remarkable decline over the past two decades in Australia’s rate of unemployment (to above 5 per cent
currently) has supported our living standards as more Australians have become employed (Figure 4).
Figure 4: Unemployment and participation rates
Source: Thomson Reuters Datastream
8
There may also be a short term tradeoff between participation and productivity: as more and more marginal workers
enter the workforce the average output per worker will tend to decline. Also, as can be seen in the three Ps
framework, the participation P is determined by three components: the rate of participation, the rate of
unemployment, and the average hours worked.
9
ABS (2012a) Cat. No. 6202.0 Labour Force.
5
However, welfare gains from reducing the rate of unemployment or increasing the rate of workforce
participation can only be temporary because the scope for such gains is limited.10 The only source of
increase in GDP per capita that is truly ‘sustainable’ over the long term is productivity growth.11
GDP per capita provides us with a simple approximation for a nation’s living standards. It captures the
average annual output per head of population as measured by the volume of production, but ignores its
value. However, it tells us nothing about how the benefits of production are distributed across society.
The living standards of individuals are shaped by more than just our average output per person. The
distribution of welfare and many other factors contribute to the quality of our lives. We now turn our
attention to discussing some of these factors.
10
Indeed, growth of the working age population (relative to total population), as well as the workforce participation
rate and the average hours worked are all subject to limits in that they cannot continue to increase indefinitely. This
also applies to reductions in the rate of unemployment (see Figure 3).
11
D’Arcy & Gustafsson (2012)
6
Why productivity isn’t everything
The Nobel-Prize-winning economist Paul Krugman famously proclaimed that ‘productivity isn't
everything, but in the long run it is almost everything’.12 It is worth pausing for a moment to reflect on the
significance of the first part of that quote. Productivity isn't everything—for a number of reasons.
Firstly, as noted above, productivity growth is only one of three key determinants of per capita income
growth. Workforce participation and population age structure also matter, at least in the short term
where there may be scope for their improvement.
Secondly, the benefits of higher productivity are typically enjoyed over the long term, but also frequently
involve short-term adjustment costs that may include the displacement of workers from one industry or
region to another.
Thirdly, temporary price fluctuations matter. For instance, as noted earlier, record high prices for mineral
exports in the last couple of years have bolstered the income of Australian mining companies and lifted
Australia’s terms of trade.13 In fact, the Millennium Mining Boom has generated the longest and largest
increase in the terms of trade since the gold rush of the 1850s, and has contributed to about half of the
overall annual increase in Australia’s gross national income per person over the period 2002–03 to
2010–11.14 The associated increase in the exchange rate has boosted the purchasing power of
Australian households by making imports cheaper.15
Finally, and perhaps most importantly, GDP per capita and its relationship to productivity (Figure 3)
suffers from all the known shortcomings of the GDP concept as a measure of wellbeing. As Senator
Robert Kennedy observed over 40 years ago:
“the Gross National Product includes air pollution, and ambulances to clear our
highways from carnage. It counts special locks for our doors and jails for the people
who break them … It grows with the production of napalm and missiles and nuclear
warheads … And if the Gross National Product includes all this, there is much that it
does not comprehend. It does not allow for the health of our families, the quality of
their education, or the joy of their play. It is indifferent to the decency of our factories
and the safety of our streets alike. It does not include the beauty of our poetry, or the
strength of our marriages, the intelligence of our public debate or the integrity of our
public officials ... the Gross National Product measures neither our wit nor our
courage, neither our wisdom nor our learning, neither our compassion nor our
devotion to our country. It measures everything, in short, except that which makes
life worthwhile”.16
Poor policy decisions and outcomes can arise if we lose sight of the ultimate objective of raising living
standards.17 The notion of living standards goes well beyond raising our GDP per capita. It includes
access to opportunities, quality health care and education, meaningful employment, a safe and
engaging family and community life, a diverse natural environment as well as other factors that
12
Krugman (1994)
13
Terms of trade increase whenever the prices of exports grow faster than the prices of imports.
14
Grafton (2012); recall that gross national income is gross domestic product adjusted for terms of trade—the ratio of
export prices to import prices.
15
Dolman and Gruen (2012). Note however that a high exchange rate is a mixed blessing since it also reduces the
competitiveness of non-mining exports including manufactures, tourism and education.
16
Kennedy (1968), as cited in Eslake and Walsh (2011)
17
Productivity Commission (2009)
7
contribute to society’s happiness, fulfilment and wellbeing. These create the context and reason for
achieving productivity growth as we contemplate the directions for policy.
Box 1 provides a useful generic framework, developed by the Australian Treasury, for thinking about the
dimensions of broader wellbeing.
Box 1: The five dimensions of Treasury’s Wellbeing Framework18
‘In undertaking its mission Treasury takes a broad view of wellbeing as primarily reflecting a person’s
substantive freedom to lead a life they have reason to value.’ In its Wellbeing Framework the Treasury
has identified five dimensions that directly or indirectly have implications for wellbeing. These
dimensions are:

‘The set of opportunities available to people. This includes not only the level of goods and
services that can be consumed, but good health and environmental amenity, leisure and
intangibles such as personal and social activities, community participation and political rights
and freedoms.

The distribution of those opportunities across the Australian people. In particular, that all
Australians have the opportunity to lead a fulfilling life and participate meaningfully in society.

The sustainability of those opportunities available over time. In particular, consideration of
whether the productive base needed to generate opportunities (the total stock of capital,
including human, physical, social and natural assets) is maintained or enhanced for current
and future generations.

The overall level and allocation of risk borne by individuals and the community. This includes
a concern for the ability, and inability, of individuals to manage the level and nature of the
risks they face.

The complexity of the choices facing individuals and the community. Our concerns include
the costs of dealing with unwanted complexity, the transparency of government and the
ability of individuals and the community to make choices and trade-offs that better match their
preferences.
The dimensions do not provide a simple checklist: rather their consideration provides the broad context
for the use of the best available economic and other analytical frameworks, evidence and measures.’
Treasury, as cited in Gorecki and Kelly (2012).
In short, productivity isn’t everything. Actual living standards in their broadest sense are determined in
significant part by having the freedom and opportunity to lead a life we have reason to value. With this
background we will now briefly explore our current methods of measuring productivity, and their
limitations.
18
Gorecki and Kelly (2012)
8
Measuring productivity
It is instructive to take a quick look at how productivity is measured because it impacts on how we
interpret statistical trends. Readers interested in learning more should to refer to the working paper
published alongside this paper titled Introduction to Productivity Measurement Framework, which
explains productivity measurement in non-technical terms. Any of the relevant papers published by the
Australian Bureau of Statistics (ABS) and the Productivity Commission also provide greater insight.
Productivity statistics can potentially be calculated at three levels of aggregation. Conceptually,
economy-wide level statistics are simply an aggregation of industry level statistics, which are in turn an
aggregation of firm level statistics. In practice, estimates are produced from statistical models, rather
than by aggregating from the ground up. The ABS currently publishes robust estimates at the economywide aggregate level, with industry-level productivity statistics labelled as ‘experimental’.19
At the aggregate or industry levels, productivity measures can be broadly classified by inputs (labour,
capital and intermediate inputs) and outputs (gross output or value added).20 A broad taxonomy of
productivity measures is set out in Table 1.
Table 1: Classification of different measures of productivity
Source: Organisation of Economic Cooperation and Development (OECD, 2001)
The two measures most frequently used in practice are:


labour productivity (LP)—the value added per hour worked; and
multifactor productivity (MFP)—the value added from a combination of labour and capital
inputs.
Despite the apparent simplicity of the concept, measuring productivity is complex in practice. The ABS
currently publishes estimates of both labour productivity and MFP in accordance with current
international practice. Both estimates inform policy and the targeting of inputs to lift productivity.
Measured labour productivity correlates positively with GDP per capita. However, it reflects not only the
contribution of labour but also MFP and capital intensity.21 In other words, it includes (but does not
separately identify) different sources of growth that do not stem from improvements in the personal
capacities of workers or the intensity of their effort.22
19
ABS (2007) Cat. No. 5260.0.55.001 Experimental Estimates of Industry Multifactor Productivity.
20
Intermediate inputs are production inputs which are not readily classified as labour or capital. They include things
such as energy, materials and services.
21
Capital intensity refers to the amount of capital available per unit of labour. At its simplest, this may be the number
of tools available per worker.
22
OECD (2001)
9
MFP growth, in theory, reflects changes embodied in labour and capital (particularly improvements in
the skills and capabilities of the workforce and improvements in the quality of capital), as well as the
application of new disembodied knowledge and technology—typically interpreted as innovation.23 In
practice, however, measured MFP also captures other effects such as efficiency savings from an
increased scale of production (that is, economies of scale).24 Yet some of these effects have little to do
with long-term prosperity and do not represent a change of productive capacity. Measurement errors
aside, the main such effects include:25

Effects of the business cycle—temporary downturns or build-up of capital due to ‘lumpy’
investment cycles, resulting in fluctuations in capacity utilisation.

Changes in industry composition—shifts in the relative size of industries and firms (that is,
structural change and firm entries/exits).

Adjustment pressures—conditions and events that induce increased investment in new
capital, leading to greater inputs without immediate output responses (for example, the
mining investment and construction boom).
Work on the improvement and refinement of MFP concepts and measurement is ongoing. As a
reminder of the caveats and limitations on measurement, MFP statistics published by the ABS are
currently classed as ‘experimental’ and require caution when interpreting.
The methodology used by the ABS and other statistical agencies around the world to derive productivity
statistics covers only part of the private sector of the economy (Table 2). The exclusion of the remaining
unmeasured part is largely due to the fact that outputs of some service-producing industries are hard to
measure independently of input use, in particular services provided by governments. 26
Ideally, MFP measures should cover all market economic activities, but this is only possible if all of the
necessary data are available. For this reason, official MFP estimates in Australia and internationally are
confined to particular industries in the private sector. In Australia this subset of industries is collectively
labelled as the ‘market sector’. Table 2 shows (shaded) the industries which are included in the market
sector definition.
23
Wei (2011)
24
OECD (2012a). Economies of scale are costs savings that producers can achieve by expanding the scale of their
production—that is, by adding more labour and capital to produce more output.
25
Parham (2012a)
26
Wei (2011)
10
Table 2: The ‘market sector’ as a subset of ABS industry divisions
Source: ABS (2008) Cat. No. 1292.0; ANZSIC refers to the Australian and New Zealand Standard Industrial
Classification.
Whenever production inputs move between the market sector and the non-market sector this will impact
on measured productivity to the extent that the productivity of the moved inputs differs from the
productivity of the inputs that remain. Productivity growth in the non-market sector is, by definition,
omitted from measured productivity growth. The 16-industry market sector (shown in Table 2) accounts
for just over 80 per cent of gross value added, leaving nearly 20 per cent of productivity across the
Australia economy unmeasured (divisions O, P and Q).27
Finally, measured productivity is usually examined over longer term ‘productivity cycles’. These are
periods between peaks in measured productivity growth—typically between four and six years—
identified by the ABS. Measuring productivity over cycles attempts to average out any short-term
statistical ‘noise’ and temporary effects, for instance fluctuations in capacity utilisation. This means that
shorter term measured fluctuations do not reveal a lot of useful information. Australia’s two most recent
productivity cycles are from 1998-99 to 2003-04 and from 2003-04 to 2007-08. The current period since
2007-08 is an ‘incomplete’ cycle (Figure 5).28
27
ABS (2012b) Cat. No. 5204.0 Australian System of National Accounts, 2011-12, Table 5.
28
ABS (2012c) Cat. No. 5260.0.55.002 Estimates of Industry Multifactor Productivity, Australia: Detailed Productivity
Estimates, Table 3.
11
Figure 5: Australia’s measured productivity growth between recent
cycles*
Source: ABS (2012c) Cat. No. 5260.0.55.002, Table 3. *Hours worked basis.
Aside from data availability issues, the numerous practical limitations on productivity measurement
outlined above serve to remind us that productivity statistics should always be interpreted with caution.
Bearing these technical caveats in mind, we now turn our attention to the key concepts around
productivity and policy directions.
12
What determines productivity growth?
It bears repeating that improvements in a nation’s material living standards are linked to its ability to
increase its average income. Over the long term this essentially means producing more output per
person. This can be done in two ways: either by employing more inputs in production, or by improving
the effectiveness with which existing inputs and capabilities are utilised.29
Productivity growth usually occurs whenever more outputs are being produced from the same amount of
inputs (or when fewer inputs are being employed to produce the same amount of output) than
previously. As a matter of convenience, all the different factors and influences that affect productivity
growth can be distinguished as either affecting MFP or capital intensity (Figure 3). This, by the way, is
the definition for labour productivity introduced in the previous section:

MFP refers to the efficiency and effectiveness with which labour is combined with capital and
intermediate inputs (such as materials, energy and services) to produce output. An increase
in MFP is usually attributed to improvements in the quality of labour, quality of capital, or
some form of technological advance. It can also come from efficiencies or input savings
associated with changes in the scale, scope or specialisation of production.30

Capital intensity is, roughly speaking, the amount of capital available per worker. Recall that
the term ‘capital’ refers generically to any physical plant, machinery and equipment, as well
as intangible assets such as blueprints, brand, intellectual property or knowledge that can be
readily applied to production to add value to output. An increase in capital intensity is often
referred to as ‘capital deepening’.
The many different factors and influences that have direct and tangible links to MFP and capital intensity
can be considered as the immediate causes of productivity growth, the underlying factors which support
productivity growth by creating conditions conducive to promoting immediate causes and the
fundamental influences, which are the more deep-seated policy, social and institutional factors that
broadly affect economic activity generally.31 These are discussed in the following subsections.
The breadth of factors that underpin productivity growth make it difficult to examine and classify each
neatly. Figure 6 offers a generic taxonomy of these drivers, developed by the Productivity Commission,
to enable us to organise them into a conceptual framework for further analysis for the purposes of this
paper, accepting that there is some overlap. In the following discussion we use this taxonomy to
describe the various immediate causes, underlying factors and fundamental influences that determine
productivity growth and emphasise those elements that are most relevant to policy. They essentially
relate to the incentives, capabilities and flexibility that give people reason and the ability to be
productive.
29
Dolman and Gruen (2012)
30
In addition to economies of scale (defined earlier), economies of scope are savings in average costs from
producing more than one type of product, while the gains from specialisation are efficiency savings that can come
about when producers focus on what they do best and abandoning (or outsourcing) product lines or activities which
they are not so good at.
31
Productivity Commission (2009)
13
Figure 6: Determinants of productivity growth
Source: Productivity Commission
‘Immediate causes’ of productivity growth
Productivity growth may be attributed to a number of immediate causes occurring predominantly at the
firm level (Figure 6). These can be organised under four headings:




economies of scale, scope and specialisation;
resource allocation across industries and firm turnover within an industry;
embodied technical change (improvements towards best practice); and
disembodied technical change (innovation and new best practices).
Economies of scale, scope and specialisation
As defined earlier, cost savings (or efficiency gains) can come about from firms increasing the amount
they produce of a particular output by adding more inputs (scale), expanding the mix of products and
services offered (scope), or focusing on doing what they do best (specialisation). These actions reflect
firms becoming more productive within the industry in which they currently operate.
The expansion of production scale can boost MFP and increase capital intensity at the same time. The
size of the gain is influenced by the availability of appropriately skilled workers, high-quality capital and
technology. The gains may initially be substantial, but as capital intensity increases they are likely to
diminish. The expansion of scope and specialisation in areas of genuine advantage can also unlock
potential savings and tap knowledge embodied in labour, capital and technology.
14
Resource allocation across industries and firm turnover within an industry
Another immediate cause of productivity growth stems from the reallocation of inputs (or resources) as
firms enter more productive industries and exit less productive ones. This represents a movement of
resources across different industries. Similarly, firm turnover within the same industry can be a source of
productivity growth whenever less efficient firms exit and more efficient ones enter an industry.
As with economies of scale, scope and specialisation, productivity growth which stems from the
reallocation of labour and capital between different industries and firms does not need to involve the
introduction of new technologies to generate efficiency gains. In Australia, the measured rates of
business entries and exits were roughly between 13 and 17 per cent over the four years to 2010-11 (but
these estimates should be interpreted in conjunction with the explanatory notes which accompany the
ABS publication).32
‘Embodied’ technical change
The movement of firms and industries towards best practice can also come about from so-called
embodied technical change.33 Quality improvements are embodied in labour, capital and outputs. They
can come about, for example, through product improvement, the acquisition of new skills, the
introduction of better management practices or improvements in operating processes within firms.
Skilled employees are generally more productive, and may also raise the productivity of co-workers.
Higher stocks of human capital facilitate investments in physical capital and enhance the development
and diffusion of new technologies. This, in turn, increases output per worker. Similarly, better
management practices can reduce idle time in labour and capital, and improve the way inputs are
allocated within firms.
From the firm’s perspective, embodied technical change is innovation, in the sense that it is ‘new to the
firm’.34 It reflects firms catching up to the frontier of best practice.
‘Disembodied’ technical change
By way of contrast, disembodied technical change includes innovation that is ‘new to the world’. For
businesses already operating at the best practice frontier and at scale, further productivity growth may
only be possible with new-to-the-world innovation—the kind that expands the production possibilities of
a whole industry or the economy. It is then up to the individual firms to catch up to the new frontier by
adopting the innovation, incorporating it into their production regime and commercialising it.
Innovation—both embodied and disembodied—is essentially a process of discovery. It can lift
productivity whenever it has a practical use in industry and is genuinely new—new to the firm, to the
industry or to the world. It can take on many forms, including the adoption of new technology,
modification of an existing one, or the application of a new idea, to name just a few.
A lot of innovation is incremental (for example, the evolution of mobile phones to smart phones and a
range of other mobile technologies). Much less frequently it can also be quite radical, representing a
32
ABS (2012d) Cat. No. 8165.0 Counts of Australian Businesses, Jun 2007 to Jun 2011, Table 13.
33
Firms will only pursue technical change that they expect to be profitable if they want to stay in business—that is,
carry on a ‘going concern’.
34
Innovation is the implementation of a new or significantly improved product (good or service), process, new
marketing method or a new organisational method in business practices, workplace organisation or external relations
(OECD 2005). It encompasses the full spectrum of human knowledge on how to organise the production and supply
of goods and services.
15
truly revolutionary ‘step change’ in production possibilities (for example, the invention of the Internet).
Radical innovation typically becomes a platform for many subsequent incremental improvements.35
It is worth emphasising that innovation is much more than the commercialisation of research and
development (R&D) or the discovery and improvement of new technology. It encompasses the whole
spectrum of human ingenuity, creativity and talent. In terms of economic wellbeing, it is the practical
application of new ideas to the production process. Recent thinking on innovation emphasises the
intangible and knowledge dimensions as key drivers of productivity growth.36
So-called ‘intangible assets’37 are increasingly recognised as important. They allow firms to compete
less on price and more on quality—for example, on product characteristics like reliability, sustainability,
differentiation, brand image—which motivates customers to pay a higher price. Competing on quality,
rather than price, is likely to be important for Australia and other high-income developed economies with
the rapid rise of lower cost foreign producers (particularly from Asia) and increased contestability in
domestic and foreign markets.38
35
Gordon (2012)
36
Productivity Commission (2009)
37
For example, brand equity, design, systems integration, business models, and so on.
38
Roberts and Stewart (2012)
16
Box 2: Australian Innovation System Report 2012
Innovation delivers productivity, but not only productivity. Official data shows the benefits of business
innovation at a firm level (Figure 7). Innovative firms are twice as likely to report an increase in
productivity compared with the previous year averaged across all firm sizes.
Figure 7: Increase in business performance or activity from the previous
year, by innovation status, 2010-11
Source: ABS (2012h) Cat. No. 8167.0, Table 3.
Productivity is not the only benefit generated by innovative firms. Innovation encourages a more
connected and skilled economy with greater market diversity and consumer choice. Compared to firms
that don’t innovate, innovative Australian firms are also:39






42 per cent more likely to report increased profitability;
three times as likely to export;
four times more likely to increase the range of goods or services offered;
more than twice as likely to increase employment;
more than three times as likely to increase training for employees; and
more than three times as likely to increase social contributions such as community
enhancement projects.
Source: Commonwealth of Australia (2012b), Available at:
http://www.innovation.gov.au/Innovation/Policy/AustralianInnovationSystemReport/AISReport2012.pdf
Innovative businesses boost productivity by, for instance, transforming their capabilities; collaborating
with customers, suppliers and competitors; adapting existing technologies and processes to new uses;
and creating solutions to meet customers’ needs. Thus, innovation can lift productivity by creating higher
value products, more efficient production processes and more effective workplace organisation and by
opening up new market opportunities.
39
ABS (2012h) Cat. No. 8167.0
17
Productivity, profitability and competitiveness: the business lens
Immediate causes of productivity growth operate predominantly at the level of firms. The decisions of
individual businesses and organisations—and relationships between them—have a direct impact on the
overall performance of the economy. It is at the level of the firm that wealth creation and economic
growth occur. Lifting the productivity of a nation ultimately depends on the performance of the individual
businesses operating within it.40
By and large, business decisions and actions are primarily guided by profit and loss—that is, maximising
shareholder value—rather than lifting productivity.41 Productivity is typically one of a whole range of
considerations in business decisions. Productivity only relates output volumes to quantities of inputs.
Businesses themselves are far more interested in profitability. The distinction is important. Profitability
reflects more broadly the ability of a business to generate income as compared to costs. The key insight
is to recognise that competition influences firm decisions in a way that links profitability with productivity.
Although distinct from one another, profitability and productivity are related through costs, prices and
quantities. Lifting productivity supports profit growth in the long term but the profit maximising behaviour
of firms can sometimes reduce productivity. For example, high world commodity prices can make it
profitable to extract inferior mineral deposits using less efficient technology and inexperienced labour,
which would reduce the productivity of mining. Similarly, rapid investment growth in response to high
demand (that is, capital deepening) can translate into a temporary slowing in productivity growth unless
the investment is quickly brought to full use.42
Notwithstanding these short-term and temporary effects, the long-term relationship between productivity
and profitability is a positive one. Especially in highly competitive markets, the productivity of a business
becomes simply a matter of its survival.43 In such markets what ultimately determines whether a
business is profitable or not is its competitiveness. And raising productivity is one way for businesses to
improve their competitiveness.44
Practical ways of lifting firm productivity (and long-term profit performance) include businesses making
better use of their labour and capital inputs, adopting smarter management practices, better matching
supply and demand for their products, and adopting new knowledge and technologies.45 Fostering skills
and innovation capital are particularly important. As noted in Box 2, evidence suggests that innovative
Australian firms are more than twice as likely to report increased productivity.46 Where appropriate,
businesses can also lift their productivity by specialising and focusing their efforts and resources on
what they do best.
40
Productivity Commission (2009)
41
In practice businesses may pursue a number of objectives, such as maximising sales, expanding market share or
even maximising remuneration.
42
See, for example, the work of Topp et al (2008) on capital deepening in the mining sector.
43
Syverson (2011)
44
Skill and service may be others—for example, expertise and craftsmanship or exceptional service can mean that
some less productive firms with relatively high costs can charge a premium for high quality goods.
45
Productivity Commission (2009)
46
ABS (2010) Cat. No. 8158.0 Innovation in Australian Business, 2008-09
18
Underlying factors: competition, market conditions, trade openness
While productivity is at the core of both profitability and competitiveness, it guarantees neither. The
success of individual firms depends not only on the internal decisions and processes, but also on the
external environment in which they operate. That environment comprises a large variety of businesses,
interest groups, institutions and regulatory authorities, creating a huge diversity of markets and
industries. The power of the external forces—relative to a firm’s size and power—determines how the
firm competes.
Generally speaking, the more intense competition is within an industry, the more likely it is that firms will
turn to productivity improvements as a way of surviving and generating higher profits. In well-functioning
competitive markets it is the profit-oriented behaviour of businesses that drives the immediate causes of
productivity growth by focusing on improving their own efficiency. By contrast, weak competition opens
opportunities for businesses to abuse their market power to gain advantages over their rivals and
extract ‘monopoly rents’47 from consumers. Such an environment undermines incentives to use inputs
efficiently and leads to inferior welfare outcomes.
Firms are usually beholden to market conditions on both the demand side and the supply side. The
relative size of businesses in a supply chain defines the power relationships between them and how
they are likely to respond in the face of changing market conditions. For example, in Australia’s grocery
retailing sector, unequal bargaining power in practice means that small producers supplying goods to
major supermarket chains often end up as ‘price takers’ in the sense that they cannot set the price but
are forced to accept the price they are offered.48 Sustained changes in demand or supply force
individual firms to either adapt or exit the industry.
The combined forces of competition and changing market conditions drive the movement of inputs
between firms and industries. Productivity will tend to increase whenever workers, managers and capital
move from low-productivity activities to high-productivity ones. Part of this movement would of course
reflect less efficient incumbent firms exiting markets and more efficient new ones entering, but there
could be other reasons.
An industry with low measured labour productivity is not necessarily an inefficient or uncompetitive one.
To assess efficiency it is necessary to understand the underlying characteristics of an industry in a
holistic fashion, taking into account factors such as size, capital intensity, the nature of competition, and
the products and services they offer—and compare those to best practice domestically and elsewhere.
High growth rates in labour productivity tend to be seen in capital-intensive manufacturing, while labourintensive services generally tend to have low labour productivity growth. 49
The effect of factor movement on the underlying structure of industry and a nation’s productivity can be
large. For example, ABS data suggest that, of the nearly two million small businesses operating in June
2007, 60 per cent were still operating in June 2011. This compares with 76 per cent for medium
businesses, 74 per cent for large businesses and 60 per cent for all businesses over the same period. 50
The ABS notes that business survival rates are heavily dependent on their size and the length of time
they have been in business. Larger businesses that have been around for some time are much more
likely to stay in business than newer, smaller ones. Of course, measured estimates of exits do not
necessarily imply business failure. They include other effects, such as firms being absorbed by other
firms through mergers and acquisitions or owners retiring.
47
Monopoly rents are returns in excess of the amount required to induce a producer to supply a particular good or
service in a competitive market. Monopoly rents are typically extracted from consumers by restricting supply, thus
creating artificial scarcity so that prices are bid up.
48
Jones (2006)
49
Uppenberg and Strauss (2010)
50
ABS (2012d) Cat. No. 8165.0 Counts of Australian Businesses, including Entries and Exits
19
Finally, open international trade and investment usually promote competition in local markets. They can
be a source of added competitive pressure and competitive advantage. The competitive pressure
comes from greater contestability in domestic markets, but foreign competition may also exacerbate any
power imbalances described above. The competitive advantage usually relates to knowledge and
technology ‘spillovers’ that can be accessed by local firms. The extent and usefulness of the knowledge
brought in from abroad depends on the closeness of the linkages between local and foreign firms and
the absorptive capacities and technological sophistication of local industries. For ‘tacit knowledge’,
business networks and face-to-face interaction play a particularly important role in its dissemination and
adoption.51
The policy environment has a clear and direct impact on competition. As noted in the introduction, the
1980s and 1990s saw a remarkable transformation of the Australian economy, thought to be in large
part the result of the Hawke/Keating government’s microeconomic reform agenda which was
characterised by the widespread adoption of pro-competition policies in Australia. These included, for
example, deregulation of the banking system and access to finance, reductions in tariffs and other
barriers to trade and foreign direct investment, and privatisation and corporatisation of government
business enterprises, among others.52
Fundamental influences: policy, institutions and people
Policy is perhaps most relevant at the level of fundamental influences. Along with the various social and
institutional factors, policy affects the fundamental influences in a way that impacts on economic activity
broadly. Government action (or inaction) can shape the decisions of firms and individuals regarding the
supply and allocation of capital and labour. This, in turn, affects productivity. The Productivity
Commission offers the following perspective on the role of policy in affecting fundamental influences and
productivity growth:53
The policy environment can affect the emphasis given to economic objectives and
the development of productivity-enhancing capabilities, and the stability of policy
settings can affect the risks involved in making long-term investment decisions.
Formal and informal institutional ‘rules of the game’ influence the costs of
coordinating production activities and conducting business. They influence the
incentives facing firms and individuals to raise productivity.
We already noted that competition, trade openness, and demand and supply conditions impact quite
broadly on whole industries and that policy has a clear and direct role in shaping these forces. Together
with the fundamental influences which operate across the whole economy they help to define a nation’s
economic efficiency—the extent to which scarce resources are being directed towards their most
valuable uses.
It is generally accepted that maximising a nation’s economic efficiency requires having in place sound
framework conditions, including well-defined and well-protected property rights, strong institutions of
governance, and healthy competition with minimal market distortions (such as trade and regulatory
barriers). Economic efficiency is also supported by low sovereign risk, sound fiscal and monetary
policies, well-developed infrastructure and a skilled workforce. Policy naturally helps create and shape
these conditions.
Beyond this, governments also frequently employ a whole range of complementary policies to address
specific issues and achieve desired objectives. A typical rationale for the use of complementary policies
51
Nelson & Winter (1982). Tacit knowledge is not always easy to codify and disseminate; it is usually disseminated
through face-to-face interaction and experience.
52
Parham (2002)
53
Productivity Commission (2009)
20
is the presence of market failure—conditional on there being a demonstrable potential for the
intervention to deliver net public benefits.54 Market failures can result from the under-provision of public
goods, externalities, information asymmetries or structural and competition failure; and the potential for
net public benefits can be quantified using cost-benefit analysis.55
The concept of market failure as a justification for policy action is not without controversy. It has been
suggested that focusing on market failures as the sole rationale for policy action is perhaps too narrow.
Some economists argue that a range of market failures are ‘an intrinsic consequence of the process of
innovation itself’ and that, without them, innovation (or any change of human knowing) could not occur.56
These ‘failures’ often relate to access to new information, temporary monopolies from new discoveries,
or firms capturing some of the benefits of research conducted and paid for by their rivals.
Indeed, modern policy practice in Australia and elsewhere in the developed world takes also into
account a whole range of perspectives and issues—including social, environmental, strategic and
national interest.57 These considerations can make policy decision making very complex but are
nonetheless important. They necessitate proper and independent research and analysis to support the
quality of decision making.
For instance, policies aimed at productivity growth need to take account of the many social factors
which are deeply embedded in the nation’s institutions, people and society.58 These factors develop
over time through the interaction of individuals, businesses, governments and community groups in the
course of the domestic and international social, economic and political life. Social barriers to
communication across different ethnic, cultural or linguistic groups also impede the productivityenhancing exchange of ideas and can be influenced by policy. Research in this area has found that
support for a common national curriculum and support for English language training for migrants can
assist in reducing cross-cultural barriers to communication.59
Put differently, the quality (as well as quantity) of information that supports policy development and
implementation bears directly on its success. To bring the focus back on productivity, policies targeted
at supporting productivity growth aim (or should aim) to enhance the efficiency and effectiveness of the
use of inputs (that is, labour and capital) and/or support growth in the production of output. In developing
these policies it is necessary to balance the potential of a particular policy to deliver on its target
objectives against the risk of policy failure—the possibility that a particular policy not only fails to deliver
the desired outcomes but also creates more harm than good. And that is why good information is
essential.
54
Market failure refers to situations where markets do not produce economically efficient outcomes and can arise for
a number of reasons such as where the existence of a large firm (or firms) restricts competition in a market, where
consumers do not have adequate information about a good or service or where pollution or other factors affect third
parties (Commonwealth of Australia 2010a). Net public benefit is a dollar figure (or range) that indicates whether the
outcomes achieved through a particular policy can justify the resources used, relative to alternative uses
(Commonwealth of Australia 2006).
55
In a cost-benefit analysis, costs and benefits are valued in terms of the claims they make on and the gains they
provide to the community as a whole (see Commonwealth of Australia 2006).
56
Dodgson et al (2011)
57
Commonwealth of Australia (2011)
58
Social capability refers broadly to the orientation of people toward change of the kind required to achieve further
development.
59
Grafton et al (2012) in Economic Record and also Grafton et al in Journal of Productivity Analysis
21
The Current Policy Debate
A major concern in the policy community in Australia at present is that the temporary boost to incomes
courtesy of the record high terms of trade associated with the Millennium Mining Boom may have
masked an underlying erosion of productivity and loss of competitiveness of Australian industry. Given
the measurement and data issues discussed earlier, evidence of this is still inconclusive and debatable.
If, however, this turns out to be true, Australian incomes would come under significant pressure once
Australia’s high terms of trade return to historically more ‘normal’ levels as expected (Figure 8).60
Figure 8: Australia’s terms of trade, actual and forecast
Source: 2012-13 Budget, Budget Paper No 1. Statement 2: Economic Outlook.
A key problem for analysts and decision makers is understanding the true nature and causes of
measured productivity trends. Many commentators attribute Australia’s recent slowing in measured
productivity growth—especially MFP—to a combination of a surge in capital investment (mainly in
utilities and mining), the impact of drought on agriculture, and factors such as the business cycle and
firm entry and exit.61 If that is the case the negative impact on measured MFP may simply reverse as
the new capacity gradually comes into full production, suggesting that we do not need to worry too much
about the slowing measured MFP growth (Figure 9).
60
Commonwealth of Australia (2012a)
61
For example Parham (2012a); Green et al (2012); Productivity Commission (2009)
22
Figure 9: Australia’s productivity growth
Source: Treasury. * denotes an incomplete cycle.
Others, however, argue that the slowing in Australia’s measured productivity growth has been far more
broad-based and systemic than what can be explained by special circumstances in a handful of
industries.62 If so, this would represent a serious problem and have different policy implications
compared to the relatively benign situation described above. It is also interesting to note that the slowing
trend in measured productivity growth has commonly been seen across major developed economies in
recent years, suggesting that there may be some bigger structural phenomena at play on an
international scale.63
On top of this, there is yet another widely shared concern that Australia faces a demographic
challenge.64 It is generally expected that as the Baby Boomer generation moves towards retirement age
Australia’s working age population and the number of Australians participating in the workforce are likely
to decline, relative to total population.65 All else remaining constant, this will tend to reduce the growth in
GDP per capita and put significant pressure on our health care system, the pension and social security
system, and government budgets.66 Such demographic trends have clear and serious implications for
our living standards.
With reference to the three Ps framework (Figure 3), Australia’s ageing demographic implies that we
can expect our pool of working age population to shrink in future. Moreover, there are limits on the
extent to which a population can participate in the workforce and, once participating, work longer hours
and keep relocating to where the work is. This would mean that, regardless of whether or not Australia
currently has a productivity growth problem, future growth in output per capita (and living standards) in
Australia will rely a lot more on productivity growth (Figure 10).
62
See for example Eslake and Walsh (2011)
63
OECD (2012)
64
Commonwealth of Australia (2010b)
65
The Baby Boomer generation can be loosely defined as the strong demographic cohort of people born roughly
over the two decades immediately following the end of World War II in 1945.
66
Commonwealth of Australia (2010b)
23
Figure 10: Australia’s participation rate
Source: Intergenerational Report 2010
Policy directions for Australia
Given the importance of productivity growth going forward, and in light of the preceding discussion, we
suggest that Australia’s productivity can broadly be supported by a combination of sound framework
conditions and appropriate complementary policies that are well defined, well implemented and wellcoordinated. Complementary policies need to reflect a deep and nuanced understanding of the
underlying issues they are trying to address, as well as the institutional, strategic, national interest and
social dimensions of modern Australian society to help mitigate the risk of policy failure.
The essence of productivity growth is not about cost cutting or working harder. It is about making the
best use of the available resources and striving for continual improvement. The Productivity
Commission points to three closely related channels through which both framework conditions and
productivity-enhancing complementary policies can be delivered: incentives, capabilities and flexibility (
Figure 11). The framework should not be interpreted as gospel, but it provides a platform for the public
debate about possible policy directions.
Figure 11: Three channels that link policy to productivity growth
Source: adapted from Gary Banks’ presentation (November 2012)
As shown in
Figure 11, incentives provide a reason to be productive while capabilities and flexibility enhance the
ability to produce. In practice the three channels are highly intertwined and interactive, rather than being
24
distinctly separate. Individual policies should always align with the specific objectives they are trying to
achieve and be delivered via the three channels as follows:67

Incentives should focus on enhancing competition and improving regulation so as to minimise
the distortionary impact on business and maximise effectiveness. Healthy competition, both
domestic and foreign, acts to support productivity by reinforcing its link with the pursuit of
profits. Policy can be both an impediment to, and an enabler of, healthy competition. 68

Capabilities should focus on developing skills and human capital, improving management
practices, strengthening the innovation system and ensuring the adequate and efficient
provision of infrastructure and government services.69 In the Australian context, areas for
possible improvement include teacher quality, vocational education and training, and the
adequate and cost-effective financing and governance of essential infrastructure.

Flexibility should focus on enhancing the operation of markets. In Australia there is already
considerable effort aimed towards improving and streamlining regulation, reforming
transaction taxes, occupational licensing, zoning and development approval processes, and
reducing sectoral red tape.70 The debate on workplace regulation is particularly contentious.
The debate is moving on to some extent, with a focus on the role of managerial decisions that
affect way capital and labour produce goods and services.
Effective and smart complementary policies can support growth in addition to sound framework
conditions. We suspect that complementary policies can help promote societal wellbeing in a number of
key areas—particularly health care, education and training, and in responding to structural change. Our
sense is that it may well be worth investigating the links of policy to productivity growth in these areas.
The health care and education systems are especially relevant, since, in addition to supporting the
societal wellbeing in general, they are also likely to underpin both productivity growth and workforce
participation. Healthy individuals need less time off work for health reasons and are likely to be more
effective while at work. Individuals with higher skills tend to be able to learn new tasks and jobs more
quickly, which also helps them cope better with structural change.71 As policy naturally plays a major
role Australia’s ‘mixed’ (public and private) health care and education systems, ongoing policy attention
is probably required to ensure these services are delivered effectively, efficiently, and in the highest
quality.
Productivity growth is also strongly linked to structural change—the movement of labour and capital
between firms, industries and activities. In Australia, as well as in other developed economies, the socalled service industries72 are a significant and growing driver of economic growth. As a whole, these
industries currently make up the largest share of Australia’s production and employment. They account
for around 80 per cent of industry gross value added in the Australian economy and employ about 87
67
Banks (2012)
68
Institutions operating in this space include the Australian Competition and Consumer Commission (ACCC), the
Productivity Commission, and the Office of Best Practice Regulation (OBPR).
69
The creation of the DIISRTE portfolio reflects efforts to bring together supply and demand sides of the economy
(see Administrative Arrangement Order signed 9 February 2012). This practice has been adopted by governments of
different political persuasions (New Zealand, United Kingdom).
70
Refer, for example, to current efforts to streamline referrals and approvals under the Environment Protection and
Biodiversity Conservation Act 1999 (EPBC Act) or efforts to harmonise and streamline regulation across the states
through the Council of Australian Governments (COAG) reform agenda.
71
Productivity Commission (2009)
72
The term ‘service industries’ refers here to industry divisions D to S, ANZSIC 2006 in Table 2.
25
per cent of the Australian workforce (some 9.9 million persons).73 Productivity growth in these industries
will be critical going forward. Since the underlying drivers across these industries are as diverse as the
industries themselves, learning about them in detail is likely to enhance the quality of policy decisions.
Structural change is also evident in manufacturing. Over the past two decades, the share of
manufacturing in total industry gross value added has declined significantly.74 Distance to world markets
and sparse settlement pattern is a barrier to Australian manufacturers’ ability to tap the benefits of
specialisation, knowledge flows, scale and trade.75 Rising input costs, wage costs and negative growth
in output prices have also put pressure on manufacturing profit margins and real sales volumes have
fallen. These conditions have been further exacerbated by record high exchange rates in recent times,
due in part to the Millennium Mining Boom. Australian business leaders and policy makers need to
consider options and strategies for Australian manufacturing going forward.
The policy directions suggested here should be viewed as points of discussion, rather than policy
prescriptions. We recognise there is no single policy or grand step that can create higher productivity—
only many improvements and changes that can collectively create an environment conducive to
prosperity and growth. Moreover, in Australia, policy responsibility is shared between the states and the
Commonwealth, which highlights the importance of state-Commonwealth relations, good governance,
clear lines of accountability and effective policy coordination across all levels of government. Some
commentators argue that perhaps the most important ingredients of good policy development are
probably a genuine understanding of the phenomena at play in the economy (facilitated by abundant,
high quality information and analysis) and a good process for developing and implementing the
solutions.76 In light of the discussion in this paper, we tend to agree with this assessment.
73
ABS (2012f) Cat. No. 5206.0 and (2012e) Cat. No. 6291.0.55.003
74
ABS (2012b) Cat. No. 5204.0 Australian System of National Accounts, 2011-12
75
Dolman et al (2007)
76
Parham (2012b); Banks (2012)
26
Concluding Remarks
The issue of productivity is receiving a lot of attention in the media and the policy community. It has also
attracted a good deal of commentary from various interest groups. By and large, this has helped move
the debate in the right direction, even though at times there may have been attempts to use the debate
to promote particular agendas. This underscores the need for a broader, more inclusive public
engagement. While simple enough in concept, productivity is notoriously difficult to measure, and even
harder to attribute to specific causes. This point is sometimes lost in the debate.
Notwithstanding the uncertainties surrounding measurement, it remains a constant ambition for
government, business and the community to maintain and improve the high living standards that
Australians have enjoyed over many decades of prosperity. Government policies are clearly integral to
the economic environment in creating and shaping the fundamental influences and complementary
policies that support productivity growth. Good understanding, good process, and open public debate
are an essential part of this.
Complementary policies and programs need to be monitored and evaluated regularly against welldefined performance indicators to mitigate the risk of policy failure and ensure they are achieving their
target objectives in an effective and efficient manner. The current productivity debate needs better
information, more data and better access, more analysis and more analysts to participate in policy
development.77 It also requires a deeper and more nuanced understanding of the phenomena at play in
our economy that takes account of the broad spectrum of social, environmental and strategic
considerations. That is why broader public engagement is essential.
Through record-high terms of trade, the Millennium Mining Boom has delivered a big boost to our
incomes in recent years—but that will not last forever. Going forward, Australia’s ageing demographic
and shrinking working age population mean that our future living standards will rely a lot more on
productivity growth. The productivity debate is ultimately about securing Australia’s future. Our hope is
that this paper will encourage more people to learn about these issues and engage in that debate.
77
Parham (2012b)
27
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