The Intergenerational Report notes that productivity matters, but we also need to care as much about who benefits

by Greg Jericho


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The forecast of productivity growth in the Intergenerational Report is not all doom and gloom – but it will be if workers continue to receive less than their fair share of the benefits

The Intergenerational Report released today placed a major focus on productivity growth and contained warnings that the projections for annual productivity growth of 1.2% are down from 1.5% in the previous two reports in 2015 and 2021. But while lower productivity is always a concern, we do need to have some caution before using it to spread doom and gloom that necessitates cuts in spending.

Australia’s productivity growth has slowed along with that of other advanced nations, and yet over the past 10 years, the Intergenerational Report notes that Australia has outperformed New Zealand and all of the G7 nations.

A major reason why productivity is slowing both here and abroad is the shift towards services. Services are inherently more labour-intensive than the manufacture of goods and as a result, productivity levels fall as more of the economy is devoted to service delivery – including health and care work.

One other problem is that the productivity of the services sector is much more difficult to measure, and indeed the traditional productivity measure of GDP per hour worked is geared towards measuring a mostly goods-producing economy.

But all of the debate around productivity too often ignores that while it may be theoretically true that higher productivity leads to higher living standards, how the benefits of that productivity are distributed is just as important.

Over the past decade workers have missed out on essentially all of the benefits of productivity growth and even the past 30 years which includes the productivity boom of the 1990s has seen workers receive less than their share of the gains of labour productivity. It is this reason why the profit share of GDP has risen so strongly through this period to its current record levels, and the share of national income going to labour has hit 60-year lows.

The productivity growth of 1.2% each year would still make Australians 61% more productive in 40 years than they are today, and the IGR suggests that real national income will be 50% higher. But that includes the incomes of both companies and households.

For Australians, the next 40 years needs to be not just about increasing productivity, but also increasing their share of the benefit they receive from that growth.

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