PC productivity update 2014

Australia's productivity performance

The Chairman of the Productivity Commission, Peter Harris, has released the 2014 edition of the PC Productivity Update. This edition provides the Commission's perspective on the latest developments underpinning Australia's productivity performance.

Mr Harris said 'It is evident from the Update that Australia's productivity performance has fallen well behind that of most other developed economies for more than a decade. There are various reasons for this, including differences in the rate of investment growth. But the picture painted in the statistics calls for strong policy attention, particularly in the current era where the recent record terms of trade will no longer support continued income growth.'

This edition of the Update focuses on three areas:

• the effect of price distortions on productivity
• Australia's 2012-13 productivity performance
• productivity in Manufacturing.

Price distortions can encourage behaviours that detract from productivity growth. Several of the Commission's inquiries have explored the benefits of removing price distortions in the economy that give rise to wasteful or inefficient resource allocation. These distortions can be found in many areas, ranging from restrictions to competition and price-based industry assistance (such as tariffs) through to poorly designed regulation. In particular, the Update draws on the Commission's recommendations on overcoming price distortions in the electricity and urban water sectors.

Previous extensive research into the recent slowdown in multifactor productivity growth in Mining, Utilities, Agriculture and Manufacturing has been brought up to date for 2012-13. In general, these industries have continued their negative trends, in part reflecting the high level of capital investment in some industries where new capacity has yet to come into full production. At the government level, better management of public assets and a microeconomic reform agenda which promotes innovation and real reductions in costs are clearly needed.

The Commission's recent research on productivity in Manufacturing is summarised in this edition of the Update. The Commission has identified a number of reasons for the decline in productivity. They include lags between investment and output; unmeasured increases in quality; and lower capacity utilisation. Some factors reflect temporary responses to changing competitive conditions. The rate of decline in productivity, across manufacturing, appears to be slowing.