Global Productivity and Trends Essay


Details of taskRead the articles“Global productivity is slowing down: Three possible explanations”“What’s needed to improve productivity growth”“Australian productivity trends and the effect of structural change”Write an essay to address the following questions:What is the difference between the labor productivity and the total factor productivity (TFP)? Why is productivity improvement important for our living standard and well-being?What are the current productivity trends in Australia?Use your own words to reflect the three reasons for the productivity slowdown in OECD countries?Which of these three reasons is more convincing to you? Explain your answer using a real-world example.Is there any other reason which might contribute to the productivity slowdown?What sorts of productivity-enhancing reforms we need to maintain the long-term growth and job creation in Australia, especially after the COVID-19 pandemic?Please note: students must write an essay to address these questions in a coherent way, rather than a Q&A style writing.

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Word limit: Must not exceed 1,500 words
To reduce the similarity,
o First and foremost, complete your assignment by yourself and independently.
o Secondly, you should NOT repeat the questions in your assignment tasks.
Please be noted, this assignment is not a Q&A, but an essay – so please
embed these questions in your essay.
o Thirdly, you may put all references in a separate document to be uploaded
separately along with your main text.
o Fourthly, make sure to upload your assignment coversheet via a separate link
in Moodle.
• Plagiarism is strictly prohibited. You should familiarise yourself with what is plagiarism
and university guidelines on plagiarism available here:
Criteria for marking:
Coherence of argument (10 marks)
Relevance to the topic: demonstrate the collection of adequate data and
figures to support your arguments (5 marks)
Logical consistency: demonstrate the understanding and appropriate use
of economic rationales in the paper (5 marks)
Originality (2 marks)
Demonstrate your creativity in the use of facts to support your arguments
Presentation (2 marks)
Having a well-structured executive summary and conclusion section
Demonstrate the appropriate use of language and the style of charting in
Referencing (1 mark)
Having a minimum of three (3) references (books or articles written in
English from reputable publishers*), in addition to the references
mentioned in this instructional paper
Demonstrate appropriate use of reference style in the paper (footnotes,
endnotes, and etc.)
Note: In the current context, reputable publishers include international
organisations, governments, universities, and well-known commercial
publishers. Citing newspaper articles is allowed but with caution in
checking the sources of information.
Citation requirements: Please follow Section 3.2 of Monash University Q Manual for
referencing and citation.
Details of task
Read the articles
“Global productivity is slowing down: Three possible explanations”
“What’s needed to improve productivity growth”
“Australian productivity trends and the effect of structural change”
Write an essay to address the following questions:
What is the difference between the labour productivity and the total factor productivity
(TFP)? Why is productivity improvement important for our living standard and wellbeing?
What are the current productivity trends in Australia?
Use your own words to reflect the three reasons for the productivity slowdown in
OECD countries?
Which of these three reasons is more convincing to you? Explain your answer using
a real-world example.
Is there any other reason which might contribute to the productivity slowdown?
What sorts of productivity-enhancing reforms we need to maintain the long-term
growth and job creation in Australia, especially after the COVID-19 pandemic?
Please note: students must write an essay to address these questions in a coherent way,
rather than a Q&A style writing.
Global productivity is
slowing down: Three
possible explanations
THE CONVERSATION / Tuesday, January 24, 2017
By Roy Green, University of Technology Sydney and Renu Agarwal, University of
Technology Sydney
There is a wide recognition by economists and policy-makers that “the large differences
in income per capita observed across countries mostly reflect differences in labour
Further, “productivity is expected to be the main driver of economic growth and
wellbeing over the next 50 years, via investment in innovation and knowledge-based
This is what makes Australia’s productivity slowdown since the 1990s so concerning, as
it coincides with a period of massive technological change and innovation. Nor is
Australia the only country to experience this phenomenon, or to be puzzled by it.
A productivity puzzle
Productivity is not an easy concept to define. Essentially, it is a measure of the efficiency
with which we can turn inputs into outputs, based on new technologies and business
models, a capable and educated workforce, and effective management of firms and
During the mining boom, the deterioration of Australia’s productivity performance was
masked by the boost to our terms of trade from higher commodity prices. With the end
of the boom, it has become apparent that new sources of growth must be identified, re-
positioning Australia as a more complex and diverse economy, embedded in global
value chains.
Given the significance of this challenge, the federal government called in the
Productivity Commission. Its discussion paper highlights the “justified global anxiety”
that “growth in productivity—and the growth in national income that is inextricably
linked to it over the longer term—has slowed or stopped. Across the OECD, growth in
GDP [gross domestic product] per hour worked was lower in the decade to 2016 than in
any decade from 1950”.
The most problematic feature of this challenge is that we lack a clear understanding of
why productivity growth has slowed or stopped in Australia and around the world,
despite a considerable amount of analysis and debate.
Three possibilities
Broadly, three reasons for the productivity slowdown have been advanced.
First, there is the claim by Robert Gordon that today’s innovations do not compare in
scale or impact with the breakthroughs of the 1990s, let alone the wave of earlier
transformations bringing urban sanitation, electricity, the telephone, television and
commercial flight, “so it’s the lack of really profound economy-wide impacting
innovation in the past few years that’s been the problem”.
Against this view, Erik Brynjolfsson maintains that technological disruption is at least
on the scale of earlier periods but has yet to demonstrate its full impact, which will
require “a host of complementary innovations, just as it did in the industrial revolution:
investments in education, reorganisation of work, new policies”.
In particular, he anticipates “the core technology of artificial intelligence, machine
learning, and combining it with knowledge in lots of different areas [will] create new
products and services”. Others agree that “the new digital economy is still in its
‘installation phase’ and productivity effects may occur only once the technology enters
the ‘deployment phase’”.
Second, evidence suggests that productivity growth is still very strong, possibly
stronger than ever, but confined to “frontier firms”. These tend to be younger, more
innovative and profitable. They also vastly outperform the laggards, whose poor
performance brings down the average. Here the productivity slowdown is thought to be
due not to lack of innovation, but rather to a lack of diffusion from the frontier to the
rest of the economy.
This stems partly from the growth of monopolies and oligopolies in many industries.
They encourage the “financialisation” of corporate activity at the expense of productive
investment, particularly in R&D. Another factor is the uneven quality of management,
which can inhibit enterprise “absorptive capacity”, or the take-up of new ideas and
business practices, even in a competitive environment.
Finally, there is the view that whether or not there has been a transformation of
productivity performance as a result of technological change, it may not be reflected in
the statistics due to measurement shortcomings. For example, the role of the internet in
changing the way we communicate, assemble data and deliver services is simply not
captured by traditional measures.
Most economists accept that “what we measure affects what we do; and if our
measurements are flawed, decisions may be distorted”. But some go further, arguing
that “the time is ripe for our measurement system to shift emphasis from measuring
economic production to measuring people’s wellbeing. And measures of wellbeing
should be put in a context of sustainability”.
We need reform
Whatever measurement tools are adopted, productivity-enhancing reform will be a key
driver of long-term growth and jobs. It will enable us to compete globally not just on
cost, which promotes a self-defeating “race to the bottom”, but on quality, design and
innovation as the framework conditions of a high wage, high productivity economy.
US Federal Reserve chair Janet Yellen understood this well in a speech last year on the
role of productivity in restoring global growth:
“Though outside the narrow field of monetary policy, many possibilities in this arena are
worth considering, including improving our educational system and investing more in
worker training; promoting capital investment and research spending, both private and
public; and looking for ways to reduce regulatory burdens while protecting important
economic, financial, and social goals.”
In Australia, the Chief Economist reports that “innovation-active” businesses are 40%
more likely to increase profitability, twice as likely to export, and two-to-three times
more likely to demonstrate higher productivity and employment.
Yet innovation has been getting bad press, just like productivity in the past. It was not so
long ago that productivity was viewed suspiciously as a ruse to make people work
harder, when the real benefit was in working smarter. Now innovation is resisted on the
grounds that it destroys jobs altogether. While this may be true in specific cases, it also
creates jobs, and has done so historically.
The problem is that most newly created jobs will not be the same or in the same places
as the jobs that are gone. It has been estimated that up to half the existing jobs in
advanced economies will disappear or be changed beyond recognition in the next 10
years. This implies a much bigger emphasis on education and training to prepare for the
To be credible, a new productivity agenda will have to ensure that the gains from
innovation are shared systematically across the workforce and society, rather than
accumulating in a few hands. This is the lesson of populist revolts over centuries,
including the current examples occupying the world’s attention. A new agenda will
require a new social contract.
Roy Green is the dean of UTS Business School at the University of Technology Sydney, and
Renu Agarwal is a senior lecturer in innovation and service operations management at
the University of Technology Sydney.
This article was originally published on The Conversation. Read the original article.
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Australian productivity trends and the effect of
structural change
Simon Campbell and Harry Withers
For a small open economy like Australia, which specialises in commodity exports, fluctuations in the
terms of trade and productivity growth are the primary drivers of per capita income growth. Because
the global mining sector responds to higher commodity prices by expanding capacity, the terms of
trade are unlikely to provide sustained boosts to Australia’s living standards. As such, labour
productivity is likely to be the main driver of future growth in living standards. This paper analyses
trends in Australia’s productivity performance and disaggregates productivity growth into industry
contributions to evaluate how structural change is affecting productivity growth.
Australian productivity trends and the impact of structural change
Labour productivity growth is, and is expected to continue to be, the key determinant of growth in
Australian living standards. In terms of the size of the economy, economic growth is determined by
growth in labour utilisation 1 and growth in labour productivity. 2 At an individual level, the primary
drivers of per capita income growth are fluctuations in the terms of trade and labour productivity
Because the global mining sector responds to higher commodity prices by expanding capacity, the
terms of trade are unlikely to provide sustained boosts to Australia’s living standards. As such,
labour productivity is likely to be the main driver of future growth in living standards.
Despite concerns, Australia’s labour productivity growth over recent years is in line with its
longer-term performance. In the five years to 2015-16, labour productivity in the whole economy has
grown at an average annual rate of 1.8 per cent. This compares to an average annual rate of
1.4 per cent over the past 15 years and 1.6 per cent over the past 30 years. 3
Given the importance of labour productivity growth in improving living standards, an understanding
of trends in Australia’s productivity performance and the impact of structural change on productivity
growth can help reveal where we stand and implications for the future. This paper discusses sources
of productivity growth in the Australian context, followed by an examination of sectoral productivity
growth to highlight how within-sector productivity growth and across-sector productivity growth (or
the effects of structural change on productivity) contribute to aggregate productivity growth.
In analysing sources of labour productivity growth, we address the tension between labour
productivity growth and multifactor productivity (MFP) metrics. Commentators who view labour
productivity growth through the lens of a closed economy neoclassical growth framework have
voiced concerns about the slow growth of MFP (Garnaut, 2015). This concern, in large part, stems
from the belief that sustainable long-run economic growth must be balanced with output and capital
growing at the same rate and that this common growth rate is determined solely by the growth of
MFP. Our analysis shows that Australia’s labour productivity growth has not been limited by
balanced growth or the growth rate of MFP. Australia’s labour productivity growth has largely been
driven by capital deepening (that is, higher capital per worker) rather than MFP growth.
Sectoral analysis reveals how aggregate productivity growth can be affected by structural change in
the economy. In Australia, most sectors have broadly similar productivity levels with the exception of
the Mining and Utilities sectors, which have relatively high productivity levels. The movement of
workers into and out of the Mining sector is the dominant factor behind the effect of structural change
on aggregate productivity growth.
Labour utilisation is a function of the ratio of the working age population to the total population; the labour
force participation rate; the employment (unemployment) rate; and average hours worked.
Labour productivity growth — the key measure of productivity growth — measures growth in output per
worker (typically defined on an hours worked basis). Labour productivity growth is driven by increases in
the ratio of capital to labour (capital deepening), as well as improvements in the efficiency with which labour
and capital inputs are utilised (multifactor productivity).
This is not a reason for complacency, however. Mechanically, there would need to be a sustained lift in
average annual productivity growth to around 2½ per cent to allow living standards (measured as per capita
income) to continue to improve at the long-run historical rate (represented by 30-year average growth in real
gross national income per capita) of around 2 per cent per annum.
Australian productivity trends and the impact of structural change
Outside a Mining boom, where the structural change effect supplements within-sector productivity
growth, aggregate productivity growth is driven overwhelmingly by within-sector productivity
growth. While within-sector Mining productivity growth is expected to contribute strongly to
aggregate productivity growth for the next few years, the large and growing services sectors will
remain responsible for growth prospects in the longer term. Efforts to increase productivity in the
services sectors will grow in importance into the future.
Sources of aggregate labour productivity growth
Labour productivity growth can be calculated as the sum of capital deepening and MFP growth.
Capital deepening is the change in the ratio of capital to labour 4 multiplied by capital’s share of factor
income. MFP, which is also known as total factor productivity, reflects the overall efficiency with
which labour and capital inputs are used together in the production process. In simplified terms,
labour productivity growth can therefore be thought of as the sum of: (i) increases in the amount of
capital per worker; and (ii) how much better labour and capital work together.
MFP growth can arise for many reasons, including new management practices that allow capital and
labour to be combined more effectively or a more efficient allocation of labour and capital across the
economy. But unlike output, labour or capital, MFP is not directly observed. Rather, it is calculated as
a residual (meaning mismeasurement of labour or capital inputs will be reflected in mismeasured
MFP). 5
Internationally, G7 countries have experienced a slowdown in MFP growth relative to capital
deepening over recent decades. Up until around the late 1990s, the contribution of MFP growth to
labour productivity in G7 countries was generally at least as important as the contribution of capital
deepening. Since then, most of the slowdown in labour productivity growth has been driven by lower
MFP growth (OECD, 2015).
The contribution to labour productivity growth in Australia from capital deepening has been higher
than the contribution from MFP growth. Of the 30-year average of 1.6 per cent whole-of-economy
labour productivity growth, capital deepening contributed 0.9 percentage points and MFP
0.7 percentage points (Chart 1). This is at odds with the balanced growth/MFP growth framework,
which implies a contribution from capital deepening equal to capital’s share of factor incomes. After
rising slowly over the past 30 years, capital’s share of factor income in Australia’s market sector is
currently around 41 per cent (coming off its peak of 44 per cent in 2011-12). 6
Labour being hours worked in our analysis.
For example, it can be difficult to accurately measure the volume of capital services.
Labour’s share of income is therefore currently around 59 per cent. (ABS cat. no. 5260.0.55.002, Table 14).
Australian productivity trends and the impact of structural change
Chart 1: Labour productivity growth decomposition
Per cent
Per cent
1981-82 to
1984-85 to
1988-89 to
1993-94 to
Capital deepening
1998-99 to
2003-04 to
Labour productivity
2007-08 to
Source: ABS cat. no. 5260.0.55.002 and Treasury calculations.
As a source of labour productivity growth, MFP growth is considered to have an important
advantage over capital deepening. Neoclassical growth theory implicitly assumes that, unlike capital
deepening, MFP growth does not necessarily require an economy to forgo consumption. As such,
growth in MFP is generally considered a highly desirable — and sustainable — source of labour
productivity growth. That said, improvements in MFP do not come for free, given they usually
require the use of other factors of production.
However, Australia has largely avoided the downside to capital deepening-led labour productivity
growth. Productivity improvements in the rest of the world have caused a persistent fall in the price
of capital goods relative to consumption goods. This has allowed Australia to sustain its high rate of
capital deepening without forgoing ever higher levels of consumption.
It is important to note that the relative contribution of capital deepening and MFP may be skewed if
new capital takes some time to boost output. For example, during an investment boom the
contribution of capital deepening to labour productivity growth may be overstated and the
contribution of MFP growth understated for capital with a long-time-to-build. Such a delay in
productivity associated with capital investment has been particularly evident in the Mining sector
over the past decade — with flow-on effects to whole of economy estimates of capital deepening and
MFP growth. With the ending of the Mining investment boom and Mining output continuing to grow
over coming years, MFP growth is expected to recover (although potentially be overstated).
Factors driving historical aggregate labour productivity growth
During the 1990s, there was strong growth in aggregate labour productivity (Chart 1). This can
largely be attributed to more investment by firms in information and communications technology
(ICT) and important microeconomic and macroeconomic reforms introduced since the mid-1980s. The
former contributed not only to productivity growth through ICT production but also the use of ICT
The time periods on the x-axis are productivity cycles as calculated by the ABS. Productivity growth cycle
peaks are determined by comparing the annual MFP estimates with their corresponding long-term trend
estimates. The peak deviations between these two series are the primary indicators of a growth cycle peak,
although general economic conditions at the time are also considered.
Australian productivity trends and the impact of structural change
(Gretton, Gali and Parham, 2004). The latter included changes in monetary and fiscal policies, capital
markets, industry assistance, taxation, government enterprises, regulation, labour markets and
industrial relations, competition policy, innovation and training (Productivity Commission, 1999
and 2004).
These reforms have been shown to have increased competition, promoted more efficient allocation of
resources and improved international competitiveness. Some have argued that they also created a
competitive environment that has led to permanently higher levels of innovation as businesses
anticipated global changes in technology, international competition and tastes (Dolman, 2009).
The resurgence of economy-wide labour productivity growth during the 1990s was led by the
services sector. Industries like wholesale trade and financial services seized on new advances in ICT
to transform the way they did business. And following the corporatisation and privatisation of their
operations, industries like telecommunications and utilities achieved continued productivity growth
by scaling back investment levels and substantially reducing their workforces. Productivity levels in
these industries rose towards the international technological frontier (Dolman and Gruen, 2012).
However, aggregate labour productivity growth slowed during the 2000s. Several factors contributed
to this decline. The Agriculture sector was hit by drought and the Mining and Utilities sectors
experienced a fall in productivity as it pursued an ‘unrequited acceleration in input use’ without a
corresponding change in output (Parham, 2012). At a broader level, a reduction of productivity
growth in most developed countries would suggest a possible decline in the pace of technological
change (Gordon, 2014).
In the end, policy settings that seek to support both capital deepening (by lowering the cost of capital)
and MFP improvements (through greater efficiency, innovation and reallocation within existing
resource constraints) will support future growth in labour productivity in Australia.
Sectoral analysis
The drivers of aggregate labour productivity growth can be better understood by examining the issue
from a sectoral perspective. In particular, doing so provides insights into the role that structural
change plays on aggregate productivity growth.
Labour productivity, capital deepening and MFP can each be measured at the sectoral level. 8 In the
analysis that follows, the paper disaggregates the economy into six sectors: Agriculture, Forestry and
Fishing; Mining; Manufacturing; Utilities; Construction and Services, where Services is an aggregate
of all remaining sectors in the Australian economy. 9
For this analysis, aggregate labour productivity growth comprises two components: a within-sector
contribution; and an across-sector contribution, also known as a structural change effect. The former
Although data is unfortunately only available from 1988-89 to 2015-16.
The ‘services sectors’ are the combination of the following sectors: Wholesale trade; Retail trade;
Accommodation and food services; Transport, postal and warehousing; Information media and
telecommunications; Financial and insurance services; Arts and recreation services; Rental, hiring and real
estate services; Professional, scientific and technical services; Administrative and support services; Other
services; Public administration and safety; Education and training; and Health care and social assistance.
Australian productivity trends and the impact of structural change
is the sum of sectoral productivity growth weighted by sectoral GDP share. The latter is the change in
productivity from sectoral reallocation of workers (see Appendix B for methodology). 10
Within-sector labour productivity growth
In the absence of workers moving between sectors, it is the productivity growth within sectors that
determines growth in aggregate labour productivity. Chart 2 shows how labour productivity has
grown in different sectors.
Chart 2: Sectoral labour productivity (indexed to 1988-89)
Agriculture, forestry and fishing
Source: ABS cat. no. 5204.0 (Table 5, Table 15), ABS cat. no. 5260.0.55.002 (Table 6), ABS cat. no. 6291.0.55.003 (Table 11,
supplemented with unpublished ABS data) and Treasury calculations.
A few initial observations can be made from Chart 2:
Labour productivity has grown strongly in the Agriculture, Forestry and Fishing sector, with
productivity in the sector now over 2½ times its 1988-89 level.
The Mining and Utilities sectors showed strong labour productivity growth until the early 2000s
before steadily declining through to 2011-12. 11 In fact, Mining sector productivity fell so far over
the period that in 2011-12 it was below its 1988-89 levels. 12
10 The shift share-analysis considered in this article can be used to shed light on whether resource reallocations
between industries are producing efficiency gains through higher productivity outcomes or whether
developments within industries are driving aggregate productivity outcomes. The analysis is primarily
concerned with describing where, on an industry basis, productivity growth is coming from. The analysis
says nothing about the underlying factors driving resource allocation between industries or the nature of
developments within industries.
11 The productivity decline in the Utilities sector from 1997-98 was due to its own unique set of factors. The
construction of new facilities for the provision of water services, the higher levels of investment to replace
ageing network infrastructure, the move from large coal to gas-fired power stations and renewable energy
sources which require higher inputs per unit of output and the drought affecting output levels in water in the
early 2000s all detracted from productivity growth in the sector (Productivity Commission, 2012a and 2012b).
12 The reduction in the level of labour productivity in the Mining industry during the 2000s can be explained by
the lead times between capital investment and the corresponding increase in output, the employment of less
skilled workers at the outset of the mining boom and the depletion of high quality natural resources. In
interpreting Mining sector productivity it should be noted the dramatic fall in Mining productivity in the
2000s may also reflect some Construction sector labour being misclassified as Mining sector labour.
Australian productivity trends and the impact of structural change
Recent data show that with the shift of the mining boom to the production phase, Mining
sector labour productivity growth has improved. Despite more subdued productivity
growth in Mining during 2015-16, the sector’s productivity growth is expected to continue
its recovery in coming years as output increases (the payoff to the capital deepening from
2003-04 seen in Chart 1).
Productivity in the Manufacturing and Construction sectors has shown growth consistent with
that of the broader economy.
Similarly, labour productivity in Australia’s services sectors over the past 25 years has grown at
an average annual rate of 1.7 per cent — broadly in line with long-run labour productivity
growth for the whole economy.
This result is not surprising, given the services sectors we define collectively account for
almost 70 per cent of Australia’s economic output (sector shares of output are shown below
in Chart 3 — note that the services sectors are plotted against the right-hand-side axis). 13
Chart 3: Sector shares of total economic output (gross value added)
16 Per cent
Per cent
Services (RHS)
Manufacturing (LHS)
Construction (LHS)
Mining (LHS)
Agriculture, forestry and fishing (LHS)
Source: ABS cat. no. 5204.0 (Table 5).
Utilities (LHS)
Chart 3 demonstrates that despite the attention given to Mining as a determinant of Australia’s
productivity performance, it is the services sectors that will continue to play a key role in driving
future aggregate productivity growth. Mining’s share of output is certainly significant — now over
8 per cent of the economy, rising sharply from just over 5½ per cent in 2003-04. But over the last five
years over half of Australia’s annual aggregate labour productivity growth was attributable to growth
within the services sectors, compared with around one-quarter attributable to Mining. This
underlines the importance of policy settings in the services sectors.
Meanwhile, Manufacturing and Agriculture (often referred to as key drivers of Australia’s
productivity) continue to shrink. The two industries now contribute less than 10 per cent of
13 It should also be noted that within the services sector composite the individual productivity levels and
growth rates of individual services sectors differ greatly; some suggest this makes them inappropriate to
consider in aggregate (Inklaar, Timmer and van Ark, 2007). While analysis of individual services sectors is
beyond the scope of this paper (perceptions about poor productivity performance in the services sectors
could relate to individual sectors) they have been aggregated to demonstrate their size and historical
contribution to aggregate growth.
Australian productivity trends and the impact of structural change
Australia’s output combined (around 7 per cent and 2½ per cent respectively). Their contribution to
aggregate productivity growth over the last five years has been negligible.
Structural change
Structural change involves the shift of resources from one industry to another. As workers shift in this
way, the contribution to aggregate labour productivity growth will depend on the relative
productivity between sectors. For instance, workers moving from relatively high productivity sectors
to relatively low productivity sectors will detract from aggregate productivity growth (and
vice versa)