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Productivity gains key to our future prosperity

09:00am September 06 2022

Prime Minister Anthony Albanese and Treasurer Jim Chalmers in discussion at last week's Jobs and Skills Summit in Canberra. (Getty)

Productivity growth in Australia in the last decade has been the slowest of any decade for the last 60 years, according to a report last month from the Productivity Commission.

Why does this matter? Well, it’s costing the economy.

The government revealed last month that it had downgraded its assumptions for long-term productivity growth to 1.2 per cent per annum, from 1.5 per cent previously. While this may not seem like a major change, the shift could potentially leave a big hole in government finances in future years.

The good news is that well-targeted policies and investment, informed by learnings from the pandemic, can lead to substantive gains.

More on that shortly. But first, it’s worth a quick refresher on what we mean by productivity, and why it’s so important.

Put simply, productivity measures how efficiently an economy can turn inputs, namely labour and capital, into outputs, like products and services - it’s about working smarter, not harder.

More efficient use of resources brings down the cost of production, which in turn supports real wages growth and improved standards of living - in fact, productivity growth is the main driver of real wages growth.

So, while other, more immediate, challenges may grab the headlines, in the long run, improving productivity should be the key objective for economists, policymakers, business chiefs, and the public alike.

The pandemic has had a profound impact on the world. While a lot of that impact has been in the form of devastating loss of life and negative affects to countless households and businesses, there have been some silver linings. One of which has been the increased use of technology.

In response to lockdowns, businesses large and small had to increase their digital capability. Technology investment enabled millions of workers who were previously office-based to work from home on a regular basis.

E-commerce boomed, as we were stuck at home but still needed access to our favourite products, while the provision of online services surged as businesses adapted to maintain contact with their customers in a socially distanced world.

Continuing these trends, and investing in digital technology, can help to drive productivity gains.

Online delivery of services allows businesses to access larger markets without a significant increase in costs. For example, a yoga teacher can deliver a class to hundreds of students across the world just as easily as delivering a class in person to a dozen local clients.

Telehealth has the potential to revolutionise the provision of medical services, particularly to people in remote communities. And if a society can make its people healthier, it will also make them more productive.

The Productivity Commission’s recent report highlighted the importance of improving productivity in the services sector, which now accounts for almost 90 per cent of employment in Australia.

It's a sector where gains have traditionally been hard won, in part because it relies more on labour than other industries and so is typically harder to automate and scale. Yet progress can be made through better use of technologies such as machine learning, cloud and quantum computing, and artificial intelligence.

That doesn’t necessarily come at the cost of jobs – it’s about working smarter, improving existing processes, and opening access to previously untapped markets. While new innovations can reduce the need for certain jobs, they often lead to more employment opportunities in other areas due to the increased use of technology.

The report also extolled the virtues of a strong education system, which has never been more relevant in the digital era. Over the next five years, more than 90 per cent of new jobs will require post-school qualifications, according to the National Skills Commission. 

A smarter workforce means a more productive workforce, so it’s vital we continue to invest across a broad spectrum of educational institutions.

The Government has announced a range of measures to help address skills shortages and provide increased education opportunities following its Jobs and Skills Summit last week.

Over the longer-term, strategies focused on productivity gains through digital innovation and education are key to lay the foundations for our future prosperity.

The views expressed are those of the author and do not necessarily reflect those of the Westpac Group. 

The information in this article is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and you should consider its appropriateness with regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed.

Jarek joined the Westpac Group as a Senior Economist in 2021. He works across several businesses, including Westpac Business Bank, St.George Bank, BankSA, Bank of Melbourne and BT. Prior to this, Jarek worked for The Treasury in Canberra for over eight years. He holds a Bachelor of Economics and Bachelor of Finance double degree from the University of Adelaide.

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