End of productivity drop no cause for complacency

Productivity Commission

Australia’s labour productivity has halted its decline but mostly because people worked fewer hours in the 2023 September quarter, according to Productivity Commission research.

For the first quarter since March 2022, labour productivity rose – increasing by 0.9% in the September quarter, although labour productivity was still down 2.1% through the 12 months to September.

This increase in productivity was driven by a 0.7% decline in hours worked over the quarter coupled with relatively minor growth in GDP of 0.2%.

“The amount of hours worked has increased every month since September 2021. Now that growth in hours worked appears to have peaked without an accompanying decline in output, productivity has slightly recovered,” said Deputy Chair Dr Alex Robson.

Thirteen out of 19 industries saw productivity growth in the September quarter. Construction, along with the professional, scientific and technical services industry, contributed 0.7 percentage points to this growth, while administrative and support services decreased labour productivity by 0.2 percentage points.

The report says that this productivity result must be understood with reference to trends stemming from the COVID era.

“The COVID-19 pandemic created a ‘productivity bubble’ as workers temporarily moved away from low-productivity sectors, like hospitality, towards higher productivity sectors,” said Dr Robson.

“That bubble burst as workers returned to those lower productivity sectors when pandemic-related restrictions eased. In the wake of this, we are only now seeing labour productivity approach pre-COVID levels.”

As such, the report cautions that this recovery is unlikely to reflect the beginning of a return to healthy long-term productivity growth.

“Australia’s productivity returning to 2019 levels is no cause for complacency, as that level came at the end of a decade of relatively weak productivity growth,” said Dr Robson.

“It’s a further sign that the kind of sustainable long-term productivity growth Australia needs will require the type of policy reforms we highlighted in our Advancing Prosperity inquiry report.”

The Quarterly productivity bulletin is available from: www.pc.gov.au/productivity-insights.