Productivity - Albanese Vs Lowe – Who gets it??

Lowe Parting Shot

In Lowe’s final address as RBA head at the G20 meeting in India, Lowe targeted a decline in productivity as the main challenge in fighting higher inflation.  He stated that ‘policy solutions’ exist but there appears to be a lack of political will to implement them.

As Australian productivity continues to decline – unless resolved, will lead to higher inflation and a lower standard of living.  Labour productivity recorded its largest ever drop in the March quarter this year, falling 4.5% in the preceding 12 months.  Output per hour work is now back to December – 2019 levels meaning there have been no gains in 3 years. 

It is not just an Australian phenomenon but a global one – adding to global inflation – with employees wanting pay rises of say 5% to keep up with high inflation but with productivity gains sub 0 (In both Australia, UK and the US in the last 6 months), though the US has just seen a recent uptick.

Albanese – productivity improvements - just because

In contrast yesterday at the AI Group 150^th anniversary event, Prime Minister Anthony Albanese cautioned businesses who cut workers rights and pay or sack their workers in exchange for new technology are bad for businesses. 

Albanese went on to state productivity boost is key to success however – “The answer is not a matter of cutting pay and conditions. Or replacing workers with technology…. The answer is boosting productivity by finding new ways for our people and businesses to get the most out of technology” he said. Just reread that and see if you spot the contradiction….

Pay and conditions of the average worker should not be cut and should actually improve, but the only way to do this is either – grow your output in a competitive environment or replace staff with automation and technology to boost productivity and in the process shed employees.  Without significant growth opportunities this quite frankly is at odds with what productivity is.

Red tape continues to be a huge cost to business, and it is one area productivity gains can be immediately made. However, this is a political solution where government department jobs may be lost in the process, (through innovation and technology) and based on Albanese’ comments not an area the government believes worth looking at or understands. 

Take for example a precious metal refinery in Australia. They are required to communicate and give information on chemicals held on site to the following government departments.

• The Fire Department
• Their local Council
• The EPA
• Worksafe
• The water department
• Department of Health
• Poisons License
• National Pollution Inventory

And then they have other private institutions such as their bank or customers that for AML, KYC and environmental compliance may request the same information. 

Then add the Bureau of Statistics business surveys which are time intensive and of which most of the information is already known by the ATO.

Just an idea to improve productivity for this example of a firm – how about a centralized database that all departments could review?  However, that would take innovation, technology and possibly loss of government jobs. 

The Australian Productivity Conundrum

The broader accepted reasons for lack of productivity growth include:

1. Less creation of firms

In Australia the rates of firm entry and exit have declined 2005-2006 and 2012 – 2013, with the main ‘new entrants’ outside these periods being sole traders and independent contractors rather than large employing companies. 

2. Less job switching

There is an aging workforce dynamism in the workforce, due to older workers less likely to switch jobs, meaning more productive workers do not move to more productive industries.  Looking at IT which is in its own right a ‘newly’ productive industry with a young workforce, it is accepted that job movement is required to improve your skills or you become ‘stale’ in the job and less employable. In service, manufacturing and mining for example this perception is the opposite.

3. Reduction in business investment

Non-mining investment in Australia has stagnated in recent decades. With rising interest rates and therefore investment costs, it is likely to slow even further.  Suggested reasons include uncertainty, risk aversion and general economic pessimism.

4. Mergers leading to decreased competition

The average concentration of Australian businesses in certain industries such as banking, mining and manufacturing appear to now be dominated by a few big firms, falling since 2000.  Most of this concentration is in already concentrated industries such as warehousing and logistics and banking.  The sheer size of investment to start in one of these industries means fewer if any enter the market further concentrating and further rising barriers to entry.

In Australia in particular, it appears ‘rolling up of businesses’ through mergers and acquisitions to create larger behemoths – with red tape and large investment making it harder for new entrants - actually takes away from business investment.  Take for example manufacturing – earnings multiples are paid for businesses in manufacturing between 4-8x.  If the company acquiring the businesses buys this company they are less likely to invest in new equipment and new lines for organic growth.  Two things happen here – less investment and an aging ‘equipment’ base which erodes innovation and decreases possible productivity gains with new technology.

Some of the less accepted reasons include the following:

5. Red tape and greater barriers to entry

Described pretty succinctly in our suggested ‘centralized database’ for the government.  But as business numbers drop and concentration increases, the growth in government departments that need to be reported to by businesses continue to grow and require more resources within the company to meet obligations.  Political will to improve as Lowe pointed out appears to be lacking.

6. Energy Insecurity

Green Technology and its investment is the way of the future – without any real path or technology commitment as to how we get there.  Investment in oil, gas and coal continues to decrease creating uncertainty as to where these energy resources will come from in the future.  This creates 2 issues – firstly it reduces investment as technology obsolescence without a definitive ‘green plan’ becomes a greater risk.  And like with the recent energy spikes due to the Ukraine war, supply shocks will be larger due to more finite reserves making it harder for both existing and new firms to want to invest into the future

7. Only a few productive firms bringing up the rest

A little understood global trend is that the most productive firms seem to be 3-4x more productive than the less productive.  Within Australia evidence suggests that in this area Australia is actually widening the gap between the most productive World companies’ vs Australian companies who are slower to adopt new technologies and innovations. 

Some of the reason this may be the case is the lack of competition makes Australian companies complacent and a lack of political support means higher risk for firms looking to invest into an uncertain future.

In Conclusion

Without fixing productivity inflation and interest rate rises will continue and may exacerbate productivity losses with lower investments in technology by firms.  But a shear lack of understanding on what productivity is and how it is achieved from the top down will hamper any action or reaction from companies stuck between red tape, rising costs and wages and a globalising economy.