Labor and Total Factor Productivity in Australia
Australian productivity is regarded as one of the best in the world. A recent report by the OECD found that Australian productivity is at its highest rate since 1994. This means that Australian workers are working smarter and more efficiently than they have in a generation, which can only be good for the economy (Manipis et. al., 2021).
Labor or workforce productivity is the total amount of products and services that are produced by a group of workers during a particular period of time (Burkhanov, 2018). Whereas, Total Factor Productivity measures the productive efficiency and the amount of output that is produced given a specified amount of inputs (Zhang et. al., 2021). Labor productivity growth may be quantified as the grand total of MFP growth and capital deepening (Kazekami, 2020). Capital deepening is defined as the alteration in the ratio of capital to labor multiplied by the capital’s portion of the factor income. In comparison to labor productivity, total factor productivity also known as MFP considers the entire efficiency with which capital and labor inputs are together used in the process of production. Hence, the labor productivity growth is the grand total of the rise in the capital per laborer and the fact how better it would be if labor and capital were to be used together. Whereas, MFP growth can occur due to practices of management that are relatively new and that allow the effective combination of labor and capital (Campbell & Withers, 2017).
Hence, productivity improvement is extremely important for our living standards and well-being. The productivity of labor is the most crucial factor influencing the living standard and well-being of Australians. When the entire economy size is taken into consideration, the economic growth is caused by the expansion in the utilization of labor and the expansion in the productivity of labor too (Peri, 2016). The mining sector on a global level acknowledges a rise in the prices of the goods by increasing the capacity, the terms of trade are improbable to produce upliftment to the living standards of Australia. It has been observed that the labor productivity growth of Australia over the last few years is in correspondence with the performance of Australia on a long-term basis, thereby affecting the living standards on a positive note (Campbell & Withers, 2017).
Having discussed how productivity improvement is important for our living standards and well-being, we now discuss the current productivity trends in Australia. In Australia, the current productivity trends are centered around high-functioning teams, which encourage employees to work smarter and faster (Bergeaud, Cette & Lecat, 2016). This has led to a growth in remote working. In addition, the Australian knowledge economy is quickly changing the way people work and think about what it means to be successful. This is encouraging a shift in the role of the individual and the workplace (Ferreira et. al., 2021). In addition, it can be difficult to keep up with coworkers outside of regular working hours which could lead to confusion or disengagement on the job. Also, on the other hand, new research suggests that not only are Australian workers feeling less productive and more stressed, but they are also working less (Campbell & Withers, 2017). A recent survey found that “less than a third of employees reported feeling engaged in their work.” The Australian Financial Review reported on a study that found that the number of hours Australians work has decreased by almost 10% since 1998. The study, by Professor Paul Green from the Melbourne Institute of Applied Economic and Social Research, found that those working in public administration were the least productive group and they also worked less than other groups. If a sectoral analysis is done, then it is observed that aggregate labor productivity is determined by:
- For the sectors of agriculture, forestry, and fishing, labor productivity had spread over 2.5 times of its 1988-89 level.
- Strong labor productivity was also displayed in the mining and utilities sector until the early 2000s and started declining from 2011-2012.
- For the sectors of manufacturing and construction, productivity was consistent.
- For the service sectors over the last 25 years in Australia, labor productivity grew at an annual rate of 1.7%.
Importance of Productivity Improvement for Living Standards and Well-being
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.
Figure 1: Sectoral Labour Productivity (Indexed To 1988 89)
Figure 2: Current Productivity Trends In Australia
Having discussed Australia in detail, it is evident that the OECD countries are facing a productivity slowdown. The three reasons that are responsible for the productivity slowdown in the OECD countries are listed as follows:
- Firstly, according to Robert Gordon, the innovations that take place in the current times are not in any comparison to the impact they create in the 1990s breakthroughs, leaving alone the innovations that took place earlier, for instance, television, urban sanitization, telephone, commercial flight, electricity and therefore, the recent innovations do not make such impact. On the other hand, Erik Brynjolfsson says that there has been a technological disruption. According to him, in order to create the full impact, there needs to be a host of other innovations too like the industrial revolution took place (Green & Agarwal, 2017).
- Secondly, according to most of the research undertaken, though the growth in productivity has been showing strong growth, this growth is restricted to the frontier firms that are young and innovative, and profitable too. These new ventures outperform the firms that perform poorly and as a result, bring down the average productivity as depicted in the figure. These new ventures predominantly pertain to the monopolies and the oligopolies which fundamentally focus on Research and Development and absorb new ideas.
Figure 3: The Performance Of The Laggards Firms
- Thirdly, there is the presence of shortcomings in the measurement process. It is said that even if there is productivity growth, this growth is not viewed properly since this growth is not even measured. For instance, the internet has changed the life of human beings remarkably but these changes have not been measured properly. According to some economists, mismeasurements lead to disruptions in the decision-making process.
Of these three reasons that are mentioned above for the productivity slowdown, the last one is the most convincing. Productivity growth is a measure of the number of goods and services produced by workers (Sveikauskas et. al., 2016). The productivity growth is often referred to as the economic growth. The economic growth can be measured in percentage figures, which can be represented by a chart that shows how production has increased over time. Productivity is a measure of how efficiently a country’s workers produce goods and services. However, the way productivity growth is measured can drastically change the calculation. For example, if one company produces a product entirely by themselves and their productivity increases by 100%, then as soon as they hire one more person to help them, their productivity will decrease because it will be split between two people. Productivity growth is not accurately measured because the current way of calculating productivity does not take into account the changing quality of goods and services (Diewert, 2018). With the improvements in technology, for example, it is now possible to produce a whole range of products that are more complex and sophisticated than what was possible before this change. This means that when a new product is invented, such as a driverless truck, productivity may be temporarily increased as the amount of output produced per worker is now larger than what was previously possible. The measurement of productivity can be misleading and there is a lack of agreement in this area. A country that is known for its over-reliance on manual labor is India. The government has been pushing for a productivity slowdown and a decrease in the use of these laborers. The Indian government has been working to incentivize employers to provide digital tools such as computers and tablets so that the workers can be more productive.
These three are not the only reasons for the productivity slowdown. There could be other reasons which can be discussed in detail to understand why they have been the reason for the productivity slowdown. At the end of 2017, the world experienced a productivity slowdown. With many countries experiencing their worst performance in decades, the cause of this slowdown is not yet fully determined. One possible reason could be due to the economic crisis in Brazil. The Brazilian economy grew at a slower rate than anticipated and as a result, it had an impact on other countries such as Argentina which has been struggling to maintain its production levels (Pereira, Bruneau & Van Dyke, 2019). Another reason for the productivity slowdown might be that people have a shorter attention span and find it difficult to focus on one task. This lack of focus leads to errors and mistakes that slow down the process. In addition, the modern office is cluttered with things that take up valuable space and are distracting. With so much clutter to distract workers, it becomes easier for people to wander around and make mistakes. Many theories might contribute to the productivity slowdown, but few stand out more than others. One is a culture of overwork, with employees expected to be at their desks from 9-5 and then work from home in the evening (Pyka, Bogner & Urmetzer 2019). Another is that employees are getting less sleep as a result of being on their devices at all hours of the night. Many also think that companies are not paying employees as much. A report released by the New York Federal Reserve, for example, found that average hourly earnings have grown 3 percent in the last year (Figart & Golden, 2013). This would contribute to the decline in productivity. Other possible theories include a decline in innovation and the use of automation to accomplish work tasks.
Current Productivity Trends in Australia
Productivity-enhancing reforms are needed to maintain long-term growth and job creation, not only in Australia but also in other parts of the world. These reforms are much needed after the covid-19 pandemic since productivity has dropped down remarkably. Productivity-enhancing reform can be a reform that operates on a global level not only on cost, which is in itself self-sabotaging ‘race to the bottom’, but also on factors like design, innovation, and quality (Green, 2017). These factors would operate as framework conditions for increased wages and an economy that is high in productivity. According to Janet Yellen’s speech at US Federal Reserve last year, there are many prospects that should be considered like the strengthening of the education system and funding more in the training of the workers, encouraging capital investment, and also investing in the research and development that are both public and private, and searching for methods to minimize the regulatory burdens along with safeguarding crucial social, financial, and economic goals (Bradlow & Park, 2020). The Chief Economist of Australia had announced that the business or firms that are innovation-active, have a 40% more chance of making their profitability rise, have a high chance to export at a double rate, and more high chance (about two to three times) to exhibit high fruitfulness and employment (Davis, 2022). To become feasible, there should be a new agenda for productivity that will make certain that the benefits that arise as a result of innovation are divided in a systematic manner covering the entire society and the workforce instead of getting accumulated in a few hands. In the following diagram, the long-run supply curve shifts to the right, assuming that there is innovation, thereby increasing the output condition and also a reduction in the price of the commodity.
Therefore, to conclude the paper, productivity growth has been slowing in OECD countries for the last few years. There have been a number of factors in play such as economic conditions, skills, and infrastructure. OECD countries are seeing a slowdown in productivity, which has been the driving force of economic growth. This may be due to a decrease in innovation and increased economic inequality. The productivity trends of Australia were on a low scale toll 2020 after which the productivity started rising. It is also clear from the paper that a miscalculation of productivity growth can lead to a productivity slowdown. Other reasons for productivity slowdown might accrue to the economic crisis in Brazil or even as minor as a shorter attention span. The role the government should play in determining people’s wellbeing is by using economic indicators to measure economic progress, such as GDP and productivity growth.
References
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