NSW Economic Society Lunchtime Seminar Series 9 th May 2007 Can Australia Match US Productivity Performance? Dean Parham Productivity Commission, Canberra ( based on paper by Ben Dolman, Dean Parham and Simon Zheng)

2 Motivation n Long term view of productivity performance n Where should Australia set its sights ?  compared with the productivity performance of other countries

3 Comparisons of GDP per hour worked groups Overtakers Movers Stagnators 2006

4 Focus n Can Australia reasonably aspire to match US productivity?  Support from catch-up theory n Can Australia go further?  Can it overtake the US (as other countries have done)?  Can it aspire to match the world’s best?

5 Answers n Some particular features of the ‘overtakers’ story have a downside  Would not necessarily be wise for Australia to emulate n Some ‘fundamental factors’ inhibit Australia’s ability to catch up completely to US productivity levels  But we can still be a ‘mover’

6 What are these ‘fundamental factors’ that inhibit complete catch-up? ‘Deep’ economic conditions resource endownments economic geography Comparative advantage Economic structure Potential level of productivity

7 Outline n International patterns of productivity leadership and catch-up n Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance

8 Productivity leadership (GDP/hr) 2005 USD per hour Industry mix?

9 But has high productivity come with a tradeoff? GDP Population Average income = Hours worked Population GDP Hours worked = Labour utilisation Labour productivity = Taking an ‘economic welfare’ perspective:

10 Relatively high European productivity came with low labour utilisation Australia France United States = 100

11 European ‘trade off’ n Policy interventions and institutional arrangements  tax structures, welfare/work arrangements, union power, legislated hours reductions, high minimum wages, low wage differentials n have had joint influence on  lower utilisation high unemployment, especially low skilled fewer average hours  higher productivity capital intensity high skilled, low intensity

12 Structural productivity levels, 2002 United States = 100 Adjusted for differences in labour utilisation

13 So who’s the productivity leader? n Discount the European leaders  Different industry mix  Policy interventions and institutional arrangements have ‘contrived’ the outcome with accompanying adverse social consequences NB. Also slower productivity growth n US more relevant  Broad technological and efficiency leader

14 Outline n International patterns of productivity leadership and catch-up n Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance

15 Aggregate labour productivity growth US (% pa) 1950 to to to Australia (% pa) Australia (% of US)

16 Australia’s productivity relative to US over the long term Per cent of US level

17 Industry dimension important n Industry contributions to aggregate US productivity growth Agriculture, Manufacturing (chemicals, transport equip, elect equip) Machinery & computer equip (non-durables retreats) ICT manufacture, services productivity (based on distribution and use of ICT)

18 Labour productivity in major sectors, US Index, 1987 = 100

19 MFP in selected manufacturing industries, US Index, 1950 = Non-durable goods Chemicals and allied products Durable goods Industrial machinery and computer equipment Electronic and other electrical equipment

20 Wide variation in performance of Australia’s industries relative to US Caught up (‘Overtakers’) 2003 relativity (%) Mining, construction, transport100+ (agriculture) Movers Utilities53 Communication83 Finance & insurance67 Stagnators Manufacturing60 Wholesale trade43 Retail trade63

21 Outline n Review international patterns of productivity leadership and catch-up n Review Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance

22 Explanations for productivity gaps n Proximate sources  MFP (~15pp) rather than capital intensity (~5pp) n Industry mix  Size of agriculture, mining  Manufacturing, ICT manufacturing n Geography n Education

23 Geography n Remoteness from international markets  High transport costs, less competition, less access to large markets and scale  But what about Canada? n Internal geography—pattern of sparse settlement  Infrastructure—mixed  Transport, information/coordination, competition, scale, regulation

24 Industry mapping n Manufacturing  external isolation, internal fragmentation, small scale n Wholesale  population reach of distribution centres, fragmentation, scale n Utilities  fragmentation n Transport  efficient long-haul n Communications?

25 Education n Average years of schooling  Poor measure to rely on solely  No account of quality and distribution of education n US: 13.9 yearsAust: 12.9 years n According to empirical studies, would account for some of the productivity gap

26 But reflects differences in past decades

27 Gap will narrow with cohort effect

28 Industry mapping n Not enough information n There are education gaps within industries  But can be different skill requirements in the two countries n Different industry mix, with different skill requirements in different industries n Can therefore be differences for good reasons  Mining engineers v. biochemists  Agriculture workers v. actors

29 Outline n International patterns of productivity leadership and catch-up n Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance

30 Outlook n Strong outlook for US productivity growth  2¼ - 2½ % pa  Durables, services n Australia can feasibly keep pace  Larger agriculture, mining sectors  Maintain strong growth in services (ICT-based innovation), not ICT manufacture

31 Catch up? n Feasible to catch up some more (a few percentage points)  continuation (at least) in communications, finance, utilities  step up in wholesale, retail  step up in non-ICT manufacturing n Not feasible (sensible) to catch up fully  fundamental constraints of geography

32 Implications n Take an industry (micro), rather than aggregate, focus on productivity gaps  Importance of accurate measurement  Some gaps of more relevance than others n Assess scope for productivity improvement within a welfare/comparative advantage framework  eg, investments in ICT manufacture unlikely to be welfare enhancing

33 Implications (contd) n General approach to ‘drivers’ and ‘enablers’ of productivity performance  incentives (competition)  capabilities (skills, infrastructure)  flexibility (regulation, labour) n General view on ‘inhibiting’ factors  geography  human capital  infrastructure  institutions

34 The end Any questions or comments?