What is Productivity?
by Phillip McGann, 28/06/07

There has been a lot of talk lately in the run up to the Federal Election about he rate of Productivity growth in Australia.  The politicians promote it as an extremely important measure of Australia’s economic progress. But what is it, how is it measured, and is it really that important?

Productivity is effectively a measure used by economists to measure how well a country produces its goods and services compared to others, and to its own past performance. At its most basic form productivity is simply the amount of output of goods and services per the unit of input used. The end product is easy to see whether it is a finished manufactured good (say a table or a car) or a service rendered (say a haircut or legal advice). The inputs side is a tad harder to fathom given that it is made up of capital goods employed (i.e. raw materials and machinery) as well as the labour used to bring it all together. 

It is this labour input (or the level of labour productivity) that is the focus of the current productivity debate.  Overtime-increased productivity is simply the ability of a country to increase its output per worker. Effectively it makes us all wealthier.

The more productive your workforce, the more units of output you can produce per unit of input. As your workforce improves their skill level, and they use more technology and better processes, then the higher the output produced per unit of input and productivity rises. This is important because the more productive our workers become, the higher the output becomes from the same amount of inputs; and hence economic activity actually rises through this more efficient use of resources, goods become more plentiful, as well as more affordable and wealth is created for all.

Think of the example of the motorcar. Originally they were made one at a time and were extremely expensive and affordable only by the rich. Once the automated production line was introduced and employees skilled up to produce cars faster they became cheaper and available to more of the population. Their economic impact has been immense. The same scenario has happened with personal computers and other new information technology devices over more recent years such as MP3 players etc.

The current debate about Productivity in Australia is revolving around how productive our work force is in comparison to how we did things in the past. The measure of productivity most often used, shows we have actually been slipping in the productivity race over recent years.

The government says it is a natural progression in our economic growth and is nothing to worry about, as we will see things pick up again soon. However, the Opposition says Productivity in Australia has stalled on the governments watch and this is due to poor investment in skills etc.  So who is right?
Well, technically they are both probably right! 

The Opposition is right to say more investment in skills is needed but this takes time and we will see improvements in the years ahead as more skilled employees hit the workforce. 

The Government is right given that the current low employment levels in Australia are causing many low skilled or no skilled employees to be brought into the workforce causing increases in our overall Productivity to be delayed as they acquire skills. Also Australian businesses have spent billions over recent years on new capital investments (i.e. new mines, new machinery etc) and this impact will flow through in coming years to increased overall productivity.