Transcript - The Economic Society of Australia

NSW Economic Society Lunchtime Seminar Series
9th May 2007
Can Australia Match US Productivity
Performance?
Dean Parham
Productivity Commission, Canberra
(based on paper by Ben Dolman, Dean Parham and Simon Zheng)
Motivation

Long term view of productivity performance

Where should Australia set its sights ?

compared with the productivity performance of other
countries
2
Norway
Belgium
99.8 100.0 102.1
France
37.4
Ireland
Netherlands
United States
0
Austria
Sweden
60
Italy
40
70.7
United Kingdom
80
Finland
100
Denmark
18.7 20.0
Switzerland
24.5 24.7
Canada
82.5 83.5
Australia
76.8
Spain
100.0
Japan
100
•
•
•
Greece
120
Turkey
1950
Portugal
United States
Switzerland
Canada
80
Australia
63.6
United Kingdom
60.6
Netherlands
57.3 58.6
Sweden
Denmark
54.1
Norway
60
Belgium
44.4
Italy
France
33.7
Finland
31.2
Austria
40
Ireland
Spain
Greece
Portugal
20
Japan
Turkey
Comparisons of GDP per hour worked
3 groups
Overtakers
Movers
Stagnators
66.8
48.1
2006
140
8.9
120
124.3
105.4 105.5 105.5
79.6 81.7
90.9 91.1 91.3
87.8 89.0 90.1
65.1
73.5
53.5
30.4
20
0
3
Focus

Can Australia reasonably aspire to match US
productivity?


Support from catch-up theory
Can Australia go further?

Can it overtake the US (as other countries have
done)?
 Can it aspire to match the world’s best?
4
Answers

Some particular features of the ‘overtakers’
story have a downside


Would not necessarily be wise for Australia to emulate
Some ‘fundamental factors’ inhibit Australia’s
ability to catch up completely to US productivity
levels

But we can still be a ‘mover’
5
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
6
Outline

International patterns of productivity leadership
and catch-up

Australian/US comparative performance

‘Fundamental factors’ that inhibit full catch-up

‘Reasonable’ expectation for Australia’s future
comparative performance
7
Productivity leadership (GDP/hr)
70
Industry mix?
2005 USD per hour
60
50
70
60
50
Netherlands
Australia
40
30
Norway
40
30
USA
20
20
10
10
0
1950
0
1960
1970
1980
1990
2000
8
But has high productivity come with a
tradeoff?
Taking an ‘economic welfare’ perspective:
Average
income
=
=
GDP
Population
Labour
productivity
GDP
=
Hours worked
•
•
Hours worked
Population
Labour
utilisation
9
Relatively high European productivity
came with low labour utilisation
United States = 100
Australia
France
120
120 120
120
110
110 110
110
100
100 100
100
90
90
90
90
80
80
80
80
70
70
70
70
60
60
60
60
50
Output per hour worked
Hours worked per capita
50
40
40
1973 1978 1983 1988 1993 1998 2003
50
Output per hour worked
50
Hours worked per capita
40
40
1973 1978 1983 1988 1993 1998 2003
10
European ‘trade off’

Policy interventions and institutional arrangements


tax structures, welfare/work arrangements, union power,
legislated hours reductions, high minimum wages, low wage
differentials
have had joint influence on

lower utilisation
 high unemployment, especially low skilled


fewer average hours
higher productivity
 capital intensity

high skilled, low intensity
11
80
80
60
60
40
40
20
20
0
0
Austria
Netherlands
Germany
Belgium
Switzerland
Denmark
U.K.
Sweden
Finland
Australia
Canada
Italy
Iceland
Japan
Spain
NZ
Greece
Portugal
Turkey
Norway
Luxembourg
France
Ireland
U.S.A
United States = 100
Structural productivity levels, 2002
Adjusted for differences in labour utilisation
140
Actual
140
120
Structural
120
100
100
12
So who’s the productivity leader?

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

US more relevant

Broad technological and efficiency leader
13
Outline

International patterns of productivity leadership
and catch-up

Australian/US comparative performance

‘Fundamental factors’ that inhibit full catch-up

‘Reasonable’ expectation for Australia’s future
comparative performance
14
Aggregate labour productivity growth
US
(% pa)
Australia
(% pa)
Australia
(% of US)
77
1950
1950 to 1973
2.6
2.7
79
1973
1973 to 1992
1.4
1.7
84
1992
1992 to 2005
1.9
1.8
82
2005
15
Australia’s productivity relative to US over
the long term
Per cent of US level
90
90
85
85
1995-2005
Average = 87
1973-1995
Average = 83
80
1950-1973
Average = 77
75
80
75
Typical OECD convergence path
Actual
70
70
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
16
Industry dimension important

Industry contributions to aggregate US
productivity growth
1950-1973
Agriculture, Manufacturing (chemicals,
transport equip, elect equip)
1973-1992
Machinery & computer equip
(non-durables retreats)
1992-2005
ICT manufacture, services productivity
(based on distribution and use of ICT)
17
Labour productivity in major sectors, US
200
200
Mining
Index, 1987 = 100
Wholesale trade
Retail trade
150
150
Manufacturing
100
100
50
50
1987
1991
1995
1999
2003
18
MFP in selected manufacturing industries, US
300
250
Index, 1950 = 100
300
Non-durable goods
Chemicals and allied products
Durable goods
Industrial machinery and computer equipment
250
Electronic and other electrical equipment
200
200
150
150
100
100
50
50
1949
1959
1969
1979
1989
1999
19
Wide variation in performance of
Australia’s industries relative to US
Caught up (‘Overtakers’)
Mining, construction, transport
(agriculture)
2003 relativity (%)
100+
Movers
Utilities
Communication
Finance & insurance
53
83
67
Stagnators
Manufacturing
Wholesale trade
Retail trade
60
43
63
20
Outline

Review international patterns of productivity
leadership and catch-up

Review Australian/US comparative
performance

‘Fundamental factors’ that inhibit full catch-up

‘Reasonable’ expectation for Australia’s future
comparative performance
21
Explanations for productivity gaps

Proximate sources


MFP (~15pp) rather than capital intensity (~5pp)
Industry mix

Size of agriculture, mining
 Manufacturing, ICT manufacturing

Geography

Education
22
Geography

Remoteness from international markets

High transport costs, less competition, less access to
large markets and scale
 But what about Canada?

Internal geography—pattern of sparse
settlement

Infrastructure—mixed
 Transport, information/coordination, competition,
scale, regulation
23
Industry mapping

Manufacturing


Wholesale


fragmentation
Transport


population reach of distribution centres, fragmentation, scale
Utilities


external isolation, internal fragmentation, small scale
efficient long-haul
Communications?
24
Education

Average years of schooling

Poor measure to rely on solely
 No account of quality and distribution of education

US: 13.9 years

According to empirical studies, would account
for some of the productivity gap
Aust: 12.9 years
25
But reflects differences in past decades
14.0
14.0
13.5
13.5
13.0
13.0
12.5
12.5
12.0
12.0
11.5
United States
11.5
Australia
11.0
11.0
25-29
years
30-34
years
35-39
years
40-44
years
45-49
years
50-54
years
55-59
years
60-64
years
26
Gap will narrow with cohort effect
14.5
Actual
14.5
Projections
14.0
14.0
13.5
13.5
13.0
13.0
12.5
United States
Australia
12.0
1998
12.5
12.0
2003
2008
2013
2018
2023
2028
2033
2038
27
Industry mapping

Not enough information

There are education gaps within industries

But can be different skill requirements in the two
countries

Different industry mix, with different skill
requirements in different industries

Can therefore be differences for good reasons

Mining engineers v. biochemists
 Agriculture workers v. actors
28
Outline

International patterns of productivity leadership
and catch-up

Australian/US comparative performance

‘Fundamental factors’ that inhibit full catch-up

‘Reasonable’ expectation for Australia’s future
comparative performance
29
Outlook

Strong outlook for US productivity growth

2¼ - 2½ % pa
 Durables, services

Australia can feasibly keep pace

Larger agriculture, mining sectors
 Maintain strong growth in services (ICT-based
innovation), not ICT manufacture
30
Catch up?

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

Not feasible (sensible) to catch up fully

fundamental constraints of geography
31
Implications

Take an industry (micro), rather than
aggregate, focus on productivity gaps

Importance of accurate measurement
 Some gaps of more relevance than others

Assess scope for productivity improvement
within a welfare/comparative advantage
framework

eg, investments in ICT manufacture unlikely to be
welfare enhancing
32
Implications (contd)

General approach to ‘drivers’ and ‘enablers’ of
productivity performance




incentives (competition)
capabilities (skills, infrastructure)
flexibility (regulation, labour)
General view on ‘inhibiting’ factors




geography
human capital
infrastructure
institutions
33
The end
Any questions or comments?
34