Australia is living proof of the benefits of productivity growth.

An average worker today works 14 hours less per week and earns a real wage six times that of the average worker in 1901 – all because we produce more per hour worked.

And yet, that rate of improvement has slowed over the past decade.

In the 60 years to 2019-2020, labor productivity (output per hour worked) grew by an average of 1.8% per year, which sounds small but is increasing every year.

In the most recent of those decades, the decade to 2020, growth fell to just 1.1% – a drop of a third.

If it stays this low, we’ll be in much worse shape for decades to come than if we could get back to the kind of growth we had.

Productivity Commission

That’s one of the reasons I was so excited to work on the Productivity Commission’s second five-year publication productivity reportreleased today by Treasurer Jim Chalmers.

Victims of our own success

In some ways, Australia has fallen victim to its success. It has a robust and highly productive economy, especially in mining and agriculture, where it ranks among the world leaders.

But as productivity growth in mining and agriculture has made us richer, we have demanded more services, such as vacations, cleaning, childcare and after-school care, gyms, and home-delivered food.

Now that we employ 90% of our workers and make up 80% of our economy, it’s harder to make services more productive, and as our population ages, they’re likely to be an even bigger part of what we do.

In government-funded non-market services such as health care, education and public administration, measured labor productivity growth has been close to zero since the turn of the century.

If we want to continue to improve our living standards, we will need to address productivity in both services and goods, including human services that are usually provided by government outside the market.

How to improve

Our report tackles the problem in nine parts and 964 pages, with 29 “reform guidelines” and 71 specific recommendations.

It focuses on five key themes:

• building a skilled and flexible workforce
• leveraging data and digital technology and spreading new ideas
• creating a more dynamic economy
• increase productivity in the non-market sector
• securing net zero carbon emissions at the lowest cost

Let me give you a taste of our recommendations for three of these themes.

The rise of telehealth and video conferencing during the pandemic shows how technology can improve productivity and improve access to services. We will need to make better use of these digital technologies, especially in non-market services such as education and public administration.

Video conferencing boomed with the pandemic and is here to stay. Photo: Adobe Stock

Digital services need a strong and ubiquitous internet that covers the entire population, including those in regional Australia. But Infrastructure Australia has found that 23 of Australia’s 48 regions are falling short in broadband and mobile connectivity.

In terms of health, better connections can save lives. We need to fill the gaps using the mix of technology that will allow all Australians to take full advantage of the digital connectivity revolution.

Data is also crucial. We need better data connectivity to improve government-funded services and better cybersecurity rules to protect that data.

Focus on outcomes rather than inputs

Too often, government funding rules for health care, education, housing and other services focus on inputs (the funding provided) rather than outcomes (the service provided).

These rules restrict service innovations that would increase productivity and benefit consumers. The rules need to be more flexible to allow more innovation, develop what works and spread best practices among all providers, while ensuring consumer safety.

A more productive economy will increasingly require a more flexible and better trained workforce. Most new jobs created over the next five years will require tertiary qualifications, especially university qualifications.

To meet this demand, we will need to better train “our own education” as well as focus our migration system on filling skills gaps.

A roadmap for reform

This is the Productivity Commission’s second five-year productivity report.

The first made explicit that productivity was not about getting the extra sweat out of the brow of an already hard-working Australian, but instead was about

• promoting better investment in workplaces
• supporting research and testing new ideas
• removing outdated regulations that prevent consumers and businesses from getting better services

This report builds on the first report that established a roadmap, focusing on the high-impact, low-cost reforms first. Some are quick and others take time and planning.

All will encounter opposition. Vested interests profit by exploiting economic inefficiencies for their own gain. Without reforms, we will all become poorer.