Why every Australian worker should care about productivity growth, in one chart

  • Australian wage and inflationary pressures are very weak at present.
  • One factor that has weighed on wage growth has been weak productivity levels, especially in Australia’s services sector.
  • RBA Governor Philip Lowe says Australia’s business leaders and policymakers should focus on improving productivity to help lift prosperity levels further.

RBA Governor Philip Lowe delivered a speech earlier this week, discussing the factors behind persistent weakness in Australian wage growth.

Productivity growth, or lack thereof, featured prominently, particularly in Australia’s services sector, the largest employer in Australia by some margin.

“Employment growth has been especially strong in household services over recent times, yet measured productivity growth in this area of the economy has been quite weak,” he told the Australian Industry Group luncheon in Melbourne.

“Output per hour worked in this set of industries is only 4% higher than it was in 2010.”

Lowe suggested that weak productivity growth was creating broader headwinds for the economy, contributing to weak wage growth, soft inflationary pressures as well as greater difficulties for households in servicing their debts.

For a policymaker looking for faster economic growth, lower unemployment and a pickup in inflationary pressures, it’s understandable why Lowe is watching productivity growth closely at present.

Now we know the question you’re asking — why should I care about productivity growth?

Here’s why.

Macquarie Bank

From Macquarie Bank, it shows annual non-farm productivity growth per hour worked overlaid against average earnings per hour worked for employees.

You.

Non-farm productivity growth per hour worked simply means the amount of output produced per worker per hour on average in non-rural sectors.

Notice something?

Where productivity goes, average earnings tend to follow.

The former has gone backwards over the last year, meaning average output per hour worked has fallen. It’s little wonder why wage pressures are so weak, especially for those in the private sector.

Along with weak productivity growth, Macquarie says another factor behind the decline in average earnings has been the decline in mining sector employment in the aftermath of the capital expenditure boom.

While little can be done about the latter, particularly as it was driven by temporary factors, until productivity growth improves, it appears unlikely that wage pressures will build.

Lowe suggested that one way to improve productivity levels is to invest more in human capital through training and education.

He also nominated other factors such as the design of Australia’s tax system, the provision and pricing of infrastructure, the way we finance innovation and new businesses and our business culture around innovation, risk and entrepreneurship.

While hard for the individual worker to achieve, Lowe said that this is something that business leaders and policymakers need to focus on to help lift prosperity levels further.

Whenever the next federal election is called, you best keep an eye on the policy decisions being announced, particularly if you’re looking for a bigger pay increase.

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