There is a little-known discussion going on in Australia at the moment among academics, consultants, the Australian Treasury and others.
It is a debate that is central to the outlook for the economy and one that is central to the standard of living Australians enjoy now and expect to enjoy in the future.
The discussion is about how Australian business and workers need to become more productive to keep pace with global competitors but equally how expensive it is to do business in Australia.
This begs the question of what can be done to improve productivity reduce those costs and get product to market cheaper.
Yesterday, global management consultants McKinsey & Co’s Australian arm released a paper titled Compete to Prosper: Improving Australia’s global competitiveness, which looks at the future for Australian business and workers.
McKinsey were upbeat on the prospects for Australian industry but said that success “is not assured” and that “purposeful action is required” because:
Australia faces a pervasive competitiveness problem. Many sectors of the economy lag behind international benchmarks. By focusing on its comparative advantages, raising productivity and improving competitiveness, Australia can continue to prosper. But complacency, or a focus on protecting the status quo rather than embracing the opportunity global trade presents, risks a painful correction through rising unemployment, falling wages and lower living standards.
Productivity and competitiveness go hand in hand.
Put simply to improve productivity means to increase an unit of output for the units of input – whether physical, such as labour or capital via the use of technology.
Until recently it was expected that the Aussie dollar would fall and naturally make Australia, Australian business and workers more competitive on a US dollar basis with other workers and thus make our products more competitive.
But as the Aussie dollar remains strong, both nominally and in terms of the real exchange rate (the combination of the nominal exchange rate and rising input costs), so the discussion has moved to other areas of production costs.
In what might come as a shock to many Australians, McKinsey says that only 3 of the 11 sectors of Australian business are intrinsically competitive (a measure of competitiveness which takes account both the relative productivity and the relative input costs of sectors) when measured against businesses in the United States.
Of course, it’s not just wages that make input costs expensive in Australia, and while McKinsey notes that “the average Australian manufacturing hourly compensation is 65 per cent higher than the US” it also says that, “this does not apply across the board.” Rather, McKinsey says:
Australia’s input cost problem arises from more than just wages. One 2012 report finds that Australia’s average facility lease costs were 50 per cent higher than the US, and transportation and utility costs were 35 per cent higher. All these costs add up. For example, the price of domestically produced intermediate goods in Australia rose 30 per cent between 2005 and 2014, compared with an EU average rise of 20 per cent.
But from the survey of 35 CEOs also included in the report, it is clear that the labour market remains a key focus of employers as a way to improve productivity.
“Restrictive work practices and poor relations between management and the workforce are cited as a barrier to enhancing productivity in jobs that Australia currently has and to creating the jobs of the future,” the report says.
Further on, the report says that: “The importance of flexibility continues to rise as global competition moves to the level of individual jobs. Australian policy makers will need to carefully consider which labour market structures will provide the necessary flexibility for workers and firms.”
McKinsey is not saying that Australian wages need to fall for Australian industry and the economy to be competitive but it is highlighting that some sectors of the economy and the workers in them face a bleak future.
Their analysis shows that Australian manufacturing has neither high process sophistication such as Germany and Japan nor low wages like China, South Korea and the United States. This means Australia needs higher productivity to offset higher input costs.
“Unless Australian firms achieve substantially higher productivity (through product differentiation or process sophistication) then they will struggle to be competitive in this sector unless wages fall”, the report said.
Clearly while a lower Aussie dollar would help with the real effective exchange rate the key to Australians maintaining current living standards into the future is a more productive workforce.
Without it the only solution seems to be lower wages for Australian workers.