Where does your business sit on the vexed issue of productivity?
Australia’s small businesses provide jobs for 5.1m people, they contribute $506b to national GDP (equivalent to a third of the economy), a contribution that’s rising 15% year on year in a strong post pandemic recovery, yet……
Our SME sector functions in a system where productivity growth (in output per hour worked) is the slowest in 60 years.
According to Competition Minister Andrew Leigh, productivity growth in Australia is now below the national long-term average growth in other developed countries -- leading to much slower improvements in living standards than in the past. This is because business competition in Australia has been reduced, resulting in decreasing dynamism in business.
And economists say this occurs when fewer companies enter and quit the business arena, when fewer people switch jobs, when there’s a significant reduction in business investment, and when mergers lead to increased business concentrations concurrent with increases in sustainable markups.
While a recent study by Monash University’s Professor Stephen King published in Australian Economic Papers confirms these things have been happening and they’re undesirable, it nonetheless concludes even if our economy years ago had been made more competitive and businesses more dynamic, this wouldn’t sufficiently explain why productivity has slowed.
There’s more to the problem, solutions to which lie in much bigger policy reforms.
Reasons for declining productivity growth
There are of course highly productive firms in our economy, but the rest are becoming increasingly less so.
Where do you and the company you own or are employed by, sit in this situation? Is its productivity lagging, and if so, what can be done to increase it?
Broad reasons for declining productivity growth include changing demographics, changing international trade patterns, and the changing nature of industries as our nation continues to move towards a more service-based economy.
Boosting productivity requires reforms in education, technology, business regulation, taxation, carbon emissions and more.
Many of the recommendations of a 2015 government Competition Policy Review focused on competition and consumer laws, have been ignored; and four months ago, the Productivity Commission produced a road map for the future.
Stephen King, referred to earlier, says head of Competition and Consumer Commission Gina Cass-Gottlieb has also “developed a proposal that would help”.
So, given there’s been a comprehensive review of policy, given the Commission’s road map, and Ms Cass-Gottlieb’s proposal, there’s no lack of published information about how Australia’s decline in productivity growth might be turned into an increase.
Aspects of concern
Average concentration of Australian businesses (extent to which industries are dominated by a few big companies) had been failing until the 2000s but has climbed since then, most concentration occurring in industries that have been able to import technology to their advantage.
For example, the warehousing and storage industry has taken on advantages that include parcel tracking, so that both concentration and competition have increased as firms scale up and instal new and evolving technologies.
Australian profit margins have increased close to 60% in almost four decades – less than in the US, Canda and much of Europe, but greater than in New Zealand and most Asian countries except South Korea. However, Australia’s governments and government agencies need to be careful in dealing with this issue at company level, because perceived markups may depend on assumptions about how a company makes a product. Different assumptions will yield different estimates.
Nonetheless, the fact remains that In Australia and indeed globally, most productive companies are about three to four times more productive than most less productive ones – and there’s no evidence Macks Advisory has sighted that suggests this gap is widening.
However, there is a small amount of credible evidence indicating the gap between the most productive Australian companies and the most productive global firms IS widening, suggesting all Australian firms are slower than those overseas to adopt leading technologies.
The business community’s view
Business Council of Australia chief executive Jennifer Westacott has told The Weekend Australian “one of the Council’s big concerns” is that the Albanese Government seems to be pulling in contrary economic directions. These “contradict the idea of increasing wages, growing productivity, and lifting competitiveness. They result in the opposite”.
She adds: “At a time when people are struggling with the cost of living, when businesses are struggling with a downturn in the economy, why would we make it harder to give people more hours, to be more flexible?
“Why would we try to lock in old industry structures when we should have the economy as dynamic as we can have it? These things contradict what needs to be done.”
Not just the business community but Australians generally, want our manufacturing sector to be revitalised. They want full employment, and despite whatever grudges some hold against miners, most people with an IQ exceeding room temperature want to see the industry prosper because they’re aware it underpins so much of our nation’s economic strength – and therefore so much that is good for them personally.
Like so many other businesses, Macks Advisory worries that in seeking to avoid blame for pain afflicted on voters by high interest rates, the Federal Government will cave into demands by unions recently made much more powerful by changes to industrial relations’ (IR) regulations.
We believe it’s fair to say that whatever the government does henceforth (and surely it should be doing something about the country’s slowest rate of productivity growth in six decades) it should, for the good of all Australians, reduce the cost of doing business, not increase it.
Surely the bottom line here is that legislators should be directing laser-like focus on ensuring we have an IR system that generates productivity growth, not retards it – for the very simple reason that this would automatically benefit everyone in many ways.
