Vital Signs: Australia’s sudden ultra-low economic growth ought not to have come as surprise



File 20190307 100799 dua322.jpg?ixlib=rb 1.1
Both Australia’s trend and seasonally adjusted GDP per capita growth rates have dipped below zero.
Shutterstock

Richard Holden, UNSW

Australia’s big little economic lie was laid bare on Wednesday.

National accounts figures show that the Australian economy grew by just 0.2% in the last quarter of 2018. This disappointing result was below market expectations and official forecasts of 0.6%. It put annual growth for the year at just 2.3%.

But the shocking revelation was that Gross Domestic Product per person (a more relevant measure of living standards) actually slipped in the December quarter by 0.2%, on the back of a fall of 0.1% in the September quarter.

These are the first back-to-back quarters of negative GDP per capita growth in 13 years – since 2006.

We’re going backwards, for the first time in 13 years

The reason this is significant is that the Australian convention around what constitutes a recession is two back-to-back quarters of negative GDP growth.

Since more people in the economy mechanically increases overall GDP, you might think that measuring things on a per-person basis gives a better sense of whether we are better off or worse off.

And you would be right. Why then, do we talk so much about overall GDP?

One answer is that in a lot of advanced economies there isn’t very much population growth, so overall GDP is a good enough measure.

Population growth hides it

The more insidious answer in Australia is that, for a long time, our high population growth, fed by a high immigration rate, has masked a much less rosy picture of how we are doing. And neither side of politics has wanted to admit it.

At 1.6% a year, Australia’s population growth is roughly double the OECD average, which is perhaps why we hear politicians say things like “Australia continues to grow faster than all of the G7 nations except the United States,” as Treasurer Josh Frydenberg did this week.

The good news is that standard economic theory tells us that in the long run, immigration has very little impact on GDP per capita in either direction, unless it drives a shift in the population’s mix of skills.

But in the short term, it depresses GDP per capita because fixed capital such as buildings and machines has to be shared between more workers.




Read more:
Solving the ‘population problem’ through policy


The business lobby doesn’t want us to focus on that because population provides more customers as well as more workers, allowing them to grow without growing domestic market share or exports.

Governments don’t want us to focus on it because adjusting for population growth makes GDP growth look small or, as at present, negative. Also, the tax revenue from the population growth is factored into the official budget forecasts – but the extra social spending needed isn’t always factored in.

Pro tip: watch for population growth as a fudge factor generating a return to surplus in next month’s budget.

There’s a better way of getting at the truth

That said, GDP itself – per capita or not – is not a great measure of the standard of living. That’s why in 2001, the Bureau of Statistics began also reporting real net national disposable income.

It is a measure with advantages over GDP. As the bureau points out, it takes account of changes in the prices of our exports relative to the prices of our imports – our terms of trade. If the prices of our exports were increasing much faster than the prices of our imports (as happened during the mining booms), our standard of living would climb and real net national disposable income would reflect it, where as gross domestic product would not, although it would reflect increased income from increased export volumes.

To get at living standards per person, which is what we are really interested in, the bureau also publishes real net national disposable income per capita.



The graph shows that so far the growth rate of real net national disposable income per capita hasn’t changed much, and that it has been negative for far fewer quarters than in the Coalition’s first term in office.

It bounces around with changes in the prices of imports and exports, and is generally climbing less than when export prices were really high.

A year of two halves?

The treasurer painted 2018 as a “year of two halves”.

The first half was great – the annualised GDP growth rate (what it would have been had it continued all year) was a very impressive 3.8%.

The second half was just 1%.

I’m not sure the change was that clear cut. As I wrote last September, there have been troubling signs for some time, despite the solid headline growth.

Household savings have been plummeting, real wage growth has been stagnant, housing prices have been falling in Sydney and Melbourne. Together they put significant pressure on household spending, which accounts for about 60% of GDP.

Those concerns are now mainstream. Good news on export prices has rescued tax receipts for the time being, and will probably also rescue real net national disposable income per capita.




Read more:
Vital Signs: National accounts show past performance no guarantee of future results


But the fundamentals of the Australian economy are looking somewhat weak. Like the US and other advanced economies, we are living in an era of secular stagnation – a protracted period of much lower growth than we had come to expect.

And until we do something to tackle it, such as a major government investment in physical and social infrastructure, we will continue to face anaemic wage growth, shaky consumer confidence, and mediocre economic growth per person.The Conversation

Richard Holden, Professor of Economics, UNSW

This article is republished from The Conversation under a Creative Commons license. Read the original article.

No surplus, no share market growth, no lift in wage growth. Economic survey points to bleaker times post-election



File 20190124 135139 mruxvh.png?ixlib=rb 1.1
Things will continue to look good enough for long enough to help the government fight the election. Beyond that, the Conversation Economic Panel is worried.
Wes Mountain/The Conversation, CC BY-ND

Peter Martin, The Conversation

The Australian economy will remain healthy for long enough to enable the government to claim it as a strength in the lead-up to the May election, but the first Conversation Economic Survey points to a fairly flat outlook beyond that, with a 25% chance of a recession in the next two years.

The Conversation has assembled a forecasting team of 19 academic economists from 12 universities across six states. Among them are macroeconomists, economic modellers, former Treasury and Reserve Bank economists, and a former member of the Reserve Bank board.

Taken together their forecasts point to no recovery in the share market during 2019, no recovery in wage growth, no further improvement in the unemployment rate, further modest home price falls in Sydney and Melbourne, and to a budget deficit next financial year despite the official forecast of a surplus and Treasurer Josh Frydenberg’s commitment that the government will fight the election continuing to forecast a surplus.

Weighing heavily on Australia’s economy during 2019 will be a much weaker US economy, with what the forecasting team says is the possibility of a US recession, and weaker growth in China. Australian consumer spending is forecast to continue to grow during 2019, but no faster than it did during 2018. The best measure of living standards is forecast to advance at a crawl.

Most of the team expect the Reserve Bank to sit on its hands throughout all of 2019, leaving its cash rate unchanged at the all-time low of 1.5% for what will be a record 40 months.

Economic growth

The panel expects the Australian economy to grow more slowly in the year ahead, by 2.6%, down from recent annual growth of 2.8% and 3.1%. None of the panel expects growth to exceed 3%. One, Steve Keen, formerly of the University of Western Sydney and now at University College London, expects growth of only 1%.

Most of the panel expect China’s growth to continue to slow, from the annual growth of 6.7% typical over recent years to just 6.2%, the weakest growth since the 2008 global financial crisis and the weakest calendar year growth since 1990.

Former Treasury economist Nigel Stapledon now at the University of NSW nominates China as the biggest threat to Australian and global growth. He says it has a good record of stimulating its economy to get out of difficult corners but one day it might get it wrong.


https://datawrapper.dwcdn.net/VJkkw/4/


The panel expects US economic growth to hold up at 2.8% during the year ahead but to weaken or go into reverse by year’s end as the “sugar hit” from the Trump tax cuts goes into reverse.

Former Treasury and International Monetary Fund economist Tony Makin points to US high public debt that will need to be rolled over, soaking up funds that could have been more productively used for investment, to higher US interest rates imposed by a central bank concerned about inflation, and to the escalating trade war with China.

ANU modeller and former Reserve Bank board member Warwick McKibbin says the US economy is “very likely” to begin to go backwards towards the end of the year. Craig Emerson, a former Australian trade minister now with Victoria University, says the US is likely to enter a recession in 2020. Former Treasury economist Mark Crosby at Monash University says if there is a US recession, it won’t hit until late 2019, with the impact greatest in 2020.

Rebecca Cassells from the Bankwest Curtin Economics Centre says a lot depends on the outcome of the US-China trade war: “The two biggest economies are going head to head, but both are almost as reliant on the other to sustain their growth trajectories,” she says.

Australia should look to other parts of the world to drive its economic growth. “India is one of them, and is rising rapidly with no downgrading of its growth trajectory of 7.75% for 2019.”

Living standards

Nominal GDP, the money earned in Australia unadjusted for price changes, is forecast to grow more slowly in 2019, by 4.5%, down from recent growth in excess of 5%, reflecting weaker iron ore prices.

The best measure of living standards, real net disposable income per capita, is expected to barely grow, climbing just 1.1% over the year to December, much less than recent growth in excess of 3%, but much more than its performance in the dismal years between 2012 and 2016 when it went backwards.

Forecasts for the unemployment rate cluster around its present 5.1%, with only four below 5% and one above 6%.


https://datawrapper.dwcdn.net/NRzsF/8/


Wages and prices

Wage growth is forecast to climb no further in 2019, finishing the year at its present 2.3% instead of climbing to 2.75% on its way to 3% by mid 2020 as forecast in the budget update.

Rebecca Cassells points out that much of the increase we have had has been driven by the Fair Work Commission’s decision to lift the minimum wage 3.5% from June 2018, suggesting very low growth elsewhere. Disturbingly, she says more and more enterprise bargains are being terminated, with employees falling back on awards.

Overwhelmingly, our panel is of the view that the only thing that will lift wage growth out of its slump (and budgets have been incorrectly forecasting a bounce out of the slump for eight years now) is higher productivity: producing more per worker.

Victoria University economic modeller Janine Dixon notes that the December budget update actually downgraded its forecast of productivity growth, from 1.5% to 1%, and so is not optimistic.

She says even if productivity growth did pick up, excessive market power in some industries combined with weakness in labour market institutions means it might not easily be passed on to workers.

Tony Makin, a supporter of company tax cuts, says the best thing to lift productivity would be new (perhaps foreign) investment embodying productivity-enhancing technology.


https://datawrapper.dwcdn.net/u7aHG/5/


The saving grace for workers facing yet another year of historically-low wage growth is that price increases will also remain low.

Inflation has been right at the bottom of (or below) the Reserve Bank’s 2% to 3% target band for four years now, meaning that even at the continuing low rates of wage growth forecast, wages should continue to climb just faster than prices.

The panel expects consumer spending to climb by only 2.5% in real terms in 2019, most of which will reflect population growth of 1.6%.

The average forecast for inflation is at the very bottom of the Reserve Bank’s target band. Only two panel members expect inflation to edge back up to the middle of the band. They are Warwick McKibbin and former Treasury and ANZ Bank chief economist Warren Hogan, at the University of Technology Sydney.

Interest rates and the budget

Without either a lift in inflation or a substantial weakening in the economy there is little reason for the Reserve Bank to move interest rates in either direction.

Governor Philip Lowe took the job in September 2016, just after the board cut the cash rate to a record low of 1.5%. He hasn’t moved the cash rate since, although on several occasions he has said the next move is most likely to be up.

Five of the panel do expect at least move up this year, including the two who think inflation might approach the bank’s target. Three expect cuts, taking the rate below 1.5%.

The remaining eleven expect no change, all year.


https://datawrapper.dwcdn.net/upjBu/3/


The government says it will deliver a budget surplus next financial year, of A$4.1 billion, the first surplus in a decade.

The panel doesn’t think so, all but one member predicting a lower budget surplus than the government, and seven predicting deficits. The average forecast is for a deficit of A$3.5 billion rather than a surplus of A$4.1 billion.


https://datawrapper.dwcdn.net/2BVOs/3/


Monash University macroeconomist Solmaz Moslehi identifies optimistic wage growth, weaker than expected mining investment and a hit to consumer spending from the housing downturn as the biggest risks to the forecast surplus.

Julie Toth, adjunct professor at Deakin University’s Master of Business Administration program and chief economist at the Australian Industry Group, says the latest indicators suggest that neither employment nor wage growth will accelerate by as much as the government expects.

Michael O’Neil from the South Australian Centre for Economic Studies says the biggest immediate risk to the forecast surplus is thermal coal prices, given China’s efforts to cut coal imports and the shift to renewables in China and India.

The biggest long term risk is the scale of the company tax cuts and the ongoing shift of income from highly-taxed labour to more lightly-taxed capital.

Margaret McKenzie of Federation University identifies the biggest risk to the surplus as a change of government, something she says she welcomes because with extensive idle capacity and underemployment, a surplus would be unhelpful.

Home prices

The panel expects Sydney home prices to fall by another 5.8% and Melbourne prices by another 5.1% in 2019, taking the slides over two years to 14.7% and 12.1%.

Only Macquarie University and former Reserve Bank economist Jeffrey Sheen expects prices to move back up throughout 2019, by 2% and 3%.

Reassuringly, none of the forecast falls are bigger than 10%. The biggest are predicted by Steve Keen, Tony Makin, Margaret Mckenzie and Craig Emerson.

The lower prices will be accompanied by much slower growth in housing investment, expected to climb only 2.1% in 2019 after climbing more than 7% in the year to September 2018.


https://datawrapper.dwcdn.net/jl3sa/6/


Business

Non-mining business investment is forecast to grow more slowly this year, by 5.7% instead of 11.4%, and mining investment is expected to keep sliding, losing a further 3.4% after losing 11.2% last year rather than climbing as the government’s budget update predicts.

Five of the team believe that mining investment to turn the corner in line with the budget forecast. Nine expect it to fall further.

The Australian share market will for practical purposes not grow not at all during 2019 according to the average forecast, which is for barely perceptible growth of 0.1%. A steady share market would come as a relief to super funds and share owners after last year’s slide of about 7%.

The range of forecasts for the ASX 200 is wide, from slides of more than 6% to gains of more than 6%.


https://datawrapper.dwcdn.net/Wftkg/4/


Markets

Fortunately for a government the panel expects to need to continue to borrow more in order run continued budget deficits, what it pays for to borrow via the 10-year bond rate is expected to remain little changed at 2.6%. Only Warwick McKibbin expects a much higher bond rate, of 3.5%.

The panel’s average forecast is for an broadly unchanged Australian dollar, of around 70.5 US cents. The highest forecast is for US$0.80, the lowest for US$0.62.

The iron ore price, at present close to US$74 a tonne, is expected to fall to around US$64. Only one panelist, Warwick Mckibbin, expects it to stay near where it is, at US$75. The government itself is cautious, using a price of US$55 in its budget forecasts, a number it might lift in the April budget, allowing it to forecast more revenue.


https://datawrapper.dwcdn.net/wjTcX/3/


The risk of recession

On average, the panel believes there is a 25% chance of a conventionally-defined recession within the next two years.

Half of the probability estimates are between 20% and 30%. Averaging all of them together other than Steve Keen’s estimate of 95% produces an estimate of 22%.


https://datawrapper.dwcdn.net/SpX5y/5/


A recession is conventionally defined as two consecutive quarters in which gross domestic product falls instead of rises. Australia hasn’t had two consecutive quarters of negative growth since 1991.

The most recent negative quarter was in September 2016. Before that there was one in March 2011, and before that in during the global financial crisis in December 2008.

Ross Guest of Griffith University makes the point that his estimate of 20% should be considered low. There will always be a risk of a recession. By itself two quarters of negative growth needn’t be a disaster. The impacts on the government and on consumer and business confidence would be more important than the downturn itself.

Guay Lim of the Melbourne Institute of Applied Economic and Social Research assigns the lowest probability of any of our panel to a recession, 5%, saying the most likely catalyst would be a global trade war.

Warren Hogan assigns the highest probability to a recession after Steve Keen, 40%, saying Australia is facing the end of a major construction boom and has heavily indebted households. It will be vulnerable to any negative shocks and especially vulnerable to higher inflation and interest rates.

Steve Keen says the only thing that has kept Australia afloat since the China boom has been the housing bubble, which the banking royal commission has been discovering was built on fragile, and in places fraudulent, foundations.

Nigel Stapledon says the biggest drag on the economy will be the collapse in the construction of residential investment units. Labor’s proposed increase in capital gains tax will make it worse, notwithstanding Labor’s decision to exempt new construction from its crackdown on negative gearing.

Rebecca Cassells says on the bright side Australia is set to become the world’s biggest exporter of liquefied natural gas, the biggest exporter of iron ore to India and the world’s biggest producer of lithium, needed for batteries.

And if there is a global economic downturn within the next few years, she says another positive is that Labor is likely to be in power, making the successful deployment of a stimulus package more likely than if the Coalition had been in office.


The Conversation Economic Panel

Click on economist to see full profile.

https://cdn.theconversation.com/infographics/368/924e6755a686ec80378dcc381368eb0ee0c37f39/site/index.htmlThe Conversation

Peter Martin, Editor, Business and Economy, The Conversation

This article is republished from The Conversation under a Creative Commons license. Read the original article.

The five not-so-easy steps that would push wage growth higher



File 20181128 32214 1wwfyyt.jpg?ixlib=rb 1.1
Market forces are unlikely to lift wage growth higher without help.
Shutterstock

Andrew Stewart, University of Adelaide; Jim Stanford, University of Sydney, and Tess Hardy, University of Melbourne

It’s been an extraordinary four years since wages grew by anything like the 3-5% per year they used to.

Ever since 2015, wage growth has been closer to 2% per year, moving only in a narrow band between 2.3% to 1.9% and back again. It’s the slowest sustained rate of wage growth since the 1930s great depression.

Opinion polls suggest it will be one of the hottest issues in the lead-up to next year’s election.


https://datawrapper.dwcdn.net/DdMTb/3/


It concerns the government directly, because its budget forecasts are based on much higher wage growth, climbing to 2.75% by June next year and 3.25% by June 2020.

It also concerns it indirectly, because weak wage growth means weak growth in living standards and consumer spending.

Given this, it is not surprising that the stagnation of Australian wages has elicited concern from the Governor of the Reserve Bank, leading business executives, and traditionally conservative international organisations such as the International Monetary Fund.




Read more:
This is what policymakers can and can’t do about low wage growth


Some, like Prime Minister Scott Morrison, counsel Australians to be patient, and wait for the forces of supply and demand in the labour market to solve the problem.

As this somewhat ugly graph prepared by the Commonwealth Bank demonstrates, wage growth has fallen instead of increased as forecast in nearly every budget this decade.


Budget forecasts versus reality, wage growth 2007 to 2020

Wage Price Index, annual growth.
Commonwealth Bank

There’s no particular reason to think that wage growth will meet the budget forecast this time either.

In good news, the Australian Bureau of Statistics Wage Price Index rebounded slightly in the September quarter, climbing 2.3 percent year over year (up from 2.1 percent).

But the rebound was almost entirely due to two things that have nothing whatever to do with “market forces”.

Wages are better, but no thanks to market forces

One cause was the unusually large 3.5% increase in minimum wages for award-reliant workers delivered by the Fair Work Commission.

The other was an apparent acceleration of wage settlements in the more highly unionised public sector.

The lesson seems to be that if we want wages to grow, we may have to push them up.




Read more:
Why are unions so unhappy? An economic explanation of the Change the Rules campaign


To investigate the wages crisis in more detail, we convened a workshop earlier this year featuring leading experts from universities, business, regulatory agencies, unions and community organisations.

Out of that event has come an edited collection of essays, The Wages Crisis in Australia, published today by the University of Adelaide Press and freely available online.

As it acknowledges, many things have been depressing wages, including the widespread underemployment, technological change, and global competition.


https://datawrapper.dwcdn.net/upv7k/2/


But there has also been a significant weakening of employee power, reflected in the continuing drop in union density and a marked recent dip in collective bargaining coverage.

The institutional framework established by the Fair Work Act has proved to be largely ineffective in countering these trends, and in some instances has perpetuated them.

Among other factors, growth in precarious forms of employment, migrant labour and “indirect” or ‘”fissured” work arrangements (such as sub-contracting, labour hire and franchising) have made workers less likely to join a union or take collective action.

Many of these workers are under pressure to accept sub-standard wages or even unlawful working arrangements.


https://datawrapper.dwcdn.net/6cZx8/1/


Governments themselves have deliberately held down wage growth for their own workers and encouraged companies that sell to them to do the same.

The five not-so-easy steps

There is no one solution. But in our book, we advance a five-point plan that we think might work:

  1. End active wage suppression by governments, both for their own workers and in sectors that rely on public funding or procurement. Governments must set a lead, not just in what they pay their own employees, but in the funding they provide for others, especially in growing sectors such as aged and disability care.

  2. Revitalise collective bargaining, including by creating paths to industry-level agreements, at least in those sectors where enterprise bargaining is not currently working.

  3. Strengthen minimum wage regulations, by enabling the Fair Work Commission to set a “living wage”, and encouraging it to lift award wages over time while dealing with the gender pay gap.

  4. Address the “fissuring” of work, by expanding the definition of employment and holding businesses responsible for underpayments by the subsidiaries over which they exert influence or control.

  5. Improve compliance with minimum wage laws, including by increasing funding to the Fair Work Ombudsman, making it harder for repeat offenders to stay in business, and creating faster and cheaper redress for underpayment claims.

Not everyone will agree with these proposals.

But as the research compiled in our book illustrates, something has to be done. Australia’s once-vaunted reputation as a fair and inclusive society depends on it.

Free digital copies of The Wages Crisis in Australia: What it is and what to do about it, published by can be downloaded from the publisher.The Conversation

Andrew Stewart, John Bray Professor of Law, University of Adelaide; Jim Stanford, Economist and Director, Centre for Future Work, Australia Institute; Honorary Professor of Political Economy, University of Sydney, and Tess Hardy, Senior Lecturer in Law, University of Melbourne

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Growth without direction: How Australia measures up against UN targets


Rod Glover, Monash University

Australia has enjoyed 27 years of continuous economic growth, arguably more than any other developed country. Almost alone among developed economies, we managed to avoid a recession during the global financial crisis. Employment is at an all-time high, due mainly to a surge in the labour force participation of women, from 40% to 56% of all women over the past three decades.

This success was built on a contract – partly explicit, but mostly implicit – in which the bulk of the population agreed to support contentious reforms in exchange for a guarantee that they wouldn’t be left behind.

The Transforming Australia: SDG Progress Report published this week by the National Sustainable Development Council in partnership with the Monash Sustainable Development Institute finds that contract has become fragile. Although the economy is much larger than it was, since 2012 disposable income per capita has barely grown at all.

Our AAA credit rating is at risk from our reliance on foreign capital for investment (mostly borrowed), our high household debt and our narrow industry base.




Read more:
Australia’s UN report card: making progress, could do better on inequality and climate


High employment masks high inequality and entrenched disadvantage. Although the unemployment rate has fallen from 6.5% to 5.5% since the turn of the century, underemployment (where people work fewer hours than they want to) has climbed from 6.5% to 8.5%. Since the crisis the proportion of the unemployed who have been out of work more than a year has climbed from 14% to 24%. Low-skilled men, younger Australians, women with children, and Indigenous Australians find working more challenging than the headline figure suggests.

Wages growth fell to an all time low after the economic crisis and has yet to recover.

Well-connected cities and regions

As a vast country, connectivity is critical to our prosperity. By and large, we meet the need well through investment in physical infrastructure. But rapid population growth in our big cities and political considerations have made it more difficult.

Our cities and regions offer a very high quality of life, but are evolving by default rather than design. Planning isn’t guided by a consensus about the desired pattern of economic and population growth. The result is low-density cities (far lower than comparable overseas cities) meaning long commutes and social isolation for many.




Read more:
Our urban environment doesn’t only reflect poverty, it amplifies it


As house prices have surged, our household debt has climbed from 70% of GDP in 2000 to 120% of GDP today. Home ownership has become more difficult, with many only able to afford options that come with poor access to services and jobs. We are now vulnerable to falling house prices, rising interest rates and global uncertainty.

Dynamic but not diversified

Our open and flexible economy has benefited from dynamism offered by new people, new ideas and new investment. Strength in industries such as international education delivers not only a sizeable brain gain, but also new and important relationships, particularly in our rapidly growing region.

But these successes disguise our wider failure to diversify our economic base. Economic complexity (EC) measures the depth (sophistication) and breadth (diversity) of what a nation sells to the world. It is a strong predictor of economic prospects.

While the EC measure has limitations for a heavily resource-intensive and service-based economy, Australia’s low and deteriorating ranking, 86th in the world, is consistent with other indicators.




Read more:
No clear target in Australia’s 2030 national innovation report


Our high investment in physical capital contrasts sharply with our comparatively low investment in knowledge-based capital. Knowledge-based capital encompasses not only research and development, but also software and data, design, marketing and organisational capabilities.

Australia’s business investment in R&D has fallen consistently since the crisis. We rely far more heavily than other nations on indirect R&D tax incentives, leaving less room for more direct approaches.

Innovative nations stimulate both public and private sector innovation through mission-driven approaches. With a few exceptions, Australia does not. We do not attempt to leverage our strengths in fields such as health, education and water, or to meet societal needs, such as those for reduced emissions, sustainable food, better population health or less inequality.

There’s an alternative

A more robust and resilient Australia would be built on a broader base of industries and capabilities. It would address goals that were more than merely economic and adopt as a goal a smaller environmental footprint.

Getting there would require us to develop a shared vision of what we want. We are doing well overall, and badly in places, without quite knowing what we are trying to achieve.

Transforming Australia: SDG Progress Report is an initiative of the National Sustainable Development Council to assess Australia’s progress against the UN Sustainable Development Goals.The Conversation

Rod Glover, Professor of Practice, Monash University

This article is republished from The Conversation under a Creative Commons license. Read the original article.

Research check: we still don’t have proof that cutting company taxes will boost jobs and wages



File 20180510 185500 guowse.jpg?ixlib=rb 1.1
There still isn’t clear research showing company tax cuts will increase employment or wages.
Shutterstock

Ross Guest, Griffith University

If you read these headlines you might think we finally have proof that cutting company taxes will boost employment and investment:

These stories are based on analysis of the 2015 company tax cut by consultants AlphaBeta. But the study, as well as some of the media coverage of it, show a worrying misunderstanding of how company tax cuts work.

Simply comparing companies that receive a tax cut with those that don’t isn’t the right methodology to conclude that the 2015 tax cuts created more employment or higher wages.




Read more:
There isn’t solid research or theory to support cutting corporate taxes to boost wages


Cutting taxes lets companies keep more of their profits, allowing them to invest in new equipment and premises for example. The company then needs to hire more workers to work with these new assets. The newly created jobs require businesses to compete for workers and this increased demand pushes up wages across the entire economy.

Suppose a retail company gets a tax cut and opens a new store. It advertises for workers, many of whom are already employed by a rival store that didn’t get the tax cut. The first company will need to offer the workers higher wages to entice them away. The rival store will need to consider matching the wages in order to keep the workers.

In other words, even workers in companies that don’t receive the tax cut should see a wage rise.

Going through the AlphaBeta report

In 2015, the federal government cut the tax rate from 30% to 28.5% for businesses with less than A$2 million in revenue. Eligible businesses saved around A$2,940 on average because of the tax cut.

AlphaBeta used transaction data from 70,000 businesses to compare businesses just below the A$2 million threshold to companies that were just above it.

The analysis looked at the differences between the two groups of firms in terms of whether they hired new workers, invested in their businesses, increased worker wages, or kept some of the cash as a reserve.

AlphaBeta chalked any differences between companies that received the tax cut and those that didn’t to the company tax cuts.




Read more:
The full story on company tax cuts and your hip pocket


As reported in The Australian, AlphaBeta found that companies that received the tax cut increased their employee headcount by 2.6%. The companies that didn’t receive the cut increased employment by just 2.1%.

This difference turned out to be “statistically significant”, meaning it is very unlikely to be the result of random chance.

As the Sydney Morning Herald pointed out, AlphaBeta also concluded that 51% of the tax cut was kept as cash, 27% went towards new investment, but only 3% was paid to workers in higher wages.

In other words, wages increased by just A$1.44 per week. This is not only a small amount, it was also found to be not statistically significant.

Problematic methodology

The main issue with this study’s methodology is actually noted by AlphaBeta in the report itself (and echoed in the coverage by the ABC and Sydney Morning Herald).

The problem is that we cannot draw any conclusions about the effect of company tax cuts on jobs or wages by studying a bunch of firms that received them and another bunch that did not, even if the firms are only slightly different.

This is because, as noted above, the effect of company tax cuts on jobs and wages take place in the entire labour market. An increase in demand for labour flows through to all business, and therefore, so do higher wages.

So we should not expect to see wages rising only in those businesses that receive the tax cuts. The finding that an increase in wages is small and insignificant is exactly what we would expect to see from this study.

Another problem is that we do not know whether the characteristics of the companies in AlphaBeta’s sample. Were some industries with particularly pronounced employment or wage increases over represented in one group but not the other, for instance?

Studying the effect of company tax cuts on employment and wages also requires a longer time period – sometimes years – and careful control of other factors affecting jobs and wages in some firms relative to others.

Blind review:

The analysis in this review is generally fair and reaches a sound conclusion regarding the AlphaBeta report. However, the logic behind company tax cut raising wages is somewhat simplified.

A cut in company tax lowers the costs of production and can flow to labour, capital (including equipment and buildings) and consumers. Economics tells us that who actually benefits from a tax cut depends on what is more responsive to the tax – labour, capital or output.

The lower production costs from a company tax cut can lead to greater output and lower prices as consumers buy more goods and services. This depends, of course, on how responsive consumers are to changes in price.

In the short-run labour is more mobile than capital, which is usually regarded as fixed. Therefore, in the short-run most of the benefit is borne by owners of capital (the companies) in the form of higher after-tax profits.

However, over the longer term, companies invest their after-tax profits in the business. So most of the benefit of the tax cut goes to workers though higher wages as the increased “capital stock” (such as equipment) makes labour more productive.

The ConversationIt follows that there is no reason to expect a significant increase in wages over a period of one or two years (as the AlphaBeta report covers). Indeed, such a result would be somewhat surprising. – Phil Lewis

Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

This article was originally published on The Conversation. Read the original article.

Budget policy check: do we need ribbon-cutting infrastructure for jobs and growth?


Hugh Batrouney, Grattan Institute

In this series – Budget policy checks – we look at the government’s justifications for policies likely to be in this year’s budget and measure them up against the evidence.

In this piece we look at the need for infrastructure projects.


We look set for another infrastructure budget: big new projects that will, we’re told, boost growth, create jobs and tackle the pressures of our booming population. For example, the Turnbull government has already pledged up to A$5 billion for a rail link from Melbourne Airport to its CBD.

Infrastructure can play an important role, but behind the rhetoric some fundamental investment principles are missing.

Are investing in infrastructure and economic growth a sort of virtuous circle that feed each other?

Through a stronger economy, you can also invest in important infrastructure that again drives stronger growth in our economy … but also delivers the infrastructure that busts the congestion in cities, that makes rural and regional roads safer.

– Treasurer Scott Morrison

Yes, sometimes infrastructure spending and economic growth form a virtuous circle. In new suburbs and rapidly growing cities, infrastructure is needed to connect people to jobs and that in turn drives economic activity.

But we shouldn’t be fooled into thinking any spending is good spending. There are many examples where the opposite is more likely true: where poorly targeted infrastructure wastes resources and weakens economic growth.

If we want to identify the best projects, a good place to start is our biggest cities. Big cities have a productivity advantage because they match workers to jobs better and faster than smaller cities and towns. Transport infrastructure is key to this matchmaking.

But in many cases, the enormous costs of construction in big cities – acquiring land, disrupting traffic, and the physical challenge of constructing in densely developed places – often makes it hard to justify the incremental increases in accessibility that a project generates.

Instead, policies and projects targeting better use of existing infrastructure can have greater economic impacts. The trouble is, these projects usually don’t involve cutting a ribbon.

Changes to the way we set prices for the use of roads and public transport, for example, can help us get more out of the infrastructure we already have. Charging public transport users different amounts depending on the time of day they travel can reduce peak-period overcrowding on our trains. With much lower capital costs, policies like this often deliver a bigger bang for the buck than major new investments.

Are these road and rail projects the sort of infrastructure that supports growth?

Whether it’s the Tulla Rail or the M1 up in Queensland or indeed in my home city of Sydney around Western Sydney Rail from the airport and the road infrastructure that goes around that in particular, we are making important national investments in infrastructure that will support growth, bust congestion in our cities and make our transport – rural and regional roads – safer.

– Treasurer Scott Morrison

Infrastructure undeniably plays a role in supporting the economy. But not every project will add to the productivity of our economy.

On the face of it, the economics of airport rail in Melbourne look thin. Infrastructure Victoria has said upgrading airport bus services should be investigated first, because at A$50-100 million it’s a much cheaper way to tackle the same problem. It has also said that the rail line should be delivered within 15-30 years.

The perceived urgent need for airport rail in Melbourne may stem from the slow and unreliable travel to the airport over the past 18 months. This is a byproduct of the Tullamarine Freeway widening project, which is now almost complete. Responding to a short-term pressure with a multi-billion dollar investment – in the absence of a detailed business case – is a depressing example of poor policy-making.

And the Treasurer’s enthusiasm for the Western Sydney airport rail is also concerning, given that a recent state government study indicated the project wouldn’t be needed to cater for customers and workers at the airport until 2036, at the earliest. Infrastructure Australia has been clear that a rail corridor, running north-south through the airport site, needs to be preserved for a future rail line. But that is a long way from justifying billions of dollars of infrastructure that isn’t needed for nearly another 20 years.

Does Australia need infrastructure to create jobs?

Our national economic plan for jobs and growth has been getting results…A $75 billion national infrastructure investment plan that is building the runways, railways and roads Australia needs to remain competitive, and create jobs.

– Treasurer Scott Morrison

At certain points in the economic cycle, infrastructure spending can help create jobs. New projects create jobs for workers involved in planning, building and deploying each project, as well as for the suppliers of equipment and materials needed as inputs.

And in the longer term, the Treasurer is right to say that infrastructure is essential if our cities are to remain competitive.

But again, context is everything.

Infrastructure can put people to work when there is “slack” in the labour market – when there is unemployment or underemployment, in other words. But if there is little slack in the labour market, then the workers required to get a project off the ground will be drawn from other productive activities. In that case, there may be no boost to jobs or economic growth, because one activity is merely displacing another.

With national unemployment currently around 5.5%, there does appear to be some slack in the labour market right now. However, firms are now finding it more difficult to access the labour they want. And the slack doesn’t appear to be in the parts of the economy that would benefit most from new projects: as the RBA reports, the construction sector recently reached its highest share of total employment since the early 1900s.

What’s the verdict?

Eminent urban economist Ed Glaeser once said, “if you have a focus on jobs and macroeconomic effects, it leads to infrastructure in the wrong place”. Australia should focus on a project-by-project approach; that’s the only way we can be assured that investments represent the best possible use of available funds.

This means starting with some basics: the government should not commit to expensive new infrastructure projects until it has commissioned a detailed look at the economic impacts of the investments, and it has made public the results of that analysis.

The ConversationThat’s how infrastructure policy would be done in an ideal world. But sadly, in a pre-election budget, we can probably expect politics to triumph over policy, yet again.

Hugh Batrouney, Fellow, Grattan Institute

This article was originally published on The Conversation. Read the original article.

Vital Signs: Australia’s stubborn growth problems are moving at a geologic pace



File 20180405 189813 tcu293.png?ixlib=rb 1.1
Unfortunately for the RBA, the health of the economy is not measured on the Geologic Time Scale.
Alfonso Silóniz/Flickr, CC BY-NC-ND

Richard Holden, UNSW

Vital Signs is a regular economic wrap from UNSW economics professor and Harvard PhD Richard Holden (@profholden). Vital Signs aims to contextualise weekly economic events and cut through the noise of the data affecting global economies.

This week: Interest rates remain on hold as the RBA talks up employment growth, green shoots remain in manufacturing, and China strikes back in the Trump-led trade war.


On Tuesday, the RBA left official interest rates unchanged at 1.50% for the 18th consecutive meeting, tying their all-time record. They will break that record next month when they do the same thing.

And the official statement by governor Philip Lowe sounded like it came from a guy who had gone from crossing his fingers to crossing his toes as well. For example:

“The Australian economy grew by 2.4 per cent over 2017. The Bank’s central forecast remains for faster growth in 2018.”

Um, why? The same macro model that got 2017 wrong is now going to get 2018 right?

Or this one:

“The unemployment rate has declined over the past year, but has been steady at around 5½ per cent over the past six months. The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected.”

But a few months ago, those same forward-looking indicators were saying the plateau in the unemployment rate wouldn’t happen.

And finally (but only because I have space constraints):

“Notwithstanding the improving labour market, wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time.”

If “over time” is read analogous to “life in the Mesazoic Era evolved over time” then I suppose that may be right.

Unfortunately for the RBA, the health of the economy is not measured on the Geologic Time Scale. Stubbornly low inflation, persistently hopeless wage growth, and with the Australian population growing at 1.6% p.a., that 2.4% GDP growth number looks pretty weak. The real question is whether the RBA is not cutting rates because it thinks monetary policy is ineffective at this level, or because it’s scared of fuelling (further fuelling?) a (the?) housing price bubble.




Read more:
What economics has to say about housing bubbles


ABS data released Wednesday showed a drop in building approvals in February. Total dwelling approvals were down 6.2%, driven by a 16.4% drop in apartments, compared to a 1.9% rise in houses. For the 12 months to February 2018, that puts the total down 3.1%, again driven by a large (14.8%) drop in apartments and a rise (6.1%) in houses.

This is all evidence that demand – often from offshore – has dried up in one important sector of the market: apartments. It is still too early to know what the fallout will be, but this is exactly the kind of pattern one sees in property markets when the music has stopped.

The Australian Industry Group’s Performance of Manufacturing Index, released this week, hit a record high of 63.1 index points for March. Perhaps more importantly, the survey indicated that capacity utilisation was at a record high of 81.2%. This matters because it suggests stronger employment and wage growth in the sector.

On the other hand, manufacturing is about 6.5% of GDP, so even strong growth in the sector has a relatively modest overall effect. But, as they say in baseball, you can’t boo a home run.

US jobs figures continued to impress, with payroll processor ADP releasing figures Thursday Australian time that the economy added 241,000 jobs in March. The official figures from the BEA come out Friday US time, with market expectations at an addition of 185,000. So if the official figures line up with ADP, this will be further evidence of strong employment growth.

Trump trade war update

This week, China struck back, again. The Trump administration recently instituted roughly US$50 billion worth of tariffs on steel, cars, automotive and aircraft parts, consumer products like televisions, and other goods. Almost immediately, China responded with tariffs of a similar value on 106 types of American goods.




Read more:
America’s allies will bear the brunt of Trump’s trade protectionism


Those 106 types of goods include soybeans and others produced in the Trump heartland. This was a cleverly designed, targeted measure, designed to hurt Trump politically.

His response:

//platform.twitter.com/widgets.js

That reveals his mercantilist view of trade: that it’s a zero-sum game rather than something that increases the size of the economic pie and makes both countries better off. But hey, maybe he has a big reading backlog and isn’t up to 1817, when David Ricardo pointed this out with his theory of “comparative advantage”.

The ConversationLet’s hope it does, and President Trump gets the message that he needs to knock this off. All he is doing is making America poorer. And the game theory of it is worse. Tariffs beget tariffs.

Richard Holden, Professor of Economics and PLuS Alliance Fellow, UNSW

This article was originally published on The Conversation. Read the original article.

There isn’t solid research or theory to support cutting corporate taxes to boost wages


Fabrizio Carmignani, Griffith University

The argument that cutting the Australian company tax rate will lead to higher investment and wages, more employment and faster GDP growth does not have solid empirical or theoretical backing.

A close look at the economic research in this area shows a lack of consensus. Different studies, looking at different samples of countries, over different periods of time, reach different conclusions.

And the predictions made by theoretical models are sensitive to the underlying assumptions and structures built into the models themselves.

Many of the issues surrounding tax cuts remain unsettled – such as the size or length of the impact, how it affects inequality and the relationship with other government policies.




Read more:
Qantas and other big Australian businesses are investing regardless of tax cuts


The recent International Monetary Fund (IMF) forecast for the American economy highlights some of the issues.

In short, the IMF acknowledges that the recent US tax cuts will have a positive impact on economic growth in 2018-19. However, this is conditional on the US government not cutting expenditure, is likely to be short-lived, and will come at the cost of increased government deficits.

In this light, corporate tax cuts seem to be a long-term pain for a short-term gain, which is probably not what we need in Australia.

Conflicting information

Let’s start with the point that is probably least controversial – that a reduction in the corporate tax rate will lead to an increase in wages.

Think of the output produced by a corporation as a pie. This pie is shared among shareholders (in the form of dividends), banks and other lenders (in the form of interest paid on loans), workers (in the form of wages) and the government (in the form of taxes).

If we reduce the government’s share then there is more for everybody else, including workers. And some data do suggest that wages increase when corporate tax rates decline.

Yet economists disagree on the extent to which wages would actually increase in response to a tax cut.

Some research suggests that this increase might be small, even in a country like Germany, which is often used as an example of the beneficial impact of tax cuts on wages.

Certain aspects of the German economy and industrial relations system make it more likely that German workers will benefit from corporate tax cuts compared to Australian workers.

In Germany, workers’ representatives sit on company supervisory boards, which monitor and appoint members of management boards.

This means German workers have a stronger say when it comes to sharing the pie. For any given decrease in the slice of the government, German workers are more likely to get a bigger slice for themselves. This is not necessarily the case in Australia.

It is therefore difficult to draw implications for Australia from studies that look at the experience of Germany or other countries with significantly different institutional arrangements.

Furthermore, the fact that wages should increase in response to a corporate tax cut does not automatically imply that other economic variables will also respond positively. For instance, the more wages increase in response to a corporate tax cut, the smaller the increase in employment is likely to be.




Read more:
The full story on company tax cuts and your hip pocket


This leads to an even more controversial question: what is the effect of corporate tax cuts on real economic activity, such as employment and GDP growth?

The trickle-down effect of corporate tax cuts rests on the idea that business investment would increase once taxes are cut, which in turn leads to the creation of more jobs and faster economic growth.

However, this line of reasoning neglects the fact that investment decisions in today’s globalised world are not necessarily driven by the corporate tax rate.

Many other factors come into corporate investment decisions, such as the quality of institutions, the proximity to important markets, and the cost of labour (wages).

Because of these other factors, the impacts of tax cuts on employment and growth can be small, short-lived, or conditional on other government policy actions, such as managing debt.

In a similar vein, recent theoretical work that incorporates more realistic assumptions about the economy (such as the distribution of entrepreneurial skills in the population) suggests that a tax cut only has a significant impact on economic growth when the tax rate is initially high.

This means that even within a given country, the effect of a corporate tax cut can change depending on initial economic and policy conditions.

Putting tax cuts in a broader context

Beyond growth and employment, the effects of corporate tax cuts should also be considered in terms of deficit and inequality.

From the point of view of the public budget, a cut in the tax rate has to be somehow financed. How?

A first possibility is that the tax cut pays for itself. This is essentially the idea that as the tax rate goes down, the increase in the tax base (e.g. pre-tax corporate profit) is sufficiently large to ensure that the total tax revenue increases.

However, an increase in the tax base would require a significant and sustained increase in business investment, which, as we have already seen, does not necessarily happen.

The government could increase other taxes, but this means the government would effectively be taking from one group of taxpayers (possibly workers themselves) to give to corporations.

Another option is to reduce some government expenditures. But this could also involve taking from one group to give to another. If the decision is made to cut social welfare and public goods like education and health, then more vulnerable segments of the population will bear the cost of lowering the corporate tax rate. This means more inequality in the economy.

Of course the government could decide to just let the deficit be. This would result in higher debt. But can Prime Minister Turnbull (or President Trump for that matter) accept that?

The ConversationThe central economic challenge for Australia is to promote long-term, inclusive growth. Are we confident that this is what corporate tax cuts will deliver? Based on the economic research that I have read, the answer is no.

Fabrizio Carmignani, Professor, Griffith Business School, Griffith University

This article was originally published on The Conversation. Read the original article.

Budget update shaves growth and wage forecasts but is brighter about the deficit


Michelle Grattan, University of Canberra

The 2017-18 budget update shows an improvement in the deficit forecast for this financial year but predicts lower economic growth and a smaller increase in wages than was expected in the May budget.

The deficit for 2017-18 is now expected to come in at A$23.6 billion, an improvement of A$5.8 billion from the May forecast, according to the Mid-Year Economic and Fiscal Outlook released by Treasurer Scott Morrison and Finance Minister Mathias Cormann.

Growth for this financial year is forecast to be 2.5% compared with the budget’s 2.75%, reflecting recent lower-than-expected growth in household consumption.

Nevertheless Morrison and Cormann said Australia’s growth story “remains a compelling one, and although real GDP growth has been slightly tempered in 2017-18, the trajectory is upward”. Real GDP is forecast to grow at 3% in 2018-19, the same as the budget number.

Budget update on wages

The update notes that wage growth “remains low by historical standards in both the public and private sectors and has been more subdued than expected since budget”.

Wages are forecast to increase by 2.25% through the year to the June quarter 2018 and 2.75% through the year to the June quarter 2019.

This is 0.25 of a percentage point lower in both years compared with the budget – vindicating the scepticism that economists expressed about the budget forecast being too optimistic.

The flat wages situation reflects a serious political pressure point for the government, as many people struggle with high power prices and other squeezes on their cost of living.

“Wage growth is forecast to lift as the economy strengthens, inflation picks up and excess capacity in the labour market is reduced,” the update says.

Budget receipts have been revised upwards by about A$3.6 billion in 2017-18 and A$2.8 billion over the forward estimates compared with budget time – driven mainly by company tax and superannuation tax. The company tax forecasts reflect increased profitability and enforcement activity by the Australian Taxation Office.

But “over the forward estimates, lower forecasts for wages and unincorporated business income are expected to weigh on individuals’ income tax receipts,” the update says.

The half yearly revised numbers confirm that the budget is on track to have a surplus in 2020-21. The projected surplus of A$10.2 billion in that year is A$2.7 billion better than estimated in May.

Savings measures on education and welfare

The government has announced in the update a new welfare crackdown to save money and also an alternative higher education savings package after it could not pass its earlier proposals.

Savings of A$1.2 billion over four years will be reaped by broadening the criteria for waiting periods for new migrants before they can get various welfare benefits.

The changes will extend the present two-year waiting period for a range of payments, such as Newstart, to three years, and introduce a consistent new three-year waiting period to apply to a further number of benefits such as Family Tax Benefit and Paid Parental Leave.

Social Services Minister Christian Porter said the measures “will reinforce the foundational principle that Australians’ expectation of newly arrived migrants is that they contribute socially and economically for a reasonable period before having access to our nation’s generous welfare system”.

The higher education package includes a freeze on total Commonwealth Grant Scheme funding from January 1, set at 2017 levels, and a combined limit for all tuition fee assistance under all HELP and VET Student Loans.

The government will also pursue an alternative set of HELP repayment thresholds from July 1 next year, with a new minimum repayment threshold of A$45,000, higher than the A$42,000 in the original plan. At present the threshold is A$55,000.

Most of the new higher education package doesn’t have to be legislated, thus avoiding the Senate hurdle. The previous higher education package was set to save A$2.7 billion over the forward estimates; the new one saves A$2.1 billion.

Real growth in payments over the budget period is expected to be an annual average of 1.9%. Compared with the budget, nominal payments are lower in every year of the forward estimates.

The payment to GDP ratio is expected to fall to 24.9% of GDP by 2020, slightly above the 30 year historical average.

Morrison told a joint news conference with Cormann: “As we push into the new year, there is still more work to be done but we are on the right track.

“Jobs and growth will continue to be our mission and our focus. Helping the lives of the thousands of Australians, millions of Australians, and their families and returning the budget back to balance.”

Cormann said: “This is a good set of numbers in all of the circumstances.”

Shadow treasurer Chris Bowen said the government remained committed to increasing the tax paid by working Australians. He said there was no mention of personal tax cuts – which Malcolm Turnbull has foreshadowed – in the update. People only got a tax rise.

He condemned the revised higher education package, saying it would particularly hit those from a lower socioeconomic background.

The ConversationThe chair of Universities Australia, Professor Margaret Gardner, said the package would leave university funding “frozen in time”. She said the blow would be hardest in areas where university attainment was lowest, such as regional areas.

Michelle Grattan, Professorial Fellow, University of Canberra

This article was originally published on The Conversation. Read the original article.

What would it take to raise Australian productivity growth?


Roy Green, University of Technology Sydney

While productivity is once again growing in Australia, we face a big challenge in getting it to a level that would restore the rate of improvement in our living standards of the last few decades.

Yet the measures required to meet this challenge may not be the ones usually promoted by economists and editorial writers. We need innovation not just in the technologies we use but in our business models and management practices as well.

The problem, according to new Treasury research, is that national income growth can no longer be propped up by the favourable terms of trade associated with our once-in-a-generation mining boom.

Does this mean we are back to the hard grind of productivity-enhancing reform? There are (at least) two opposing schools of thought on this. Some believe reform is needed, but mainly corporate tax cuts and labour market deregulation. Others deny any such reform is even necessary.

What has happened to productivity?

Productivity is a complex issue, but may be simply defined as output produced per worker, measured by the number of hours worked. On this basis we have seen a modest spike in productivity growth over the last five years to 1.8% per year.

This is primarily due to “capital deepening”, an increase in the ratio of capital to labour. Contemporary examples include driverless trucks in iron ore mines, advanced robotics in manufacturing and ATMs in banking.

Before this five-year period, productivity growth was much lower, even negative. This was especially the case during the mining boom itself when capital investment was taking place but had not yet translated into increased output.

The Treasury paper argues that to achieve our long-run trend rate of growth in living standards of 2% a year, measured as per capita income, we now need to increase average annual productivity growth to around 2.5%.

This will require not just capital deepening, but also improvements in the efficiency with which labour and capital inputs are used, otherwise known as “multifactor productivity”.

The hype cycle

Australia is not alone in facing this productivity challenge. Globally, amidst what would appear to be an unprecedented wave of technological change and innovation, developed economies are experiencing a productivity slowdown.

Again, explanations for this vary. Some economists question whether the current wave of innovation is really as transformative as earlier ones involving urban sanitation, telecommunications and commercial flight.

Others have wondered whether it is still feasible to measure productivity at all when innovation comprises such intangible factors as cloud computing, artificial intelligence and machine learning, let alone widespread application of the “internet of things”.

However, there is an emerging consensus that we are merely in the “installation” phase of these innovations, and the “deployment” phase will be played out over coming decades.

This has also been called the “hype cycle”. New technologies move from a “peak of inflated expectations” to a “trough of disillusionment” and then only after much prototyping and experimentation to the “plateau of productivity”. Think blockchain in financial transactions and augmented reality for consumer products.


Read more: A guide to deconstructing the battery hype cycle


The world is bifurcating between “frontier firms”, whose ready adoption of digital technologies and skills is reflected in superior productivity, and the “laggards”, which are seemingly unable to benefit from technology diffusion.

These latter firms drag down average productivity growth and, lacking competitiveness, they inevitably find it more difficult to access global markets and value chains.

The increasing gap between high- and low-productivity firms is less a matter of technology as such than the capacity for non-technology innovation. In particular, this encompasses the development of new business models, systems integration and high-performance work and management practices.

Many of the world’s most successful companies, such as Apple, gained market leadership not by inventing new technologies but by embedding them in new products, whose value is driven by service design and customer experience.

Engaging our creativity

Recent international studies have shown that a major explanatory variable for productivity differences between firms, and between countries, is management capability.

It is noteworthy that Australian managers lag most behind world-best practice in a survey category titled “instilling a talent mindset”. In other words, how well they engage talent and creativity in the workplace.

Most organisations today would claim that “people are our greatest asset”, but much fewer provide genuine opportunities for participation in the decisions that affect them and the future of the business. Those that do are generally better positioned to outperform competitors and demonstrate greater capacity for change.

More survey work on this issue is under way.

A more inclusive approach

Wages are also related to productivity but not always in the way that is commonly assumed. It is said that productivity performance determines the wages a company can afford to pay, with gains shared among stakeholders, including the workforce.

But evidence is emerging that causation might equally run in the reverse direction, with wage increases driving capital investment and efficiency.

This casts the current debate on productivity-enhancing reform in a very different light. It may now be a stretch to argue that corporate tax cuts will be much of a game-changer in the absence of any incentive to invest in new technologies and skills. The same may be said about the ideological insistence on labour market deregulation, if all that results is a low-wage, low-productivity economy.

The populist revolt against technological change and globalisation has its roots not just in the failure to distribute fairly the gains from productivity growth, but in a longstanding effort in some countries to fragment the structures of wage bargaining and to exclude workers from any strategic role in business transformation. This has assigned the costs of change to those least able to resist, let alone benefit from it.

The next wave of productivity improvement, if it is to succeed, must be based on a more “inclusive” approach to innovation policy and management.

The ConversationAs jobs change or disappear altogether, Australia’s workforce can make a positive contribution. But workers will only be able to do so if they have the skills and confidence to take advantage of new jobs and new opportunities in a high-wage, high-productivity economy.

Roy Green, Dean of UTS Business School, University of Technology Sydney

This article was originally published on The Conversation. Read the original article.