Growth spurts

Australians are working fewer hours and are less likely to be employed than they were at the start of the decade. Growth in our productivity has slowed as has growth in our working aged population.

It is perhaps no surprise then that real GDP growth is much slower than previous decades. Australia’s long run real GDP growth is about 3.25 per cent, but since 2007, growth has averaged about half a percentage point below that.

In per capita terms, the story is much worse. Between 2004 and 2014, real GDP per capita grew at 2.6 per cent, over the last decade it’s been about a third of that, just 1.0 per cent.

The difference between 1.0 per cent and 2.6 per cent and is much bigger than it sounds. If you were to invest a dollar at 2.6 per cent, that investment would more than double in a generation. At 1.0 per cent, the investment would only be about 35 per cent higher.

We can start to understand why this is the case — and maybe even how to fix this — by breaking up growth into its component parts. Per capita growth is approximately equal to the sum of growth in: labour productivity; average hours worked; the employment rate; the labour force participation rate; and the share of the population aged over 15.

The ABS looked at this in 2005. They found that in the decade to 2004, the biggest contributor to real income growth was, by far, productivity (about 84 per cent). Labour productivity grew on average 2.1 per cent over the period, almost double what we’ve had over the last decade.

The next biggest contributor was the fall in the unemployment rate (or the rise in the employment rate). Unemployment fell dramatically over the period — from 10.2 per cent in 2004 to 5.5 per cent in 2014. But its contribution to per capita GDP growth was less than a quarter of that made by productivity increases.

These results are reported in the table below, along with an update for the decade leading to 2017. Real incomes have grown much slower over the past decade — the average annual increase being 1.6 percentage points lower. The contribution made by all factors to growth was less, with the exception of hours worked. The average number of hours worked fell over the last decade, but by less than in the earlier period. If it weren’t for the little productivity growth we did have, real incomes would have shrunk.

Contribution of components to real per capita GDP growth

 

1994-2004

2007-2017

Difference

Labour productivity

2.10

1.18

-0.92

Average hours worked

-0.40

-0.27

0.13

Employment ratio

0.50

-0.14

-0.64

Labour force participation rate

0.10

-0.04

-0.14

Share of population 15+

0.20

0.10

-0.1

Real GDP growth per capita

2.60

1.00

-1.60

Note: figures refer to the average annual increase over the period.

Source: ABS 6105.0, July 2005 and me.  

So once again it seems that productivity is the answer to our growth worries. Productivity can however, be a very abstract concept. And it can be difficult to conceive what a one per cent increase in productivity precisely means for an advanced economy like Australia.

One way to think about this is to estimate how many additional hours or jobs or migrants would be needed to increase real GDP growth per capita to previous levels. In the absence of an increase in productivity, restoring real GDP growth to 2.6 per cent would require either:

·         every worker to work an extra 20 mins a week each year

·         an annual reduction in the unemployment rate by 1.5 percentage points

·         200 thousand retirees, stay at home parents and/or students to join the labour force every year

·         an annual increase in Australia’s migrant intake of around 320 thousand persons.

Over a 10 year period, these all add up to some very large, and somewhat unrealistic numbers — this gives an indication of the scale of the task at hand.