Productivity and Progress in Australia – Setting the Scene

Considerable comment has been made in recent months regarding low wages growth in Australia and the comparative wage setting in many industry sectors and occupations compared to wages in other parts of the world.  Recent research by the Productivity Commission and others highlight varying challenges including the age distribution of the nation and its workforce, the relatively high nominal cost of commuting, the level of household debt and government debt, and trends in retail spending in parallel with positive consumer and business confidence.

At the time of preparing this report, the All Ordinaries Index on the ASX broke through the 6,000 barrier for the first time since the Global Financial Crisis, though the rate of increase in the value of Australian equities has remained behind many of the global bourses which represent the reference point of many commentators.

With disappointing capital returns compared to emerging markets and global industrialised markets with pressure on investment yields, many organisations are containing fixed costs by limiting annual wage increases.

In our rapidly changing, technology-driven work environment and with the emergence of the work-life expectations of millennials, Australian employers have been increasingly aware that offshoring an expanding proportion of operating and administrative activity improves their bottom line.

There are many countries where wage costs are significantly lower than Australia and terms of employment do not  mandate four weeks’ annual leave, ten days’ sick and compassionate leave and between eight and ten days’ public holidays.  Nor do these other countries limit the “reasonable” working week to 37.5 hours.

Reality for your average Australian employer bites further when they require one additional employee for every seven permanent staff to cover absences due to annual holidays, sick and carer’s leave and public holidays compared with many offshore environments where the offset is closer to one in fifteen and the hourly cost substantially less without penalty rates.

In parallel, shareholders are also becoming more active in commenting on the level of incentives paid to senior executives.  Comment is generally heightened where profit improvement has not met expectations and where company reputation in relation to engagement with customers and responsiveness to the environment and occupational health and safety is sub-optimal by global standards.

Tax payers and commentators are also observing both operational and policy challenges in the government sector.  Focus is primarily on unexpected cost increases on a number of infrastructure projects, with industries and many households being adversely impacted by an unexpected rate of growth in energy costs.

In this setting governments, industry and the general public remain challenged.  There is a heightened awareness of the need to find ways to improve the job security and standard of living of the Australian workforce through focussed and relevant education with on the job training and upskilling.  Constituents and industry expect governments to plan more effectively over longer term horizons and manage their expenditure.  This must be undertaken with the same rigour and return focus as the most successful enterprises operating in Australia, across the spectrum of locally owned and international corporations which operate in partnership with both government and local businesses.

As in all economies, productivity in Australia is a key determinant of prosperity and economic security. The anticipated Australian Productivity Commission’s Inquiry Report No. 84 entitled, “Shifting the Dial: 5 Year Productivity Review” (“the Review”), published on 3 August this year goes towards clarifying many of the economic changes that have been influencing productivity in Australia over the last five years.


Productivity and Technology

The Review refers to a slowdown in productivity consistent with continuous technological change. For many Australian businesses, adapting from the twentieth to the twenty-first century has proved difficult.

The Report considers the observations of Brynjolfsson and McAfee in their book, The Second Machine Age, in relation to large companies, citing Kodak as an example of a failure to adapt their products, specifically, a failure to compete with digital technologies.  This failure resulted in the Kodak Corporation filing for Chapter 11 bankruptcy protection.  At its peak in 1996, Kodak employed 145,000 and held billions of dollars in assets globally. Meanwhile, and in stark contrast to Kodak’s inertia, Instagram launched in 2010, quickly grew to a staff of fewer than 20 people, and was acquired by Facebook for $1 billion just fifteen months after its founding.


Productivity and the Impact of Commuting

Although the average duration of the daily one-way commute in Australia is 29 minutes, a quarter of commuters, more than 2 million people, travel for 45 minutes one way each day according to a Department of Infrastructure and Regional Development Research Report.  The Department considers a one-way commute of 45 minutes or more to be “lengthy” and is the average one-way commute for workers residing in built up areas in Sydney, Melbourne, Brisbane, Perth and Adelaide.  Lengthy commutes have an obvious impact on productivity, even taking into account the scope for workers to engage remotely with their workplace while commuting on, for example, public transport.  The report reveals that lengthy commutes can also impact job satisfaction and, consequently workplace attendance and productivity.


Productivity and Housing

The high cost of housing in Australia is recognised not only locally, but also internationally, as nothing short of extraordinary.

According to the Australian Bureau of Statistics’, Housing and Occupancy Costs, 2015-16, on average households continued to spend 14% of their gross weekly income on housing costs in 2015, unchanged since 2009-10.  The proportion of gross weekly income that home owners with a mortgage spent on housing costs remained stable at 16% in 2015-16 while renters continued to spend 20% of their gross income on housing costs for the same period.

Household incomes vary between the most populated cities of Sydney, Melbourne, and Brisbane.  According to the ABS Census in 2016 data, “Sydney’s median weekly household income was $1,750, the median monthly mortgage repayment was $2,167, and the median weekly rent was $440.”

Analysis by the Herald Sun of ABS Census 2016 data indicates that Melbourne showed slightly lower costs for housing. Melbourne’s “median weekly household income was $1,542, the median monthly mortgage repayments were $1,800, and the median weekly rent was $350.”

The cost of housing in Brisbane was slightly more than Melbourne, with Brisbane’s median weekly household income at $1,562, median monthly mortgage repayments at $1,861 and median weekly rent at $355.


Productivity and Economic Growth

Economic growth in Australia continues its positive trend. Having entered its 26th year of continual economic growth, Australia is positioned as the world’s thirteenth largest economy and enjoys a AAA rating by three global agencies.

The Australian Trade and Investment Commission (“Austrade”) noted that Australia’s economic growth has outperformed its peers for the last two decades, with the likelihood of this trend continuing.  Further, we note that IMF forecasts released in October 2016 predict Australia’s annual real GDP growth at 2.9% between 2017 and 2021.

According to Austrade, Australia is ranked thirteenth among the world’s twenty largest economies in 2017, with the USA, China and Japan in the top three, and that Australia’s nominal GDP is “estimated at $1.7 trillion and accounts for 1.7 per cent of the global economy”.


Productivity and Household Debt

Household debt in Australia is another influence that affects productivity.  ABS data contained in its Household Income, Wealth and Expenditure Survey shows that the average amount of debt has almost doubled in the past 12 years — from $94,100 in 2003-04 to $168,600 in 2015-16, with most of this being accounted for by property debt.

The ABS used these figures to assert that around three in ten households, or 29%, were classified as “over-indebted”.

In examining the debt level profile of Australian households, the ABS applied two measures based on definitions used by the OECD,

  • debt-to-income ratio, where over-indebted households had debt three or more times their annual disposable income; and
  • debt-to-asset ratio, where over-indebted households had debt equal to 75% or more of the value of assets.

The ABS found that debt growth outpaced growth of incomes and assets in 2015-16 resulting in the proportion of households who are over-indebted rising from 21% in 2003-04 to 29% in 2015-16.

Additionally, the ABS found that high income households were more likely to be over-indebted. One quarter of the households in the top income quintile were over-indebted compared to one-in six (16%) low income households (in the bottom 20%).

Sydney and Melbourne had the highest number of over-indebted households.

The ABS concluded that over-indebted households in “Sydney were 407,000, while Melbourne had reached 419,600.”


Productivity and Consumer Confidence

Australian economic conditions are determined through retail spending and consumer confidence.

Retail Spending – In  “Australian Consumer Spending”, Trading Economies observed the growth of retail spending in Australia and noted that consumer spending in Australia had “increased to $243,348 million in the second quarter of 2017 from $241,693 million in the first quarter of 2017”.

The ABS also discussed changes in retail spending in Australia in its Retail Trade Report, indicating that retail turnover was relatively unchanged in September 2017.

In relation to retail spending, consumer confidence is another influence on productivity in Australia.

Consumer Confidence – Indicators in October were that consumer positivity was outweighing negativity in terms of consumer spending. Research by Trading Economics, in “Consumer Confidence” showed that the, “Westpac-Melbourne Institute Consumer Sentiment Index in Australia rose 3.6% to 101.35”, suggesting that consumer optimism increased in response to the market since November 2016.

Consistent with these figures, Bill Evans, Westpac’s Chief Economist stated that, “consistent reports of an improving global economy may have been a factor behind this lift in confidence.”

Unfortunately, the lift was not sustained.  In recent days, Trading Economics’ Australian Consumer Confidence analysis showed that the Westpac-Melbourne Institute Consumer Sentiment Index for Australia “declined 1.7 percent month-on-month to 99.7 in November 2017 as pessimists again outnumber optimists after a short-lived climb.”

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