Let’s talk seriously about productivity.

We talk all the time about productivity, of course. From around 2010 to 2015, we were obsessed with a “productivity crisis”. It was only last year that Treasury produced a paper acknowledging we’d been obsessing over nothing when it came to labour productivity, because it had substantially increased after 2007-08, compared to the large fall that coincided with John Howard’s WorkChoices.

But rarely do we talk seriously about productivity. For many in the business sector, and in the Coalition, “productivity”, like “reform”, is a nebulous mantra to be constantly uttered, regardless of how productivity is actually performing. And for many of them, it’s code for giving things to business. Take the Minerals Council, for example. Only last week, the miners said that the only way to fix our “falling national labour productivity” was to give companies a big tax cut, remove industrial relations protections, abandon climate action and remove regulatory requirements for mining.

That is, give multinational mining companies a wish list of goodies that will inflate their profits and productivity will be “fixed”. 

As Treasury showed, “national labour productivity” isn’t falling, it’s rising. We know that the big surge in labour productivity that began around 2011 has faded in the last few quarters, but annual private sector labour productivity is still going up. And according to the Productivity Commission, which sector has seen the strongest labour productivity growth — at nearly three times the growth of the next most productive sector? Why, that would be mining. 

If business were serious about productivity, they’d acknowledge the surge in labour productivity under the Fair Work Act and look for the reasons why it occurred, and why it began fading in the last couple of years, rather than denying it happened at all. They’d try to explore the growing divergence between rising labour productivity and stagnant multifactor productivity in recent decades. But they’re not serious about productivity. 

The Productivity Commission is serious about it, of course. Always has been. That’s why, when the government tasked the PC with developing a list of productivity-enhancing reforms, Peter Harris and his crew last year produced reforms they’d been advocating for years and, in some cases, decades — including putting a price on carbon. No surprises, then, that the government has been ignoring the report ever since. It’s not serious about productivity either. 

But what if we weren’t even asking the right questions about productivity — or more correctly, not asking about the right things? What if some outside-the-square thinking was required to identify why multifactor productivity has been stubbornly stagnant?

Now evidence is emerging that we should be looking elsewhere — particularly at the financial sector, and how finance has been allowed, even encouraged, to grow a much greater share of the economy, with a consequent negative impact on productivity.

In a paper to the Reserve Bank’s December conference on monetary policy Claudio Borio, head of the monetary and economic department at the Bank of International Settlements, provided a possible explanation linking financial liberalisation, financial booms and busts and our love of property booms with underperforming productivity. In his (co-authored) paper, Borio argued:

Financial booms tend to go hand in hand with slower productivity growth, mainly as a result of a shift of resources into sectors such as construction. The adverse implications for productivity growth become considerably larger if the bust ushers in a financial crisis… a possible explanation is that the boom results in the overexpansion of certain interest rate-sensitive sectors, such as construction, which then need to shrink during the contraction. The reallocation of resources may, in turn, be hindered if the banking sector runs into trouble… unless their balance sheets are quickly repaired, weakly capitalised, loss-averse banks would have an incentive to keep afloat weaker borrowers (i.e. ‘extend and pretend’) and curtail the quantity, or increase the cost, of credit for healthier ones – the so-called zombie lending phenomenon.

In his remarks to an OECD conference last week, Borio went further:

For a typical credit boom, a loss of just over a quarter of a percentage point per year is a kind of lower bound. The key mechanism is the credit boom’s impact on labour shifts towards lower productivity growth sectors, notably a temporarily bloated construction sector. That is, there is an economically and statistically significant relationship between credit expansion and the allocation component of productivity growth… credit booms undermine productivity growth… mainly by inducing shifts of resources into lower productivity growth sectors.

Borio says this misallocation to lower-productivity sectors the loss of around 0.6 percentage points per year for economies that saw booms and busts. “This is roughly equal to their actual average productivity growth during the same window.”

Borio’s work complements that of Industry Super Australia, which found that the finance sector itself has become dramatically less efficient at capital allocation in recent decades, as the industry has chased equities and housing investment rather than investing in new capital. That in turn complements the work of the Bank of England Silvana Tenreyro, who identified the financial and manufacturing sectors as key drags on UK productivity growth in the last decade. It all feeds into concerns that have been around for a while in Australia that our vast super system is a deadweight on the economy, not the boon we assume it is.

If we were seriously interested in productivity, we might be talking about about our banks and super industry even more than we already do.