Productivity sounds good, but it’s just words — not something business pursues

You’ll hear a lot about productivity over the next few days. You’ll hear it from media commentators and economists. You’ll hear it from the government, which claims the path to higher wages growth involves higher productivity, and of course you’ll hear it most of all from business.

Employer groups may be divided on industrial relations changes but they’re as one on how the jobs and skills summit should be aiming for higher productivity. As Jennifer Westacott of the Business Council claimed last week: “The summit is a chance to finally decide as a nation how to drive productivity harder.”

Amid the unanimity about the importance of productivity, it might see counterintuitive to wonder just how committed we are to it — and especially how interested Australian business really is.

The answer seems to be that business likes productivity, but it likes other things a lot more.

The first clue lies in the fact that, even after it became clear that WorkChoices, as predicted, led to a noticeable fall in labour productivity, business groups still continued to demand deregulation, greater flexibility and more anti-union laws. This happened at the industry level as well — despite labour productivity in the construction industry improving dramatically when the Rudd-Gillard government gutted and then abolished the Australian Building and Construction Commission, employers still demanded its restoration.

And when they got their way, the inevitable happened — productivity in construction not merely stopped growing, it went into reverse.

Another lies in data that shows that labour productivity has consistently outperformed multifactor productivity over the past decade, even as both delivered poorer performance. In 2016, the Productivity Commission discussed the possible reasons for this and observed that “there is other compelling evidence that a significant share of Australian businesses have poor management practices, and while this is true for all countries, Australia lags behind the leading countries… Multinational firms tend to have high quality management and to perform better… A significant share of the gap in productivity between Australia and the United States appears to be driven by varying management capabilities.”

This was no fleeting fancy of the Productivity Commission’s. In January, Treasury published a paper noting “the productivity gap between the global frontier and Australian firms has grown over time… We find that Australian firms are catching up to the frontier more slowly than they did in the early 2000s. This suggests that Australian firms have been slower to adopt cutting-edge technology and processes.”

That came nearly 10 years after David Gruen, then a Treasury deputy secretary, and Ben Dolman published a Treasury paper pointing out that Australian management was at best average compared with international peers, that we had a long tail of poorly performing managements, that large firms are better managed than small ones, and key areas like manufacturing were characterised by a large number of smaller firms. Gruen was attacked by right-wing economists for daring to suggest productivity wasn’t the fault of workers.

Poor management practices and failures to adopt new technology and innovate are of course within the direct control of business. They’re not crimped by industrial relations “inflexibility” or government regulation. They’re the one area where business can walk the walk on productivity. But 10 years on from Gruen’s paper, the contribution of Australian management to productivity appears to be even poorer.

One factor that would drive productivity growth and innovation is more competition. Higher productivity growth is linked to higher rates of firm turnover, as poorer-performing firms die (or are propped up by government support, as during the pandemic) and new firms enter to challenge incumbents. As Treasury noted in its January 2022 paper, rates of turnover have fallen noticeably in Australia since the start of the century.

Another paper from mid-2021 confirmed what a number of studies have shown in recent years — the Australian economy has grown significantly more concentrated in the past two decades, and this had contributed both to more dominant firms using their market power to increase mark-ups, and to lower productivity.

That’s just the way investors like it, too — they would far rather invest in big corporations with lots of market power (or “moats” as Warren Buffett calls it) to protect them from competitors, rather than highly innovative firms.

Productivity seems to be something for Australian business to talk about, but not actually pursue — a view also advocated by the in-house journal of Australian management, The Australian Financial Review. The lesson of WorkChoices and the ABCC is instructive — business and its media cheerleaders prefer wage suppression and attacking unions over productivity. Given the choice, they prefer to attack workers every time, even knowing that it will harm labour productivity. Making improvements where business has direct control appears to be all too hard for many business managements. And corporations would rather grow more dominant in their industries, and exploit the market power it gives them to increase prices, despite knowing this leads to poorer productivity.

And it has worked — this formula of wage suppression and market power ahead of productivity has helped give us the lowest wage share of national income for decades and the highest profit share.

And let’s not forget where so much other business activity is directed in Australia: the hard work and extensive resources dedicated to attempting to influence government policy through lobbying, political donations, media campaigns and employing former politicians and staffers. That is one area where Australian business has proven competitive with the best in the world — many of our business leaders would be perfectly at home in Washington, the global capital of influence peddling. If Australian businesses were half as engaged and innovative on productivity as they are on trying to get governments to do things for them, our performance would likely be significantly better.

Not that any of that is likely to be mentioned tomorrow or Friday in Canberra.