Scott Morrison doesn't know the meaning of productivity

What does falling labour productivity mean for wages? Given that Scott Morrison has long argued the only way to boost wages is to boost productivity, does that mean he thinks last quarter’s decline in labour productivity will lead to a fall in wages?

Most politicians either don’t know what productivity is, or they say things that suggest they have no idea what they’re talking about. There’s nothing in any economics textbook that ensures productivity growth inevitably leads to wage growth, nothing that suggests changes to industrial relations laws would have a measurable impact on average productivity or GDP growth, and absolutely nothing to suggest that productivity growth creates jobs.

Indeed, with a slowing economy, productivity growth is more likely to cause unemployment than fix it. But just like climate science, it seems you don’t need to be an expert to talk authoritatively about it in modern Australia.

So, what exactly is "productivity"? Productivity refers to the amount of output produced by a given unit of input. Labour productivity measures how much stuff gets made by each unit (usually an hour) of labour. Capital productivity measures how much stuff gets made by each unit of capital (usually measured in dollars).

Let’s start with the myth that regulating union activity is a big driver of labour productivity growth.

First, there’s no empirical evidence that productivity grew more rapidly after the Howard government made it harder to strike and easier to sack people. And second, as the Morrison government is at pains to point out, just 10 per cent of the private sector workforce is unionised, so how can something that effects a small percentage of the workforce have such a big impact on productivity growth across the economy?

No wonder measured productivity is declining, the guy claiming to run our economy doesn’t even know what it is.

Second, as the national accounts have made clear, labour productivity growth has outstripped real wages growth for the past 18 years. This highlights that there’s absolutely no reason for a firm with market power to pass on increases in labour productivity to workers in the form of higher wages. There’s also no reason for them to pass on cost reductions to their customers in the form of lower prices.

Put simply, firms with market power have a choice between helping their customers, helping their workers, or helping their shareholders, and as the steady increase in the profit share of GDP since the Coalition came to power makes clear, Australian companies haven’t been too keen to help their customers or workers in recent years.

Job losses not job creation

Then there’s jobs. Companies don’t employ workers because they’re productive. They don’t even employ workers because they’re cheap, well trained, or un-unionised. Companies only employ more workers when existing workers can’t produce as much stuff as customers want to buy. If customers aren’t buying more, companies aren’t going to employ more staff.

It gets worse. With low wages growth, low private sector investment growth and an unstable world economy, there isn’t a lot of private sector demand growth around. In fact, last quarter private sector spending shrank by 0.1 per cent and by 0.3 per cent over the past four quarters. And when workers can make more stuff per hour while customers are buying less stuff, labour productivity growth leads to job losses not job creation.

You’d hope the Prime Minister understands these simple truths, but instead he’s spouting this nonsense at the BCA annual dinner: “Productivity is not about paying people less to do more, productivity is about enabling people to earn more from what they do every day. That’s how I measure it. And that’s what our productivity agenda is all about.”

Let’s break this down: “Productivity is not about paying people less to do more." It’s true, productivity isn’t about pay cuts. But to then say “productivity is about enabling people to earn more from what they do every day” isn’t true at all.

Productivity is about getting people to produce more per hour tomorrow than they did yesterday. Productivity growth can come from new equipment, better training or improved motivation. But to be clear, it is entirely unrelated to "enabling people to earn more from what they do every day".

Having completely misrepresented what productivity is and its causes, our Prime Minister concludes by assuring us, “That’s how I measure it. And that’s what our productivity agenda is all about.” No wonder measured productivity is declining, the guy claiming to run our economy doesn’t even know what it is.