Australians working harder and longer, not smarter, lowering productivity nosedive

In a bid to bolster their pay packets, Australians are working harder and longer, but not smarter and it’s leading to a productivity nosedive, fresh analysis has revealed.

A new report, released by the Productivity Commission on Friday, has revealed while Australia has experienced a record breaking increase in the number of hours worked, up 6.7 per cent in the 2022-23 financial year, economic output had failed to keep up.

And that was driving a decline in the nation’s productivity – which measures how efficiently labour can produce goods and services – of 3.7 per cent over the same period.

Economists are concerned that the nation’s anaemic productivity growth, if not reversed, could lead to a further erosion in living standards.

The Commission’s deputy chair Alex Robson said while workers had benefited from taking on extra hours to boost their incomes, they would struggle to replicate this strategy to get ahead in the future.

“Australians’ incomes grew in 2022-23, mostly because they worked more hours. But productivity growth is about working smarter, not working harder or longer,” Mr Robson said.

“Given our labour force participation rate is near its historical high, we won’t be able to rely on working harder or longer as a source of income growth moving forward.”

Even worse, Mr Robson warned that easing inflationary pressures could rebound if higher wages weren’t supported by a commensurate increase in productivity.

“We know nominal wage growth without productivity growth can fuel inflation. Sustainable, long-term wage growth can only be realised by securing productivity gains.”

This phenomenon, known as a ‘wage price spiral’, occurs when inflation rises as a result of higher wages which fuels spending.

In more positive news, Australia’s recent slide in productivity growth may have been arrested, the Commission added.

“Looking beyond the 2022-23 annual data, the decline in labour productivity appears to have halted in the first quarter of the 2023-24 financial year, although this is largely attributable to a fall in hours worked,” the Commission said in its quarterly bulletin.

The report also found that while the relationship between wages and productivity had weakened slightly, most workers were still realising the benefits of rising productivity gains in the long run

For more than nine in every 10 workers, average annual wage growth was approximately 0.18 percentage points lower than labour productivity growth, the Commission said, up from 0.12 percentage points it had estimated last year.

“Despite this uptick in decoupling, the underlying connection between labour productivity and wages remains intact, emphasising the importance of improving labour productivity to support a rebound in real wage growth,” the bulletin read.

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