Australia’s productivity growth has stalled, with market-sector multifactor productivity rising just 0.1% in 2023-24 – well below historical averages and among the weakest in the developed world.  

According to Danielle Wood, Economist and Chair of the Productivity Commission, productivity is widely misunderstood: “Productivity is simply how much we can produce for a given amount of input. The most common way we measure it is labour productivity – the value of what’s produced per hour worked.” 

Lasting productivity gains come from getting more out of each hour worked. “That’s about improving skills, adopting new technology, and refining processes. Picture a teacher who has high-quality lesson plans at their fingertips, or a builder using prefabricated housing components, or a lawyer turning to AI to quickly summarise documents," she said. "Those are productivity improvements.”

UNSW Business School Scientia Professor Richard Holden, Director of the Manos Institute for Cognitive Economics, agreed: “People often think productivity means working more. It doesn’t. It means working more effectively, with better tools.”

But why should everyday Australians care about productivity growth in the first place? What’s in it for them? “Productivity growth is what makes sustained wage growth possible," Ms Wood explained. 

"You can get some short-term shifts between profits and wages, but over time, the two move together. That’s why productivity is critically important for living standards – especially for younger Australians. Sluggish productivity growth puts at risk the expectation of generation-on-generation progress in living standards.”

What drives productivity growth? 

Over the past decade, Australia’s productivity growth has averaged just 0.2% a year, which makes it among the weakest in the advanced world. Australia’s slowdown is now both a historical and international lag, with potentially serious consequences for the next generation.  

Ms Wood explained: “If you break it into phases, the late 1990s and early 2000s were a golden era. Labour productivity growth averaged over 2% a year – a really healthy pace. In the decade surrounding the global financial crisis (GFC), from 2005 to 2015, it slumped to 1.3%. The most recent decade is a story of stagnation. Labour productivity growth averaged just 0.4% over the decade – its slowest rate in 60 years.” 

Learn more: How AI is changing work and boosting economic productivity

Australia isn’t alone in this. “Most rich countries saw the same," she continued. "Many of the drivers, like declining investment, less economic dynamism, the expansion of care sectors and less policy reform, are common across developed economies. You can build skills across the population. You can encourage businesses to invest in new tools and machines. But in the long run, the real growth engine is new ideas – new technologies, new ways of working, new products and services.” 

“We haven’t had a big technological boost since the internet or perhaps even the personal computer revolution,” added Prof. Holden. “Part of it is also that richer economies naturally shift toward services, and it can be harder – though certainly not impossible – to increase productivity in services. Another part is that we have tax policies that disincentivise investment in physical and human capital. And part of it is that our labour markets are not flexible enough.” 

The process of boosting productivity growth is explored in a joint e61 Institute and UNSW Sydney report, Five Economic Themes That Will Dominate the Next Parliament. The report said international research links the slowdown in productivity growth to a decline in ‘economic dynamism’ – the extent to which the economy uses and reallocates resources. Michael Brennan, CEO of the e61 Institute and co-author of the report, said there is no simple, single explanation for the slowing of productivity growth in Australia in recent decades, though he did point to a few obvious headwinds.

“Some economists feel that the pace of technological advance has slowed relative to much of the 20th century and late 19th century," he said. "Where technological progress has been evident, it has often required substantial additional resources (like highly educated researchers, for example) to bring it about. So, the productivity of productivity growth might have fallen somewhat. It’s hard to know for sure.  

“Another issue, which we at e61 have talked about a lot, is the rise of a services-dominated economy, with a large role for government-funded, provided and regulated services often with a significant and fairly rigid labour component. There is nothing written in stone to say that we cannot achieve greater productivity in these areas – like health or education – but the path to productivity growth in these sectors is likely to look different to the path of productivity growth in manufacturing or agriculture, for example.” 

Common misconceptions about productivity 

Productivity often makes new headlines, but they rarely capture the full picture. As Ms Wood explained: “One common misconception is that productivity is about working harder. In fact, it’s the opposite. Productivity is about boosting what we can produce in an hour worked. When we are more productive, we can take the gains as higher incomes or more leisure (less work).” 

Indeed, since the 1980s, Australia’s labour productivity has risen enough that average working hours could have fallen by 15 hours per week without reducing consumption. Instead, Australians used about 23% of those gains to work less and 77% to raise incomes. Put another way, if all productivity growth had gone into higher incomes rather than shorter hours, GDP per capita would be 11% higher than in 1980.  

Learn more: A primer on Australian productivity

“Another common misconception is that productivity is all we care about. Growth matters a huge amount, but there are important things that aren’t included in the national accounts, like environmental impacts, or unpaid work and care, and the distribution of incomes,” said Ms Wood. 

“Good economists think about how to design pro-growth policies that factor in these other outcomes that are important but unmeasured."

How does Australia compare to other advanced economies? 

The productivity slowdown is a broadly observed global phenomenon, suggesting that the rate of global technological advancement may be a contributing factor. 

“A lot of other advanced economies share some broad policy directions with Australia: they are more regulated than in the past and have shifted towards services," said Mr Brennan. "In very recent years, the US has been somewhat of an outlier – recording stronger productivity growth post-COVID than most developed economy peers.

“There is a lot about the US economy we would not want to emulate – but there is an enviable sense of dynamism and entrepreneurship which is attractive. And while other economies – in Europe or Canada or Australia – might have once believed we had a superior economic model to the US, the gap in average incomes is getting a bit hard to ignore.” 

Mr Brennan also said that an important question regarding boosting productivity growth is whether Australia has lost its appetite for productivity-enhancing reform. “We often hear this claim, but it’s hard to prove. Nonetheless, I do think there is something in Danielle’s speech at the Press Club, that we don’t talk about growth as much as we once did and probably as much as we should,” he said. 

Hard to measure – harder to lift? 

Prof. Holden noted that his top three policy priorities for boosting productivity growth would be maintaining an internationally competitive company tax rate, shifting taxation from income to consumption through a progressive GST, and increasing investment in research and development. 

Mr Brennan stressed the importance of policy fundamentals: “Solid policy frameworks – in fiscal policy, tax, regulation and education – are the main game," he said. "If we simply avoided new bad policies for the next 20 years, we would end up with much better living standards.” Looking for a “miracle pill,” he warned, is futile: “Solid fiscal, tax, regulatory and other settings… allow human ingenuity and innovation to flourish.” 

He also emphasised the role of prices: “Prices shouldn’t lie. They should guide investment and consumption choices. Sometimes, like with carbon emissions, it requires that we intervene to make sure the price fully reflects all costs.” 

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On dynamism, he affirmed that new firm entry, labour mobility and competition are the “engine room of economic experimentation and ultimately growth.”

While Ms Wood noted the challenges of measuring productivity in services like health, education and care: “When economists talk about the ‘non-market sector,’ we’re really talking about services like health, education and care," she said. "That makes productivity hard to measure.”

She pointed to Productivity Commission research, which shows that if you adjust for outcomes in treating key diseases, productivity gains are much bigger than the official statistics suggest. “We’ve just taken the gains as better quality treatments – longer and healthier lives – rather than lower costs,” she said.

“But boosting productivity in care remains difficult as they’re labour-intensive by nature; people want to be cared for by people. That limits how far machines can substitute.” Instead, she said technology can and already is augmenting care in different ways, like utilising AI for rostering, spotting patients at risk of falls, or robots handling routine tasks, freeing up people to focus on the human side of the work.

AI as a game-changer 

AI adoption is spreading rapidly in workplaces and is often hailed as a driver of productivity, but many argue its benefits are unclear. While the technology is still in its early days, there’s real potential if used correctly.

“I’m genuinely optimistic about AI," said Ms Wood. "Technology is critical for productivity growth. And it’s particularly technologies like AI – general-purpose technologies that reach almost every part of the economy – that can have the biggest effects. The Productivity Commission's early estimates suggest that AI is likely to add more than 4% to labour productivity over the next decade. This would translate to an additional $116 billion in economic activity – equivalent to boosting incomes for each Australian by $4300 a year.

“I think even more exciting is that AI could accelerate innovation itself. Whether that’s new medical breakthroughs, climate technologies, or even new economic theories… if AI can speed up the rate of discovery, it could supercharge productivity.”

However, there are potential risks, and Ms Wood suggested governments should address gaps within existing regulatory frameworks. "What we want to avoid is broad technology-specific regulation that might stifle the upside to AI technologies," she said. “Much of the debate when it comes to industrial relations policy is how much of the ‘economic pie’ should go to capital versus labour inputs to production. We’ve largely stayed away from that.” 

Learn more: When productivity meets reality: Why working harder isn't the answer

What would help businesses adopt new technology in ways that lift rather than hinder productivity? One key is ensuring industrial relations policy maintains flexibility while still supporting fair wages and conditions. “Enterprise agreements should not be used to restrict businesses from adopting tools and technologies that would improve productivity,” said Ms Wood. “That’s especially relevant in the AI world. Workers and unions will naturally want to be consulted, but constraining firms’ ability to adopt new tech would be a big drag on productivity growth.” 

Prof. Holden echoed Ms Wood's observations and concluded: “AI is our biggest opportunity when it comes to boosting productivity. We must avoid knee-jerk regulation before we even know what AI really is, what it can be, how far it can go.”