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NSW Economic Society Lunchtime Seminar Series 9 th May 2007 Can Australia Match US Productivity Performance? Dean Parham Productivity Commission, Canberra ( based on paper by Ben Dolman, Dean Parham and Simon Zheng)
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2 Motivation n Long term view of productivity performance n Where should Australia set its sights ? compared with the productivity performance of other countries
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3 Comparisons of GDP per hour worked 1950 3 groups Overtakers Movers Stagnators 2006
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4 Focus n Can Australia reasonably aspire to match US productivity? Support from catch-up theory n Can Australia go further? Can it overtake the US (as other countries have done)? Can it aspire to match the world’s best?
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5 Answers n Some particular features of the ‘overtakers’ story have a downside Would not necessarily be wise for Australia to emulate n Some ‘fundamental factors’ inhibit Australia’s ability to catch up completely to US productivity levels But we can still be a ‘mover’
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6 What are these ‘fundamental factors’ that inhibit complete catch-up? ‘Deep’ economic conditions resource endownments economic geography Comparative advantage Economic structure Potential level of productivity
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7 Outline n International patterns of productivity leadership and catch-up n Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance
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8 Productivity leadership (GDP/hr) 2005 USD per hour Industry mix?
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9 But has high productivity come with a tradeoff? GDP Population Average income = Hours worked Population GDP Hours worked = Labour utilisation Labour productivity = Taking an ‘economic welfare’ perspective:
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10 Relatively high European productivity came with low labour utilisation Australia France United States = 100
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11 European ‘trade off’ n Policy interventions and institutional arrangements tax structures, welfare/work arrangements, union power, legislated hours reductions, high minimum wages, low wage differentials n have had joint influence on lower utilisation high unemployment, especially low skilled fewer average hours higher productivity capital intensity high skilled, low intensity
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12 Structural productivity levels, 2002 United States = 100 Adjusted for differences in labour utilisation
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13 So who’s the productivity leader? n Discount the European leaders Different industry mix Policy interventions and institutional arrangements have ‘contrived’ the outcome with accompanying adverse social consequences NB. Also slower productivity growth n US more relevant Broad technological and efficiency leader
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14 Outline n International patterns of productivity leadership and catch-up n Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance
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15 Aggregate labour productivity growth US (% pa) 1950 to 19732.6 1973 to 19921.4 1992 to 20051.9 Australia (% pa) 2.7 1.7 1.8 Australia (% of US) 771950 791973 841992 822005
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16 Australia’s productivity relative to US over the long term Per cent of US level
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17 Industry dimension important n Industry contributions to aggregate US productivity growth 1950-1973 Agriculture, Manufacturing (chemicals, transport equip, elect equip) 1973-1992 Machinery & computer equip (non-durables retreats) 1992-2005 ICT manufacture, services productivity (based on distribution and use of ICT)
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18 Labour productivity in major sectors, US Index, 1987 = 100
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19 MFP in selected manufacturing industries, US Index, 1950 = 100 50 100 150 200 250 300 194919591969197919891999 50 100 150 200 250 300 Non-durable goods Chemicals and allied products Durable goods Industrial machinery and computer equipment Electronic and other electrical equipment
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20 Wide variation in performance of Australia’s industries relative to US Caught up (‘Overtakers’) 2003 relativity (%) Mining, construction, transport100+ (agriculture) Movers Utilities53 Communication83 Finance & insurance67 Stagnators Manufacturing60 Wholesale trade43 Retail trade63
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21 Outline n Review international patterns of productivity leadership and catch-up n Review Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance
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22 Explanations for productivity gaps n Proximate sources MFP (~15pp) rather than capital intensity (~5pp) n Industry mix Size of agriculture, mining Manufacturing, ICT manufacturing n Geography n Education
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23 Geography n Remoteness from international markets High transport costs, less competition, less access to large markets and scale But what about Canada? n Internal geography—pattern of sparse settlement Infrastructure—mixed Transport, information/coordination, competition, scale, regulation
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24 Industry mapping n Manufacturing external isolation, internal fragmentation, small scale n Wholesale population reach of distribution centres, fragmentation, scale n Utilities fragmentation n Transport efficient long-haul n Communications?
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25 Education n Average years of schooling Poor measure to rely on solely No account of quality and distribution of education n US: 13.9 yearsAust: 12.9 years n According to empirical studies, would account for some of the productivity gap
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26 But reflects differences in past decades
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27 Gap will narrow with cohort effect
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28 Industry mapping n Not enough information n There are education gaps within industries But can be different skill requirements in the two countries n Different industry mix, with different skill requirements in different industries n Can therefore be differences for good reasons Mining engineers v. biochemists Agriculture workers v. actors
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29 Outline n International patterns of productivity leadership and catch-up n Australian/US comparative performance n ‘Fundamental factors’ that inhibit full catch-up n ‘Reasonable’ expectation for Australia’s future comparative performance
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30 Outlook n Strong outlook for US productivity growth 2¼ - 2½ % pa Durables, services n Australia can feasibly keep pace Larger agriculture, mining sectors Maintain strong growth in services (ICT-based innovation), not ICT manufacture
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31 Catch up? n Feasible to catch up some more (a few percentage points) continuation (at least) in communications, finance, utilities step up in wholesale, retail step up in non-ICT manufacturing n Not feasible (sensible) to catch up fully fundamental constraints of geography
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32 Implications n Take an industry (micro), rather than aggregate, focus on productivity gaps Importance of accurate measurement Some gaps of more relevance than others n Assess scope for productivity improvement within a welfare/comparative advantage framework eg, investments in ICT manufacture unlikely to be welfare enhancing
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33 Implications (contd) n General approach to ‘drivers’ and ‘enablers’ of productivity performance incentives (competition) capabilities (skills, infrastructure) flexibility (regulation, labour) n General view on ‘inhibiting’ factors geography human capital infrastructure institutions
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34 The end Any questions or comments?
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