glen stevens : mining boom for few more years!, page-7

Boom slowing? Time to re-balance the Oz economy - away from mining and become more productive.

Where's the Productivity Problem?

Over the past century and a half, real wages have kept pace with productivity. Real wages growth averaged just 1.65% per annum and productivity growth averaged 1.7% per annum over that period! It didn’t happen every year, but evened out over time.

The pattern of productivity growth in the 20th century and into our new century is shown below.

Since 1980, productivity growth has averaged slightly lower growth (1.6%), but wages growth has averaged just 1.1%. However, wage earners are sharing in the productivity growth indirectly nowadays via company profits going into their superfunds. So it is probable that, over time, the linkage between productivity and total worker benefits remains closer than wages alone.

But poor productivity over recent years is an issue that isn’t going away. So where is the problem? The second chart shows the aggregate growth in productivity over the five years to December 2011.

There has been negligible productivity growth overall, as is well known. Indeed, seven of the nation’s 19 industry divisions had negative performance, headed by Mining (aggregate 51% decline) and Utilities (aggregate 35% decline) – these are shocking.

The other divisions in the red were Hospitality (15% decline, mainly due to the high Australian dollar and the global financial crisis); Administration Services, including HR services (10% decline); and three others with minor negativity.

The third chart shows the growth in real wages over the same five-year period. To add insult to injury, two of the divisions with the fastest growing wages also had the worst (severely negative) productivity. At least the gap between the high wages growth in Construction was nearly matched by its growth in productivity.

The bottom line of these disconnects is the degree of both overpaying and underpaying of wages compared with the productivity in each industry division. The final chart does this calculation.

Eleven of the 19 industry divisions paid out more in wages than they achieved in productivity growth, although the gap was minor (if not insignificant) in the case of Recreation & Arts. The overpayment of employees in the Mining and Utilities industries is of real concern. The minerals prices boom explains why it could even happen in the Mining industry, while government ownership of much of the Utilities division (electricity, gas and water) and union membership probably explains the latter – although there may be other factors at work too.

The Mining division disconnect has serious implications for the medium to long term. This industry accounts for close to one-tenth of the nation’s GDP, but will face static or falling prices in this decade and – in the very long term – possibly falling volumes. The current situation does not augur well for the adjustments that will need to take place in employment numbers and/or wages as a result – either or both will affect our GDP growth at some stage. A falling Australian dollar will, hopefully, buffer this fall for some of the period.

And with the carbon tax now in place, the severely negative productivity in the Utilities industry adds a further unwanted impost on utility prices and business competitiveness.

We do not have to look far for the villains causing our dreadful medium-term stalling productivity growth. Fair Work Australia cannot yet be blamed for this dilemma – it hasn’t been in effect long enough – but, in its present form, it may not contribute to the solution either, and may indeed prolong necessary adjustments.

We could also spare a thought for those eight industry divisions that appear to be underpaid, indeed severely underpaid in several cases. We have escaped the ravages of the global financial crisis, but if the disconnects covered above are not addressed – and soon – we will endanger our fortunate membership of the fast-growing Asian region. This region now accounts for about four-fifths of our trade in goods and services, which in turn is heading for one-quarter of our GDP. Time to get serious about a serious problem.

Source: Phil Ruthven, IBISWorld, Melbourne, VIC 3000