Can Australia match US productivity performance?

Staff working paper

This paper by Ben Dolman, Dean Parham and Simon Zheng was released on 8 March 2007. This paper examines Australia's future productivity growth prospects and, specifically, whether it is feasible for Australia to match the performance benchmarks set by other countries now and in the foreseeable future.

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Key points
Contents

International comparisons of productivity at a national level are useful, but should be treated with care. Comparisons of productivity performance are more meaningfully made at an industry level.

The United States can still be taken to be the world's productivity leader in an aggregate 'technological' sense. Some European countries now have higher levels of productivity, but that reflects industry mix (oil production) and policy and institutional distortions in labour markets (which have not brought overall gain in average living standards).

Australia's catch up toward the US aggregate level of productivity since the 1950s has been generally weak. One positive (albeit transient) movement came in the 1970s, but it was associated with the US productivity growth slowdown and some unsustained influences in Australia. Another sharp rise came in the 1990s, when Australian productivity growth accelerated sooner and faster than in the United States.

A sizeable gap between Australian and US productivity levels remains. However, the aggregate level of US productivity should not be regarded as a realistic target for Australia to achieve.

The aggregate productivity comparison masks a diversity of experience at the industry level. Although industry data are of poorer quality, it appears that some Australian industry sectors have performed at the productivity frontier and have participated in frontier shifts along with US industries. Large gaps remain in other areas: manufacturing, wholesale trade, retail trade, utilities (electricity, gas & water), communications and finance.

Australia's relative performance is constrained by differences in industry presence and composition and in access to gains from specialisation and scale. These in turn are linked to fundamental factors of history and geography, including Australia's remoteness from large markets and its pattern of settlement.

Based on an industry-by-industry assessment, Australia appears well placed to at least maintain its overall position relative to US productivity, even with resurgent US productivity growth.

It also seems feasible for Australia to go further and to catch up some distance on US productivity levels. However, this will not necessarily come automatically. Further policy and institutional change may be needed.

Preliminaries
Contents, Preface, Abbreviations, Key points

1 Introduction and summary
1.1 Background
1.2 What the paper does and says

2 The international productivity frontier
2.1 Productivity and technological leadership over the 20th century
2.2 Frontier shifts: focus on the United States
2.3 Future frontier shifts: the outlook for US productivity growth
2.4 Summary and implications

3 Catch-up and convergence
3.1 Varied evidence of catch-up
3.2 Catch-up and convergence within industries
3.3 Summary and implications

4 Australia's historical performance
4.1 Australia's productivity performance in a convergence perspective
4.2 Industry contributions
4.3 Summary and implications

5 Geographical constraints
5.1 Remoteness and sparseness
5.2 Mapping to industry gaps
5.3 Possible effects on future performance
5.4 Summary and implications

6 Education
6.1 Differences in education and skill
6.2 Mapping to industries
6.3 Future relevance and effects
6.4 Summary and implications

7 Concluding remarks
7.1 The scope for catch-up
7.2 Broad policy implications

A The industry dimension of US productivity

B Comparisons of industry productivity levels

C Projections of educational attainment

References