Australia’s long-term productivity experience

The COVID-19 pandemic has generated Australia’s worst recession since the Great Depression and brings to an end 28 years of continuous economic growth.

“Over the last two centuries, Australia has experienced several severe recessions. While economic growth has often rebounded quickly, the labour market has taken longer to recover,” Chair of the Productivity Commission, Michael Brennan said.

Labour markets are often weak long after recessions end. In some cases, unemployment has remained high for over a decade and ‘hidden unemployment’ can mask the real extent of unemployment.

A new research report from the Commission emphasises the importance of policy in improving relative living standards and increasing productivity.

Recessions can also induce fundamental change to policy settings. The aftermath of the 1890s recession saw the establishment of the ‘Fortress Australia’ approach – with trade protection, wage arbitration and government monopolies in key industries.

The 1930s saw the worldwide rise of trade barriers. By contrast, the early 1980s and early 1990s saw a fundamental rethink of Australian policy, focused on openness to trade, competition and greater flexibility.

The report shows that Australia has always been a rich country, but productivity growth rates have varied over time.

“Almost all of Australia’s long term increases in income are due to productivity growth. But the path has not always been smooth,” Mr Brennan said.

The microeconomic policy reforms of the 1980s and 1990s coincided with – and likely contributed to

– a productivity boom in the 1990s, in which Australia’s productivity grew at its fastest rate in the two decades before or after, with Australia’s per capita income growth surpassing that of all G7 economies.

“Looking to our history provides some lessons for the future – including the importance of openness to trade and investment, competition and flexible regulation of product and labour markets,” Mr Brennan said.

Being a high productivity economy in the 21st century relies on having a high productivity service sector.

The forces that drive innovation and productivity growth in services might look different to those which achieved such stellar gains in agriculture, mining and manufacturing. This will require new policy approaches, and a new research agenda to support it.

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