No. 3 - Department of Treasury - The Western Australian Government

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Western Australian Economic Summary2006 No.3Figure 37MINING PRODUCTIVITYAustralia, Index, 1985-86 = 1002502001501005001985-86 1989-90 1993-94 1997-98 2001-02 2005-06Labour ProductivityMulti Factor ProductivitySource: ABS Cat. 5204.0; Productivity CommissionImports, however, have grown strongly in both volume and value terms. Asa result, net exports detracted significantly from Western Australia’s realeconomic growth in 2005-06 (see page 2) 1 – again, an intuitively unlikelyoutcome in an economy in which strong growth is apparently being fuelledby export demand.Across Australia, while the value of output from the mining sector has risen,it appears that the volume of output has not. Yet inputs into this sector haverisen rapidly, with both employment and investment increasing in responseto high commodity prices. As a result, the level of productivity in thenational mining sector has dropped sharply (Figure 37).Although state-based productivity estimates by industry are not publishedby the Australian Bureau of Statistics, it is highly likely thatWestern Australia’s mining sector has shared in this trend, both because theState accounts for a large share (45%) of the national mining industry, andbecause Western Australia has also recorded strong growth in mininginvestment and employment, but only weak growth in the volume ofmineral production.As resources comprise the bulk of Western Australia’s exports, this is likelyto also explain the weakness of export volumes in recent quarters (seepage 49).1 Note that the usual measure of ‘real’ economic growth, the chain volume estimateof Gross State Product, measures the quantity of output, not its value. As discussedbelow (see page 64) this many not be the best measure of the community’s realeconomic purchasing power at a time when the terms of trade are increasing sharply.56 Department of Treasury and Finance
2006 No.3 Western Australian Economic SummaryFigure 38LABOUR PRODUCTIVITY IN WAAnnual Growth, Gross State Product Per Hour Worked7%6%5%4%3%2%1%3.5%5.3%period average = 2.2%4.0%6.2%5.0%2.7%2.1%1.6%1.3%1.8% 1.8% 1.8% 1.7%0%-0.4%-1%-1.2%-2%-1.6%1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05Source: ABS Cat. 5220.0, 6291.0.55.003 .This drop in mining productivity may well be responsible for the decrease inthe overall level of labour productivity in Western Australia in 2004-05 andits weak growth in 2005-06. Such weak productivity growth is very unusualin conjunction with the State’s strong economic growth.This article explores the paradox of Western Australia’s strong economicgrowth and weak productivity, and considers the implications of theresources boom for the present and future welfare of Western Australians.The Productivity ParadoxThe close relationship between a country’s or state’s productivity growthand its economic welfare in the longer term is well established in economics.As US economist Paul Krugman has said (1990, p. 9):Productivity isn’t everything, but in the long run it is almost everything. Acountry’s ability to improve its standard of living over time depends almostentirely on its ability to raise its output per worker.The relationship is most direct in the link between real wages 1 andproductivity. The correspondence between real wage growth and labourproductivity growth may be fairly loose in the short term or even themedium term, if the share of national income devoted to wages compared togovernment or profits is shifting.1 Economic welfare is probably best evaluated as real consumption per capita, butreal wages are a significant determinant of consumption possibilities. Therelationship between productivity and real wages is also discussed here as it can beexpressed directly through a simple formula (see next footnote).Department of Treasury and Finance 57
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