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

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Western Australian Economic Summary2006 No.3Figure 39GROWTH IN PRODUCTIVITY & REAL EARNINGSAnnual Average, 1990 to 20063%IcelandReal Compensation per Employee2%1%0%TrendPortugal NorwayKoreaSwedenUSAIrelandUKAustraliaCanadaGreeceSwitzerlandDenmark FinlandFranceLuxembourg AustriaNetherlandsSpainGermanyJapanItaly0% 1% 2% 3% 4% 5%ProductivitySource: OECD dataBut unless the wage share of GDP is changing, long-run growth in realwages will equal growth in real output per worker 1 . And changing theprofit or wage share of economic output is not sustainable indefinitely as ameans of generating real wage growth above (or below) growth in outputper worker.There is evidence as well as theory behind this assumption. In the longerterm, growth in labour productivity and growth in real earnings are closelycorrelated across countries (Figure 39).It is hardly surprising, then, that any deceleration or reversal in productivitygrowth causes consternation. Australia’s deceleration in labour productivityin recent years has puzzled the Reserve Bank of Australia, with the Bank’sGovernor Glen Stevens recently observing that Australia’s labourproductivity growth has slowed to “approximately zero” in the past threeyears (Stevens, 2006, p.15).1 If:Real GDPEmploymentAverage Real WageAggregate Real WagesLabour ProductivityLabour Share= G= E= W= Y = W x E= P = G ÷ E= S = Y ÷ GP = G ÷ E so G = P x EW = Y ÷ E so Y = W x ES = Y ÷ G = S = ((W x E) ÷ (P x E)) = W ÷ PAnd P = W ÷ SIf productivity (P) growth is running faster than real average wage (W) growth, thelabour share of GDP (S) must be falling, and vice versa.58 Department of Treasury and Finance
2006 No.3 Western Australian Economic SummaryAustralia’s weak productivity growth in the past few years is due mainly todecelerating output growth. Western Australia’s productivity turnaround -from strong growth in 2001-02 to 2003-04, to a dip in productivity in 2004-05and a modest rise in 2005-06 - is more puzzling, given its generally strongoutput growth over the past few years.As noted above, it seems highly likely that Western Australia’s recentproductivity record is linked to falling productivity in the mining sector, itslargest industry. So to explore the paradox of Western Australia’s weakproductivity, it is necessary to explore why mining productivity should befalling so sharply in the middle of a resources boom.Mining Sector ProductivityFigure 38 on page 57 shows productivity in the Australian mining industry.For multi-factor and particularly labour productivity, the recent trend hasbeen markedly downwards. Although state-based estimates of productivityby sector are not produced by the ABS, it is plausible thatWestern Australia’s mining productivity has followed a similar trend.At least three factors could explain why a boom in commodity prices mightlead to a fall in mining sector productivity, at least in the short term.Firstly, the rise in prices makes it profitable for miners to exploit previouslymarginal or uneconomic resources that yield a lower volume of output for agiven level of capital and labour inputs. Devoting substantial additionalresources to achieving modest additional output may be highly profitablefrom the business’s perspective, even if it means a fall in productivity asconventionally defined (the volume of output per unit of inputs).The 75% increase in employment in Western Australia’s mining sectorbetween September 2003 and September 2006 suggest that businesses areseeking to produce more from their existing assets and resources.Rising mining investment levels similarly indicate that the capital stock islikely to be expanding, although as the Australian Bureau of Statistics doesnot publish capital stock data by state there are no official data describingtrends in Western Australia’s capital stock 1 .The second and related factor is that the depletion of resources that arecheap and easy to exploit may necessitate the use of less productiveresources to meet rising demand. This, too, could lead to rising costs andfalling productivity as rising demand is met from resources that are morecostly to produce.1 National data show that the mining sector’s real net capital stock rose by 25.2% inthe five years to 2005-06 (ABS Cat. 5204.0, Table 89).Investment cannot necessarily be assumed to generate growth in the capital stockbecause of depreciation and because some investment risks may not pay off,resulting in capital expenditure exceeding the economic value of the assetpurchased.Department of Treasury and Finance 59
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No. 3 - Department of Treasury - The Western Australian Government

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