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

2006 No.3 Western Australian Economic SummaryProductivity and Prices by SectorThe relationship between productivity and prices in the resources sector iscentral to understanding the causes and consequences of the resource boomand mining productivity trends in recent decades.In principle, three groups could benefit if an industry is enjoyingproductivity growth ahead of other sectors – shareholders, in the form ofhigher profits; employees, in the form of higher real wages; or customers, inthe form of lower relative prices. It may be possible for capital or labour tocapture the benefits of higher productivity in the short term, but in acompetitive environment such benefits are likely to be eroded bycompetition 1 . In the longer term, customers are likely to be the mainbeneficiaries, and industries with relatively high productivity growth arelikely to be those with relatively low growth in output prices.This account fits the evidence in Australia fairly well. Figure 40a shows aclear relationship between long-run average productivity growth and outputprice growth by industry in Australia between 1989-90 and 2005-06 2 .Until the late 1990s, the mining industry typically enjoyed productivitygrowth somewhat ahead of the average for the rest of the economy, and itsrate of output price growth was somewhat lower (Figure 40b).This is consistent with the Prebisch-Singer hypothesis, which holds that theprice of commodities relative to manufactured goods decreases over time.The reasons for this are low income-elasticity (as people’s income increases,their consumption of basic commodities grows less quickly thanconsumption of manufactured goods or services), and the relatively stronggrowth of primary industries’ productivity 3 .In the long term, global commodity prices have shown a trend declinerelative to other goods. Cashin and McDermott found that the real long-termdecline in commodity prices is about 1.3% a year over almost 140 years(from 1862 to 1999), albeit with considerable short-term volatility and somefairly prolonged periods of marked deviation from that trend (Figure 41).1 Unless there is a scarce factor of production, e.g. a lack of skilled labour.2 This methodology was adapted from Philip Lowe’s 1995 study of the relationshipbetween productivity growth and relative wages. The start date for the chart data –1989-90 - is the earliest for which both price and productivity data are available.3Analysis by the staff of the Commonwealth Treasury suggests that thePrebisch-Singer hypothesis does not hold for Australia, and that the prices ofcommodities in the long term show no declining trend compared to prices ofmanufactured goods (Grant et al, 2006). This mainly reflects the fact that thecomposition of Australia’s commodities production has tended to shift towardsrelatively high-priced commodities over time – a fixed weight basket of commoditieswould show a downward trend. It should also be noted that the real long-runcommodity price data in Figure 41 compare commodity prices to the general pricelevel. Grant et al point out that, compared to manufactured goods prices (which tendto grow less quickly than services prices), commodity prices rose in the second halfof the 20 th century.Department of Treasury and Finance 61