The amount of valuable ‘stuff’ Australia produced has failed to keep up with the number of hours workers clocked in for, with labour productivity in the nation falling 3.7% over 2022-23.

The Productivity Commission revealed the drop was largely driven by an increase in the number of hours worked per person, which climbed by nearly 7% last financial year.

Further, companies have been hesitant to invest in the resources that could increase productivity among employees, as evidenced by Australia’s falling capital-to-labour ratio.

“This data shows that this pandemic ‘productivity bubble’ has well and truly burst,” Productivity Commission deputy chair Alex Robson said.

Labour productivity directly impacts Australia’s economic health and growth, making its mark on wages, employment, and public services.

Strong productivity typically allows businesses to offer better products and services at lower prices, helping to increase standards of living.

Slowing productivity, on the other hand, is likely bad news for inflation.

Wage growth without an accompanying increase in productivity can fuel inflation, the very beast the Reserve Bank of Australia is aiming to slay by keeping interest rates high

For that reason, the central bank has long flagged it as a major concern going forward.

Labour productivity’s 3.7% fall doesn’t compare well to the measure’s long-term average growth rate of 1.3%. 

It comes after population growth and sliding productivity saw the nation officially slipping into a per capita recession in September last year.

“We now have a clearer understanding of what’s behind Australia’s productivity slump,” Mr Robson said.

“Australians’ incomes grew in 2022-23, mostly because they worked more hours. But productivity growth is about working smarter, not working harder or longer.”

There might be more to the rising number of hours worked by employees than initially meets the eye. 

The years prior to last fiscal year encompassed the pandemic period, wherein Aussies worked fewer hours thanks to lockdowns but economic output largely continued unharmed. 

It’s unlikely the economy will be able to support a further major increase in hours worked, anyway. 

The labour market is still incredibly tight, as the latest unemployment figures show.

“We won’t be able to rely on working harder or longer as a source of income growth moving forward,” Mr Robson said.

“What’s worse, we know nominal wage growth without productivity growth can fuel inflation. 

“Sustainable, long-term wage growth can only be realised by securing productivity gains.”

Businesses aren’t investing in productivity tools 

Meanwhile, Australia’s capital-to-labour ratio fell faster than labour productivity.

The ratio measures how much capital each worker has access to.

It dropped 4.9% last fiscal year – the largest fall ever realised. 

“So, while a record number of Australians had jobs, employers didn’t invest in the equipment, tools, and resources that are needed to make the most of employees’ skills and talents,” Mr Robson said.

“Further capital investment would help turn our strong employment growth into strong productivity growth."

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