Australia’s productivity gap with the US is becoming embarrassing

Australia and the United States produced broadly similar economic growth over the year to the June quarter. But the latest productivity data show they achieved it in very different ways.

Productivity sounds technical, but the basic idea is simple. Labour productivity measures how much output an economy produces for each hour people work. If workers can produce more in an hour — through better technology, equipment, skills or business processes — productivity rises. Over time, productivity is one of the main ways economies can sustainably increase wages and living standards without generating inflation.

Australia's result is poor.

Real GDP grew 2.1% over the year to June, but hours worked increased 2.4%. As a result, GDP produced per hour worked fell 0.2%.

In the United States, nonfarm-business labour productivity increased 2.2% over the same 12 months. In the June quarter alone, US output increased at a 1.7% annualised rate while hours worked increased only 0.3%, producing productivity growth of 1.4%.

The measures are not perfectly identical: Australia's figure covers the whole economy, while the US measure covers the nonfarm business sector. But the direction and size of the gap are difficult to ignore.

Australia is increasing economic output largely by adding labour. America is increasingly getting more output from each hour of labour.

That matters because adding workers can increase GDP, but productivity growth is what ultimately determines whether Australians become materially better off.

The rest of the comparison reinforces the contrast. Australia has stronger employment growth, but also higher underlying inflation and substantially tighter monetary policy. See table for comparison of key metrics.