Productivity | the single statistic ringing alarm bells

A positive development since the emphatic Labor win at the election is the renewed discussion about the potential for productivity-enhancing economic reforms.

Encouragingly, this is not being ruled out by anyone. The Treasurer has colourfully noted that the primary economic task for the first Labor Government was to tackle inflation while keeping an eye on productivity. This term, he said, the task is to tackle productivity while keeping an eye on inflation.

Measuring productivity is inherently difficult because much economic activity is not market-based — that is, goods and services are provided without clear price signals to indicate demand and supply. For example, much of the health and education sectors operate with heavy taxpayer subsidies and are delivered at little or no cost to the user.

Nevertheless, the most widely used and cited figure to track productivity is Gross Domestic Product (GDP) per hour worked. By using the ‘hour’ as the base, this measure accounts for changes in the labour market, including the rise in part-time and flexible work arrangements.

As shown in the chart below, the current index for GDP per hour worked is sitting at 99.10. Alarmingly, this was the estimated index level in 2016. In other words, if accurate, productivity in Australia has not increased for eight years. That’s a shocking statistic.

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Technical further explanation of indexing and benefits of an index for tracking GDP per hour index

An index is a statistical construct used to track changes in a variable over time relative to a base period, which is typically assigned a value of 100. Rather than reporting the actual level of a quantity (e.g. dollars per hour), an index shows how that quantity changes in relative terms — as a percentage movement from the base period.

In the case of GDP per hour worked, the Australian Bureau of Statistics (ABS) uses an index to represent labour productivity. This metric shows how efficiently labour is being used to produce output in the economy.

Why is an index appropriate for tracking GDP per hour worked over time?

1. Adjusts for structural changes: The absolute value of GDP per hour worked can be influenced by many structural factors (industry mix, relative prices, exchange rates). Using an index focuses on changes in productivity, abstracting away from level effects.
2. Facilitates comparison: An index allows you to compare growth rates across different time periods or countries, even if the starting levels are different or not directly comparable.
3. Highlights trends: By holding the base constant, the index makes it easier to identify long-run productivity trends, growth cycles, and inflection points without being distracted by the raw scale of the underlying numbers.
4. Avoids distortion from inflation: The ABS constructs the GDP per hour worked index in real terms — meaning it's adjusted for inflation — so the index reflects real output per hour, not just nominal increases in prices or wages.
5. Simplifies complex aggregates: GDP per hour worked combines national income and total hours worked. Using an index summarises this into a single, trackable figure.

Example:

If the index was 100 in the base year (say 2012–13) and is 110 in the latest year, that tells us productivity has improved by 10% over that period — without needing to know the raw dollar value of GDP or hours worked.