Selling Australia’s productivity (growth)

Students of Economics and Econometrics! This is not how you use graphs. Graphs require Titles and Captions.

Kevin Rudd is in trouble! Caught red-handed with a (leaked) Labor policy briefing discussing how Labour would spin the productivity numbers to make Howard look bad. I can see the headlines:

Labor Plays Game!

Crazy. The briefing recommended using figures from the May budget instead of recent national accounts figures, the result being less-to-no growth in productivity. Specifically, it discusses the less-than-historical-norms rates of productivity growth – a key ingredient in long-run economic growth, and one of the things for which we require governments (instead of politicians).

That Labour are trying to turn the numbers to their advantage at election time is hardly surprising. The policy briefing, moreover, is a good deal more in-depth than the few paragraphs and Prime-Ministerial sound-bytes are making it out to be. In any event, I don’t think this is a great political move, as it stands. Productivity (as Labor’s leaked document states) isn’t much for a short-run numbers game, because the short-run numbers don’t mean anything. Using growth or other figures for a couple of quarters is also not particularly informative. If productivity slow-downs are structural, then they’re problematic, and certainly cause for political threshing. Productivity, however, isn’t something that grows smoothly, but rather in fits and starts.

Here is what I’d like to see the media throw up on our TV screens (cue that cool day-dream/flashback thing they had in Wayne’s World).

In terms of productivity, we are on what is called the ‘flat of the curve’. My undergraduate textbook uses the following example for the per-worker production function:

new-picture-1.png

We use this to talk about the important of technological change in long-run economic growth (in today’s post, the equivalent of ICT, or Information and Communications Technology). One can see that Capital Deepening (increasing capital – machinery – per worker) produces diminishing returns. Economic growth will tail off and die – unless ICT change causes the per-worker production function to shift upwards.

So, important? Fyeah.

new-picture-2.png

Hence the importance of a structurally sound economy, in terms of labour, manufacturing, communications, etc. Total Factor Productivity is stitched together thus:

new-picture-7.png

There are two methods open for us: using ABS data or the Diewart-Lawrence data (read this if you really want to get into it). Using each, we get the following figures (forgive the sizes – WordPress is killing me here. Amongst other things, it has jumbled the files with the thumbnails – I can hardly tell which is which)

new-picture-6.png

So we have productivity growth, but not much – not much scope for electioneering, anyway. Moreover, the latter-year’s decline is not especially worrying, relative to long-term trends

new-picture-3.png

This is why period-peaks, or period-averages, are more relevant for measuring and comparing productivity. What Labor will want to discuss is the underlying change in productivity, which includes a decline from manufacturing and agriculture (the last one not at all surprising):

new-picture-11.png
And:

new-picture-9.png

For Labor, if it could even get the media this far, the importance of ICT-based factors in total factor productvity is the element with political gain attached:

new-picture-8.png

I’ve seen a few reports discussing this, even down to the effects high-speed internet access in the workplace can have on electronic commerce. How much moreso in rural areas, where access to high-street goods might only be available thus? And what effect might it all subsequently have on declining agricultural productivity?

This is where all the broadband stuff comes into play, particularly considering that, despite all of this work (most of the above through either the ABS or Australia’s Productivity Commission), investment in communications has been down for most of the period of interest:

new-picture-10.png

That was IT investment – I lopped off the headings, and I can’t be assed going to get them again.

This, to me, is Labor’s hold-all, from a policy-making/electioneering perspective. Not ‘big-p’ Productivity, because it’s relatively meaningless – and relatively meaningless = both sides can be right, wrong, or make no sense. It will be all heat and no light. If Labor want to get specific in relative terms, it can promote structural changes to move us up in the world:

new-picture-13.png

But it’s hard to say what will do that – labour market restructuring may or may not:

new-picture-4.png

So chasing after America, for example (who are ahead of us)

new-picture-5.png

by way of their IR laws is no guarantee of anything.

So. Fun with graphs aside, I’d like to see Labor do something different with the idea of productivity, the structural soundness and future character of the Australian economy. Just turning one year of number onto another set of Liberal’s number like some kind of Pokemon – Election Edition would be a real wasted opportunity.

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