Can incoming Productivity Commission Chair Danielle Wood solve the mystery of Australian productivity?

Wood has joined an international squad of sleuths to solve a problem that’s now two decades old. As the incoming head of Australia’s Productivity Commission, Wood must try to solve the productivity mystery.

It has largely emerged over the past quarter-century – productivity growth has pretty much continuously fallen. And nobody can convincingly explain the fall.

Wood is not giving media interviews about her appointment. But Public Accountant spoke with her about just this productivity mystery shortly before that appointment was announced. When we spoke at the end of August, another person – Victorian public servant Chris Barrett – had been announced as stepping into the role. Then Barrett withdrew to become Victoria’s Treasury secretary.

Wood’s comments to Public Accountant tell us something about where she will take the Commission, and about her approach to the Great Productivity Mystery.

She is optimistic that technology, in particular, can boost productivity growth again in the coming years. But she also believes that productivity growth will not be revived by “a single lever or a magic bullet”.

“You need to move on a whole lot of fronts,” she argues.

The great productivity mystery

The challenge that Danielle Wood confronts started at the end of the 20th century. In the late 1990s, productivity was growing healthily. The vital figure technically known as “labour productivity growth” typically topped 2% a year. For the Productivity Commission, the late 1990s was an age of plenty.

In technical language, productivity is the quantity of outputs we produce with a given amount of inputs, such as labour and capital. Productivity growth is an increase in the amount we achieve with the same amount of labour and capital.

And it’s as close as economics comes to magic, in that it changes the world around us and our experience of each day. Over time, productivity growth transforms our societies by letting us do more with less. Deeper pools of capital and labour play a part, but by far the biggest spur to productivity growth is learning. Over the decades, and especially since about 1870, we have learnt new ways to work smarter, not harder.

Productivity growth is what has made the rich nations so rich and incomes so high. Especially in the past 150 years, its effects have been startling. More productive medicines mean that while the staggering wealth of the French King Louis XV could not save him from death by an ordinary case of smallpox, today’s $10 vaccines can lower our risk of death from many diseases to almost zero.

Productivity growth is the reason why a technician with a modern industrial loom can churn out huge bolts of cloth in the time it took a weaver 300 years ago to produce a few squares of hand-woven linen.

Productivity growth explains why you can do more today with a $100 smartphone than you could in 1987 with a $10,000 handheld phone and a $10,000 PC put together.

Indeed, productivity’s magic is hard to overstate.

“Productivity isn't everything,” wrote Nobel-winning economist Paul Krugman, “but in the long run it is almost everything”.

When Australia in 1998 set up the Productivity Commission – the first body of its type – most economists quite reasonably thought that strong productivity growth would continue. People kept coming up with new ways to make more things at lower cost, to grow more crops in less space, to compute and communicate in ways they hadn’t before.

In a 2003 paper for the United States National Bureau of Economic Research, a leading economic research institution, prominent economist Brad DeLong asked: “Will this higher level of productivity growth persist?”. By his reckoning at the time, it was likely to.

And then something happened that neither DeLong nor most other economists had expected: the magic began to fade. The longer the 21st century went on, the less productivity grew in advanced nations.

In Australia it dropped from 2.4% in the 1960s and 1970s to 2.2% in the 1990s, and then down to 1.1% in the 2010s. In the past 12 months, Australia’s 10-year average labour productivity growth has slipped below 1% a year.

For the Productivity Commission’s outgoing chair, Michael Brennan, retiring after five years with this mystery unconquered may well feel like a defeat. But Brennan can take solace from this fact: The mystery is global, and is unconquered by economic thinkers and policy makers from the US to Germany to Japan.

Even as Australia and other rich nations seem to be conquering that scourge of the late 1900s, unemployment, this has not been accompanied by higher productivity growth. Instead we’ve seen the reverse – the two-decade slowdown in global productivity growth.

Solving this issue is critical. And Wood faces no shortage of suggestions about why productivity growth has fallen.

AMP chief economist Shane Oliver points out that ideas range from labour market over-regulation to increased market concentration to confusion over climate policy.

The Institute of Public Accountants also catalogued many reasons in its 2018 Small Business White Paper, Small Business: Big Vision.

Champions of broad reform

One school of thought on Australian productivity emphasises that it could be boosted substantially by many well-understood reforms, if only a government would make them. The Productivity Commission itself listed 71 of these changes in March 2023, in its massive nine-volume report Advancing Prosperity.

They range across the economic landscape from workforce and workplace issues to competition, government service efficiency, digital technologies, and the cost of emissions reduction.

Most of these ideas have been around for years, but political leaders have taken up relatively few of them. AMP’s Oliver recognises few champions for this broad agenda outside the Productivity Commission.

In his 2023 Shann Lecture in August, the Productivity Commission’s first chairman, Professor Gary Banks, suggested the current Commission knows very well that political leaders don’t want to embrace its ideas.

For instance, Banks argued, in 2013 the Coalition effectively demonised market pricing as a way to lower greenhouse emissions, calling it “a great big tax on everything” – even though it is the most efficient tool we know of for that job.

Similarly, Banks said, since 2007 both Labor and Coalition federal governments have neglected the Commission’s suggested changes to workplace agreement arrangements.

Banks argued that much of what the current federal government has proposed “appears more likely to impede than promote the enterprise ‘dynamics’ on which, as Treasury has stressed, productivity growth and well-paid jobs depend”.

Advocates for a new approach

Other players in the productivity debate – including Federal Treasurer Jim Chalmers and Assistant Treasurer Andrew Leigh – take a slightly different stance.

In recent statements Chalmers in particular has suggested that in future the Commission should give more emphasis to building workforce skills, creating competition for big business, encouraging renewable energy and adopting new technology.

Leigh, a decorated former economics professor, has also stressed the importance of “business dynamism”. That concept gives an important role to smaller businesses, and to counteracting anti-competitive big business dominance of the economy.

Michael Brennan, as chair of the Productivity Commission, pursued business dynamism keenly, at least before the COVID outbreak, and the IPA’s most recent Small Business White Paper also looked at the relationship between dynamism and productivity. Outgoing Reserve Bank chief Philip Lowe has lent it support.

Another leading economist broadly supporting this agenda is Dan Andrews, Research Director and Head of Policy Engagement at think-tank e61 Institute, and former head of structural analysis for the Organisation for Economic Co-operation and Development (OECD).

Government figures acknowledge “that Australia’s productivity slowdown, and its wage slowdown, have their roots in this decline in economic dynamism”, Andrews says.

He believes this acknowledgement is significant.

But some economists who emphasise the traditional Productivity Commission stance – that we need reforms across a broad front – suggest that the ideas championed by Chalmers and Leigh are not a full diagnosis of our problem.

Professor Stephen King, co-author of the nine-volume Productivity Commission report, wrote in a May paper that business dynamism and reduced competition in particular were not sufficient to explain falling productivity growth.

Wood: Likely to steer a middle course

Wood argues that there is some truth in all these perspectives. A career economist, she has been immersed in productivity issues in her role as CEO of the Grattan Institute. She believes some of the causes of Australia’s productivity growth slowdown are common to advanced economies and unlikely to be fixed by government.

As Wood argues, our inexorable shift towards a services-dominated economy has pushed productivity growth down, as it has in most advanced economies. She notes, for example, high-quality aged care “needs a certain number of people for high-quality care services, and that number doesn't change much over time”. This is a classic economics problem known as ‘Baumol’s cost disease’. But it’s also a timely one to raise – productivity growth efforts must, this example shows, take care not to succeed at the expense of vital in-person services.

Wood also notes that technological change in advanced economies is not boosting productivity growth the way it did in the 1990s, or the 1960s.

Those two ideas alone might explain much of this century’s productivity slowdown. They also suggest it could continue for many years yet.

But while identifying some underlying reasons for the slowdown, Wood is committed to pushing for productivity-enhancing policies.

“I don't think there is a single lever that you can say ‘doing that is going to transform the economy and unleash growth’,” she says.

“It's a whole series of things.”

She cites reforms that help us embrace technology and improve competition. She also refers to “reforming cities and helping people live closer to high-productivity jobs”, a priority shared by such disparate groups as the Centre for Independent Studies (often identified as centre-right) and NSW’s centre-left Minns government.

Wood’s comments on reshaping cities point to a more general tendency: as Grattan’s leader, she has often gravitated to productivity reforms that discomfit both sides of politics equally.

As well as overseeing Grattan’s sustained criticism of Victoria Premier Daniel Andrews’ $100-billion-plus Suburban Rail Loop project, for instance, she has criticised the Andrews government for lack of transparency and rosy Budget projections. But she has also been careful to point out the fiscal failings of the plans of both Victorian and NSW Coalition governments.

Peter Tulip, chief economist at the Centre for Independent Studies, says Grattan under Wood has been “skilful at picking issues on both sides of the fence to minimise any perception of partisanship”.

Wood’s recent speeches and articles show a slightly eclectic mix of left-wing and right-wing policy beliefs. In a 30 August speech in Hobart, for instance she argued for several key public policy ideas: improving maths and reading skills, improving conditions for renters, taking tougher action to reduce global warming, cutting government borrowing, and taxing superannuation earnings in retirement.

Tulip rates Wood as a good appointment. While he sees her as “more publicly sympathetic to Australian Labor Party values” than her Grattan predecessor John Daley, he notes that may help her persuade ALP members to accept Productivity Commission recommendations. And he believes she has the runs on the board.

“The CEO of a think-tank that regularly delivers substantial contributions to the policy debate is an ideal candidate to be running the Productivity Commission,” Tulip says.

The rest of Wood’s CV also suits a Productivity Commission chair. She started her career at the Commission in 2002 as a senior research economist. She’s well-armed for any debate on greater economic dynamism: along with her economics masters, she holds a second masters in competition law and spent several years as a senior staffer at Australia’s competition watchdog, the Australian Competition and Consumer Commission (ACCC).

She brings a strong reputation among economists, too; from 2019 to 2022 she was president of the Economics Society of Australia.

High stakes and low expectations

For incoming Productivity Commission chair Wood, the stakes are high. When productivity growth slows down for long periods, incomes tend to stagnate. That can lead to social stress and even breakdown.

The economist Benjamin Friedman wrote in his 2005 book The Moral Consequences of Economic Growth that economic growth affects the moral character of a society. If productivity growth falls too low, incomes fall too. As incomes fall, Friedman suggests, many people may stop seeing the social system as legitimate.

He also argues elsewhere that we see today in several nations the “predictable pathologies that emerge any time a society goes for a period like 15, 20 years without the public having a sense of getting ahead in its material standard of living”.

Expectations for productivity growth are not high. After almost a quarter-century of falling productivity growth, most leading Australian economic commentators see it staying low for years or even decades.

But Wood is at least prepared to make governments uncomfortable about it.

As she said in August: “The question is really whether after almost two decades of subdued economic reform ambition … governments have the appetite or the political capital to pursue some of the more challenging choices.”