Peter Martin | Philip Lowe is right, productivity is falling. But it is not workers' fault

Reserve Bank governor Philip Lowe has begun referring to "productivity" in each of the statements he makes after each Reserve Bank board meeting.

Whereas in the past he has only said we needed to boost productivity to lift real wages (to lift wages growth above price growth), he has begun saying we need to boost productivity to justify wage increases well below inflation.

Lowe is right to say that labour productivity (output per hour worked) is falling. He's also right to say that's unusual. But it would be wrong to conclude from that that the solution is to work harder.

To the extent that productivity is in anyone's hands, it is in the hands of employers, and also in the hands of broader economic forces beyond anyone's ability to easily control. So you needn't feel bad.

Lowe has been suggesting he will only tolerate the wages growth we've got "provided that trend productivity growth picks up".

Inflation is officially 7 per cent. The bank's best guess is that the update, due in six weeks, will show it has fallen to 6.3 per cent.

Wages growth is only 3.7 per cent, and the bank's best guess is the update, due in nine weeks, will show it little changed at 3.8 per cent.

This means wages growth is below inflation and set to stay that way, but Lowe is concerned enough about wage increases that aren't backed by productivity growth that he prepared to push up interest rates further to bring them down.

As it happens, this isn't something he has said about businesses. Last month Telstra said it would lift its mobile and data charges "in line with the consumer price index, rounded to the nearest dollar".

That's an increase of 7 per cent, allowing Telstra to boost its charges in line with inflation in a way Lowe doesn't want workers to. And Telstra won't need to show it is more productive. It won't need to offer anything extra.

The official figures show labour productivity (output per hour worked) falling. Although it usually increases, and increased very fast in the 1990s, GDP per hour worked has been falling since March 2022. Since then, it's down 4.6 per cent.

But it's the sort of thing that would be expected when there's a surge in employment. Other things equal, the more hours that are worked, the less GDP per hour should be.

In the past year, hours worked have surged an extraordinary 5 per cent to an all-time high. When a cafe puts on an extra staff member it doesn't immediately mean it'll sell more food. When a childcare centre or a school puts on extra staff it mightn't produce more at all.

In the short term, the quickest way to boost measured productivity is to bring on recession and throw people out to work. Productivity jumped in the United States in 2009 after what it calls The Great Recession. In Australia, where it was called the global financial crisis because there was no recession and employment stayed strong, productivity growth slumped.

As a rule, getting people into paid work is something to be welcomed, and as a rule there's not much anyone can do to stop it, which means that a key driver of measured productivity is beyond anyone's direct control.

And there's another driver that's hard to control.

One of the biggest direct drivers of measured productivity is automation. The more that employers put in machines to increase output per worker, the greater the output per worker.

(One of the reasons it's hard to increase output per worker these days might be that the industries that are growing are those such as aged care that are hard to automate. The Productivity Commission says after growing 2.2 per cent per year through the 1990s, labour productivity grew by just 1.1 per cent per year in the decade to 2020.)

And there's something else. When the price of Australia's mineral exports booms, which it does from time to time for reasons beyond Australia's control, other non-mining businesses tend to spend less installing machines. To use the approved terminology, there's less "non-mining business investment".

Former Treasury secretary Ken Henry believes the two are connected. He says high prices for mineral exports push up the value of the Australian dollar, which makes Australian non-mining businesses less able to compete with imports and less able to see the sense in installing machines.

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He says that's what's been happening and is happening at the moment. Australians and foreigners are finding better opportunities overseas.

Australia has become a net exporter rather than a net importer of investment funds, a change Henry says isn't only because superannuation has boosted household savings.

There are all sorts of things we can do to boost labour productivity - earlier this year the Productivity Commission published a nine-volume report outlining them.

But they won't pay quick dividends, and it'll be hard going while employment remains robust (which is something we want) and minerals prices remain high (which is something we probably want).

In what has to be his most re-quoted observation ever, Nobel prize-winning economist Paul Krugman famously said: "productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker."

There are all sorts of things we can do to boost productivity, but working harder is one of the least likely to make a difference.