Treasury Secretary Steven Kennedy said Australia had absorbed a large number of new workers, who were less productive, in a short amount of time.
The Treasury says an influx of new workers is the reason behind Australia’s slowing productivity over the past year.
During a recent Budget Estimates hearing, Treasury Secretary Steven Kennedy presented his department’s view on Australia’s economy.
While the federal government has been optimistic about the strength of the labour market, Kennedy acknowledged productivity was an issue, but his reasoning was different.
The latest data from the Australian Bureau of Statistics showed that employment increased by 434,900 in the 12 months to September 2024, up from 394,300 in the previous year.
Meanwhile, a recent report by the Productivity Commission indicated that labour productivity dropped 0.8 percent across the economy in the June quarter, and increased by 0.5 percent in the 12 months to June 2024.
“Labor productivity across the economy was flat in 2023-24,” he said. “This reflects, in part, a cyclical weakness in productivity because of the strength in our labour market.”
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“Initially, this cohort of new workers, on average, is less productive than the existing workforce over time,” Kennedy said.
“However, these workers will become more productive as they build skills and find jobs that are a better match to their skills. This will contribute to better labour productivity outcomes.”
Another reason for the low productivity, according to Kennedy, was “capital shallowing,” a phenomenon in which labour inputs grow faster than capital inputs.
“The capital stock cannot adjust as quickly to the rapid increase in employment because it takes time to make investment decisions and then build and install capital over time,” he said.
However, the secretary noted that once capital inputs were adjusted and employment growth slowed down, there would be an improvement in labour productivity growth.
While workforce numbers have expanded, much of it has also been attributed to taxpayer-funded government services like the National Disability Insurance Scheme.
Improving Government Service Delivery Important: Secretary
At the same time, Kennedy said Australia was not immune from the global downward trend in productivity.
“Other countries have also been bringing down their productivity longer-term trends,” he said.
“Global trends in productivity will affect the numbers here. If we are experiencing the global slowdown in productivity, it will turn up in Australia.”
Kennedy said the Treasury had revised Australia’s long-term productivity growth, downgrading it from 1.5 to 1.2 percent amid the current economic outlook.
Due to the impact of global trends, the secretary noted that it was important for Australia to focus on things that it could control, such as the efficiency of the delivery of government services, to improve productivity.
“That will make the economy, in aggregate, more productive, and get us closer to the most efficient we can be in the world, which will generate more income for all Australians,” he said.
