Despite recent employment growth, worker productivity in Australia dropped in 2022-23, according to the annual report of the Productivity Commission.

The 3.7% decline was attributed to a significant increase in hours worked without a proportional increase in output growth. As a result, incomes grew mainly because of working longer hours rather than working smarter.

With labour market participation near its record high of 67%, the potential for generating higher incomes through additional workers or hours on the job is limited. Meanwhile, the lack of productivity growth poses risks of fuelling inflation without sustainable wage growth.

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Limited investments into productivity

The report criticised employers for their inadequate investment in equipment and resources to enhance productivity. The capital-to-labour ratio declined by a record 4.9%, indicating a failure to maximise employees' skills and talents effectively. Increased capital investment could have also translated the strong employment growth into productivity gains.

“While a record number of Australians had jobs, employers didn’t invest in the equipment, tools and resources that are needed to make the most of employees’ skills and talents,” said Alex Robson, deputy chair of the Productivity Commission.

Robson added: “Productivity growth is about working smarter, not working harder or longer.”

The Reserve Bank of Australia also cautioned wage increases must be accompanied by productivity gains to prevent inflationary pressures, The Guardian Australia reported.

Poor productivity outcomes could lead to higher costs for businesses and ultimately higher prices for consumers. The decline in hourly output per worker was partly attributed to the hiring of less experienced or less productive labour, particularly in low-productivity sectors such as retail and hospitality, the Commission reported.

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Implications of lower productivity for employers

1. Need for increased investment in equipment and resources to enhance productivity

2. Risk of higher costs and reduced competitiveness without productivity gains

3. Importance of aligning wage increases with improvements in productivity to avoid inflationary pressures

4. Potential for enhanced employee performance and job satisfaction through effective use of resources

5. Opportunity to capitalise on strong employment growth by fostering productivity gains

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6. Need to adapt management practices to support remote and flexible work arrangements for sustainable productivity

7. Challenge of retaining skilled workers amid rising competition and labor market fluctuations

8. Potential for long-term growth and profitability through strategic investments in technology and employee development

9. Importance of fostering a culture of innovation and continuous improvement to drive productivity enhancements

10. Responsibility to balance short-term financial goals with long-term productivity and sustainability objectives