Running Head: OVERALL PRODUCTIVITY OF THE ECONOMY

Overall Productivity of the Australian Economy

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Introduction
The best definition of productivity under the Australian and other contexts is, “the efficiency with which an economy employs resources to produce economic output” (D’arcy and Gustafsson, 2012, p. 23). It will remain that the most complete measure of productivity is the TFP (Total Factor Productivity), which accounts for all inputs involved in production. Normally, “the inputs are classified into capital (K), labour (L), energy (E), materials (M) and services (S)” (O'Mahony and Timmer, 2009, p. 538); the lead letters of each input are why this is called the KLEMS approach. Principally, the measures of inputs and outputs can be incorporated adjustments for quality change. Nonetheless, KLEMS approach is arduous in terms of data and that is the reason why very few countries in the world utilize this approach (Hannula, 2012). The MFP (multifactor productivity) approaches are easily implementable. The MFP approach accounts for merely two inputs, namely labour and capital. Presently, the most comprehensive measure of productivity available in Australia is MFP. Principally, labour input in the MFP ought to be adjusted for enhancements in the human capital (the quality of labour), yet as earlier hinted, this is not done in Australia at present, similar improvements to get into the MFP measure (Topp, Soames, Parham, and Bloch, 2008). Arguably, the prevailing MFP measure in Australia is more linked to market sector and it does not incorporate the efficiency of use of other inputs from other sectors, for instance, services, materials, subsoil assets, and energy
Productivity in Australia
Growth in living standards and growth in income per capita are driven by growth in productivity. The increase of new technologies significantly determines the nature of productivity growth, and how efficiently resources – fixed resources (for instance, land), capital and labour – are systematized during the economic production (Kishtainy, 2012). The named factors influence the capacity of a nation’s economy to supply services and goods and in the short run; they are not directly receptive to momentary policy. However, due to the fact that inflation pressures dictate the balance between demand and supply growth in an economy, prevailing nature or trend productivity growth is a vital determining factor of the speed in which an economy can grow in the medium period without instigating inflationary pressures (D’arcy and Gustafsson, 2012).
Equally, Mankiw (2012) explains that productivity is the accrued value of output attained from a single unit of input (p.251). For instance, a worker producing an output of 4 units in one hour, while the price of a unit is Au$50, then this worker’s productivity is Au$200. In the same context, computation of average economic productivity is attained through dividing the output value and the specific units of input (physics/time). Notably, when a production process utilizes a single process, such as labour, the above computation provides the productivity of that factor, in this instance, labour productivity. On the other hand, TFP (Total Factor Productivity) tries to give a concept of productivity incorporating numerous factors. To attain meaning in such an aggregation of factors, additional hypothesis is required; hence, it is not assumed in a general context.
Determinants of Productivity
In general, there are four determinants of economic productivity, namely, human capital, physical capital, technological knowledge and natural resources. Physical capital refers to the stock of structures and equipment that are employed in the production of services and goods. Human capital is the necessary skills and knowledge that labourers have to acquire through training, education and experience. Natural resources are input into the production process attained from nature, for instance, mineral deposits, rivers, and land. Finally, technology or technological knowledge, presents an understanding on the best possible means for producing goods and services (Gnos, 2012). In summary, Gnos (2012) expounds that technological knowledge infers to the population being appreciative of the global trends and dynamics, and human capital could imply the resources engaged in conveying knowledge to the labourers.
Economic productivity in the Australian setting has been characterised by improvement since early 1990s. Both multifactor productivity (MFP) growth and labour productivity growth has seen whole digit growth for most of this period. Most literatures have attributed the productivity growth in Australia to three possible factors. The three are developing in labour force skills, the application of more advanced information and communication technologies (ICTs), and above all, suitable policy reforms targeting improving Australian productivity (Parham, 2002). Lowe (2013) contextualizes the prevailing Australian productivity. He explains that, Australian productivity growth slowed, in the mid-2000s, compared to the vibrant growth witnessed in the late 1990s. This is partly a global occurrence. In nations whose economies greatly rely on commodity-exportation, a fast capital growth has simultaneously existed with a decline in growth of multifactor productivity. Whereas productivity growth in Australia has mainly been slower in the utility and mining industries, productivity growth has slugged in other industries (Gustafsson, 2013).
As earlier hinted, Australia’s recent slowdown in productivity is not an isolated case. It is similar and could be classified midst developed economies. However, there are variable influences on particular countries, and Australia’s economic performance is mainly determined by local or domestic factors instead of factors mutual to developed economies. To effectively understand Australia’s productivity, it's important to first develop the knowledge that productivity is a fundamental constituent of economic growth, yet it is not the only determiner or sole driver of economic growth. Notably, productivity also has various aspects and sectors in it. For instance, agricultural and mining sectors have greatly boosted the overall performance of Australian productivity, due to their substantial efficiency brought about by utilization of technology, technology, natural resources, human capital among other determiners of productivity.
Measuring Productivity
Most theoretical analysis of economic growth starts from the Solow-Swan model (Wickens, 2008). The main idea in this model is that the build-up of labour and physical capital cannot sustain continued, long term growth in output per individual, but, instead, this is sustained by the rate at which technology is changing; this rate is in other words referred to as productivity growth (2008, p.115). In the Solow-Swan model, production is assumed to be in the form of: Y=f(A,K,L); where A = Technology K = Capital L = labour A = A specific input into the model This formula can be interpreted in the forms of stock of innovation or knowledge, disembodied skills and education, the quality of cultural and infrastructure, attitudes to work and entrepreneurship, and the strength of property rights. Remarkably, fresh growth theories expound on this model, in that institution, human capital and technological growth are determined within the presented form of the model (Wickens, 2008). Microeconomic theory has extra understandings on a certain country’s position regarding its production possibility boundary, which gives the most efficient way of producing a variety of goods and services. A combination of these concepts proposes means through which a country can increase its economic growth.
Primarily, a country can revert to a greatly optimal position in relation to its domestic production possibilities boundaries through altering the range of the products it produces for a certain type of input. Then, the option of getting closer to the global production possibility boarder, through adoption of more efficient technologies and processes that have been created and used or tested elsewhere in the world. Lastly, innovation can be used by a country that is applying global possibility boundary to further improve its economic growth (Valdés, 1999).
Just as earlier implied, multifactor productivity (MFP) presents the efficiency of inputs that are incorporated in a production process, and comprises of A that is pure technological change, accompanied by changes influencing returns to scale. Then, labour productivity (LP) computes “the level of output per unit of labour input (such as hours worked)” (Wickens, 2008, p.171). The existing association between multifactor productivity growth and labour productivity growth is “LP growth = MFP growth + a contribution from growth in capital deepening” (2008, p.174).
Practically, the gauged productivity performance is prejudiced by all factors affecting the use of capital and labour and the level of production. Some of the factors affecting capital and labour are financial markets, climate and weather, business cycle, technological change, education, competition, geological and structural change, and population ageing and growth (Gnos, 2012, p.210). Arguably, certain factors can be influenced to different levels by the government’s policies and reforms, and at the same time other factors cannot be influenced by the government’s policies and reforms. It is worth mentioning, that the productivity of the private sector is fully and eventually determined by the moves of individuals and firms in the particular sector (Mankiw, 2012).
The real income growth in Australia has been historically supported by labour productivity, though contribution brought about by foreign income flows and labour participation have remained relatively small, as depicted in Graph 1, below.
Graph 1: “Contributions to Growth in Average Incomes by Decade”

Source of Data: This Data is attained from Calculations made by the Treasury and was Based on ABS
Actually, the leading contribution of labour productivity growth in Australia was confronted during the 2000s by terms of trade that produced a record contribution. This was possible because the terms of trade guaranteed a rising income, even with slower labour productivity growth.
Gustafsson (2013) exposés that over the past decade, virtually all developing economies have witnessed declines have occurred multifactor productivity growth and labour productivity growth; and the only exception is Australia. In Australia there has been capital deepening, even though during different timeframes (Gustafsson, 2013, p. 480). Australia’s economy is a small open economy, it is not predictable in performing a main role in forcing production possibility frontiers outwards, apart from particular areas providing competitive advantages, for example, mining. But, Australia’s actual current potential for productivity growth is and will be maintained by the implementation of different innovations developed overseas.
Typically, a higher growth is evident in labour productivity compared to multifactor productivity, due to the fact that labour productivity includes other labour productivity created by deepening of capital when the capital-labour ratio rises over time. Segmenting multifactor productivity growth and capital deepening from labour productivity indicates that the go-slow in labour productivity growth has during 2000s. Largely, this is attributed to capital and investment accumulation which were very robust in 2000s, greatly representing the increase in portion of resources used by the capital-intensive and fast expanding utilities and mining industries. Nonetheless, it is somehow astonishing that even with the high level of investment, in the mining and utilities industries, the capital within the two industries stalled in the same period, this also attributed to a large increase in labour inputs (Australian Government Department of Foreign Affairs and Trade, 2012). Having established most crucial aspects of Australian economic productivity, especially the importance of labour productivity, it is important to take a look at the theoretical examination of the future challenges that Swan (2010) foresees for Australia. It is evident that Australia has seen variation in productivity from time to time. Prior to giving further explanation, it is worth mentioning the means of attaining annual labour productivity growth. Cingano and Schivardi (2004) mentions that the output per hour or labour productivity is computed by dividing a particular index of real output by a particular index of hours worked by the entire people, comprising of family/unpaid workers, proprietors and employees (p.80). When measuring Australian productivity, it is a concept in the form of ratio, thus “Productivity = Output volume / Input volume”, this ratio is derived out of the ‘production function’, where “Output = Productivity * f(Input)”. Under this the assumption is that the growth in the volume of goods and services produced can correspond to the growth in inputs employed in the growth or process of production or even when both are combined. Similar to the earlier mentioned, there are numerous variable measures of productivity, but, the actual difference between the many measures is the type of inputs used or placed in the denominator of the productivity ratio. .

References
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