"Productivity: facts not myths" speech at the AIG Annual National Dinner, Parliament House, Canberra
MON 20 AUGUST 2012
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It’s a pleasure to join you tonight and I pay tribute to the AiGroup for its informed advocacy towards a stronger and more productive economy.
It’s one of the most important debates we can have.
A lot of people have had a lot to say about productivity.
Tonight, I want to have my say.
Yes, higher productivity is how Australia will remain competitive and reap the advantages of the Asian Century.
As Professor Paul Krugman famously said, “Productivity isn’t everything, but in the long-run it’s almost everything.”
But too often the concept of productivity is forced to carry more weight than it can possibly bear.
It’s become shorthand for old and stale agendas that have nothing to do with our genuine productivity challenge.
Too much ideology.
Too few facts.
So tonight I want to join AIG and other respected commentators like Ross Gittins in calling for a mature and sophisticated perspective based on the facts.
I start with the single most important fact: the level of labour productivity itself.
Fact: Australia’s level of labour productivity ranks above South Korea, Japan, Canada and the UK.
Fact: Australia is one of the top 12 international performers when it comes to labour productivity levels.
Fact: In the year to March 2012, labour productivity grew at its fastest annual rate in a decade.
Fact: Exclude mining and utilities, labour productivity grew by a healthy annual rate of 1.7 per cent in the seven years to 2011.
Of course we can’t read too much into quarterly or annual productivity figures.
Nor should we imagine that labour productivity can’t be further improved.
Of course it can.
Productivity is the race that never ends.
But let’s also keep things in perspective.
Unlike the early 90s, today we conduct this debate from a position of strength:
With 800,000 jobs created since 2007.
Half a trillion dollars in the investment pipeline.
A combination of GDP growth, low inflation, low unemployment and low official interest rates not seen since 1964.
Along with steady wages growth, high profit share and relatively low levels of industrial disputation.
A gold medal performance, so vastly at odds with much recent reporting.
Yes our overall productivity rate has fallen over the past decade.
And there are some fairly common-sense reasons for that.
Not lazy or militant workers.
Not restrictive industrial legislation.
But a sharp multifactor productivity decline in mining and utilities, with some impact from agriculture as well.
Recently, the Productivity Commission and the Reserve Bank concluded that much of the decline in multifactor productivity growth could be attributed to these sectors.
The Productivity Commission attributes the productivity fall in those three sectors as high as 70 per cent of the overall decline.
In mining, because new investment takes years before it leads to output and because miners are accessing lower quality or less accessible deposits.
In utilities, because there has been increasing capital expenditure, often well beyond levels suggested by demand.
In agriculture, because our worst drought in a century led to falling agricultural output.
Many of these temporary factors are working their way through the system.
For example, agriculture has been the sector with the largest productivity growth since 2007-08.
Likewise, mining productivity will increase in the longer term as major projects move into production.
But the explanation goes further.
We’re also recovering from a decade of neglect because our predecessors failed to invest in skills, infrastructure, communications reform, and federal-state regulatory reform.
Hawke and Keating bequeathed to the Howard government an impressive record of reform in all these areas.
We received no such inheritance.
These are the facts.
Here’s a myth: Individual contracts and the associated legislative regime boosted productivity.
ABS data show that multifactor productivity experienced virtually no growth when Work Choices was law.
The workplace model that best drives productivity improvements is enterprise bargaining.
As Saul Eslake has observed: “productivity only happens as a result of the decisions that are made and implemented in places of work.”
That is why enterprise bargaining has been the shared basis in three out of our four industrial regimes since the Keating era.
The fourth – Work Choices – is the outlier.
Workplace flexibility to increase productivity is the common thread that has delivered results.
That’s why enterprise bargaining is the cornerstone of the Fair Work Act.
The success of that model was borne out in the recent Review that concluded:
“key outcomes such as wages growth, industrial disputation, the responsiveness of wages to supply and demand, the rate of employment growth and the flexibility of work patterns have been favourable to Australia’s continuing prosperity.”
Yes, we can refine the Act to better meet its objectives.
So the Government is keen to consult with industry and unions on the Fair Work Act Review.
But labour regulation is not the whole story.
We need to take a much broader view of productivity rather than putting more focus than is warranted on our workplace arrangements.
That means accepting once and for all that you don’t achieve productivity by cutting wages and conditions.
That just makes for poorer workers, and arguably more unhappy, less trusting and less motivated workers as well.
Not must it mean losing jobs.
Our record productivity growth cycle in the mid-90s showed you can grow productivity and grow employment together.
The Hawke-Keating era was indeed a remarkable time: rising high school retention rates, a huge lift in university enrolments, rapid adoption of new technologies, and the first wave of enterprise bargaining.
In other words, a golden age of productivity secured by working smarter:
These are what truly build productivity in a mature, advanced economy that competes on quality, not on price.
We did it then.
We can do it again.
That’s why as Australia ventures upon the Asian Century, we are shaping a productivity agenda built around five factors.
The five pillars of productivity: infrastructure, innovation, tax, deregulation and skills.
On infrastructure, we’ve doubled the roads budget and increased investment in rail tenfold in just five years.
In fact, infrastructure investment is up 42 per cent in real terms since the Howard Government.
Look at high-speed broadband.
Each 10 percentage point increase in broadband penetration can add 1.3 per cent to a high income country’s GDP.
A great case for why Australia needs the NBN and structural separation too.
Turn to innovation.
We know that Australian businesses that innovate are twice as likely to report increased productivity.
Yet Australia ranks poorly on the proportion of businesses collaborating in innovation compared to other OECD countries.
And our level of management expertise is relatively low, as first identified by Karpin in 1995 and highlighted in last week’s McKinsey report as well.
We know an efficient tax system cuts compliance costs and gives incentives to invest for the future.
We now have a menu of savings measures on the table to enable a cut in company tax.
In government, we now only fund new measures by re-prioritising existing funding, and this applies to corporate tax as well.
Any reduction must be fully offset within the business tax system.
So you can have a rate cut agreed before Christmas.
But the government cannot want a corporate tax cut more than the business community does.
On deregulation, we’ve removed 1,650 Commonwealth legislative instruments, with another 12,000 to go over the next year.
In transport, we are taking 23 regulators and replacing them with just one for each sector – maritime, rail and heavy vehicles.
On a wider canvas, we’ve completed 20 of the 27 COAG Seamless National Economy reforms.
I strongly urge you to press the Premiers to work toward completing the remaining ones, especially National OH&S laws and National Occupational Licensing.
Then we can tackle the next big wave of regulatory reform discussed at the Business Advisory Forum and agreed by COAG in April.
None of those five pillars are more important than skills.
I know AiG has made skills a consistent priority, and indeed you helped drive the creation of the Workforce and Productivity Agency this year.
But yours has been a rare voice for skills in recent productivity debates.
Last week for example, we received the “Foreign Investor Perspective” report from the International CEO Forum.
It referred to education just twice, and then only briefly in passing.
Yet nothing is more critical to Australia’s future economic success than education, skills and training.
Independent modelling by KPMG Econtech in 2010 shows that lifting human capital could increase per capita income by around $4,000 over the three decades to 2040.
A 2005 study from Britain found that a one percentage point increase in training increases labour productivity by around
0.6 per cent.
Yet in the decade before we took office, education and skills were neglected in Australia.
This Government has put in five years of determined effort and long-term reform to turn that situation around.
Those efforts are beginning to bear fruit.
Apprentice and trainee numbers rose by 17 per cent between 2007 and 2011, while VET student numbers were up 13 per cent.
We’re on track to see 40 per cent of Australians aged between 25 and 34 hold a bachelor’s degree by 2025.
Just last week we learned five Australian universities are now among the world’s top 100 – giving us the fourth most successful higher education system globally.
None of these changes has come about by accident.
They are the result of investment, policy reform and very hard work by people in those sectors to deliver better outcomes.
In the long run, the performance of Australia's schools will be one of the greatest influences on our economic performance.
Australia has great schools that compare well with other countries.
But international evidence shows we are slipping behind.
Four of the world's top-performing school systems are now in our region: Hong Kong, Singapore, South Korea and Shanghai.
These systems have dramatically improved their performance through rapid and transformative change.
Between 2000 and 2009, Australia slipped from equal second to equal seventh in reading and from equal fifth to equal 13th in maths in the OECD's PISA rankings.
In addition, the gap between our highest-performing students and the lowest performers – too often from disadvantaged backgrounds – grew wider.
I suspect a lot of our skills shortage among adults today is a result of the decade of neglect we inherited.
Australia cannot remain an economic powerhouse unless it also wins the education race.
We have a unique and diverse school system of which we should be proud.
We don't need to imitate systems where high student performance comes at a high human cost.
Improving our schools doesn’t mean adopting every practice from Shanghai or Singapore, or Finland for that matter.
We don't want a system with much larger class sizes.
And our students don’t have to adopt the high-pressure study cultures we see in some countries.
But we do need to follow what works.
We know, for example, that the systems improving fastest ensure their students have rigorous subject knowledge and independent reasoning and problem-solving skills to go with it.
And these systems have been pursuing strategies to pay attention to what works in the classroom and make sure teachers are able to do more of it.
We need to adopt those strategies and shape them into a uniquely Australian form of excellence.
That means focusing relentlessly on the things that improve performance and make a real difference to educational achievement.
The international evidence is clear about what drives excellence in schooling:
A high quality curriculum.
Highly skilled teachers able to focus their teaching precisely on what each student needs to learn.
Systematic use of performance information to drive continuous feedback and improvement.
Empowered school leaders able to focus resources on student outcomes.
And strong partnerships between schools and the wider community, reinforcing high expectations of all students.
These are priorities that we have focused on relentlessly since 2007.
We have put in place the foundations of an Australian school system that can excel throughout this century.
And we know that these policies can make a difference because the results are already starting to show.
For example, in our National Partnership for Literacy and Numeracy, 70 per cent of participating schools increased the number of children performing above the national minimum standard in Year 3 reading, and 80 per cent of schools increased the percentage of children in Year 5 numeracy above the national minimum standard.
The transparency we introduced through the My School website now shows how individual schools have lifted their performance to significantly higher than other schools with similar students.
We need to turn these positive movements into a sustained, national effort to improve student results:
This is isn’t just an issue for school sectors, teachers or parents – it’s a business issue.
It demands the full and active involvement of employers because you have a fundamental interest in school performance.
So much of our productivity challenge is an education challenge.
And I want you to be part of the solution.
I’m proud to outline tonight the contours of our productivity reform strategy to set Australia up for the Asian Century.
Of course, there is still much more to do – productivity is a task that by definition is never done.
That’s why in coming weeks and months we will deliver the Asian Century white paper and our Industry and Innovation Statement, working with AiG and other stakeholders on the Manufacturing Leaders Group.
We’ll keep a firm hand on outlays to ensure the budget comes into surplus.
And we’ll consider changes to the Fair Work Act to ensure its objectives of fairness and productivity continue to be realised.
What we won’t do is be party to stale old battles based on assertion, not evidence.
Our nation doesn’t have the time or the luxury for such a phoney debate.
Let’s have the real thing.
An informed, fact-driven debate about the true drivers of productivity in an advanced, mature economy that needs to move quickly up the value-chain.
That’s the high road to lasting productivity outcomes, just like we did in the early 1990s.
The high road paved with facts, leaving the myths far behind.
In the spirit of the good work we have done together, I ask you to join us on that journey, and let’s create a more productive and prosperous nation together.
Thank you very much.