The Role of Productivity Growth in Preventing a Recession

Without improvements in productivity, the implication is that a recession is looming to bring wages and inflation down. This has been further emphasised with the recent increase in monthly inflation rates. However, the catch-22 here is whether productivity growth can improve without real wages growth. Here's an analysis of the current state of productivity growth in Australia and why it is crucial for the economic well-being of the country.

Factors Affecting Productivity Growth

There are several factors affecting productivity growth, with declining workforce productivity being the primary concern. The shift from goods to services is one of the major reasons for the decline. As stated by The Productivity Commission, it is more challenging to drive productivity growth in the services sector. The growth in the care sector coupled with automation is also hampering productivity growth. Automation, in particular, has a significant impact on productivity growth as every job lost due to automation can lead to a decline in productivity.

However, the decline in productivity growth is also attributed to workers feeling undervalued and exploited. The main reason for this is the stagnation of real wages, which has made it difficult for workers to make any meaningful financial progress. Workers who cannot get a pay rise, or whose work is undervalued because of insurance or any other reasons, are less productive.

Impact on Inflation

The Reserve Bank governor stated that productivity growth is the solution to inflation. To achieve the aim of 2.5 per cent inflation with more than 3.5 per cent wages growth, productivity growth needs to reach at least one per cent. There has been no increase in productivity growth for three years, and this has resulted in the inflation rates remaining high.

The Reserve Bank has no control over productivity, but what it controls is the rate of interest, which influences aggregate demand. Here, borrowers cut back their spending more than savers who end up increasing it. Therefore, the Reserve Bank's goal is to reduce cash flow, which will lead to reductions in spending and increase unemployment rates. This move decreases wages, which then leads to reduced inflation rates because firms do not get to raise the prices of their products.

The Bigger Picture

Declining productivity growth is not only an economic issue but also a policy problem. According to economist Ross Garnaut, economic policy should have a "full orchestra," including fiscal, monetary, trade, energy, immigration, competition, labour, and other forms of policies. He goes ahead to suggest that the best monetary policy cannot deliver good outcomes without the full support of other policies.

The government can play a significant role in increasing productivity, and this can be achieved by ensuring that the country’s infrastructure is up-to-date. The role of technology, particularly artificial intelligence, in enhancing productivity growth cannot be overlooked. The Government can also encourage more innovative technology, enhance competitive wage rates and push for higher standards of education.

Conclusion

Productivity growth is a crucial factor for improving the economic health of the country. It impacts wages, inflation rates, and overall aggregate demand. There is a need for the Government and other policymakers to collaborate to stimulate productivity growth through effective fiscal and monetary policies. This can be achieved by encouraging the use of technology, proper investment in infrastructure, and continually assessing new strategies that can further boost productivity growth.

Published:Thursday, 1st Jun 2023
Source: Paige Estritori

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