Resource Allocation

International Comparisons

After many years of productivity gains which did not keep pace with the rest of the world, Australia is now achieving satisfactory rates when compared to the rest of the world. In 1999, the Productivity Commission published a report that showed how Australia compared in terms of labour productivity with many other nations around the world. Over time, our ranking fell as follows:

However, since 1992 the commitment to achieving more efficient resource allocation has been successful. In recent years, Australia’s rate of multi-factor productivity has been measured to be second in the world (only Finland achieved a more efficient use of their resources during this time).

It is extremely significant that Australia is able to maintain comparable rates of productivity with that of our trading partners. As this will equate to an increase in aggregate supply, the implications are enormous. To be able to produce a higher overall quantity with a lower effective price to the consumer will mean that our international competitiveness will improve. This will, in turn, create jobs and growth, and also improve our situation in regards to external stability. If we are unable to achieve these productivity gains, then businesses overseas will choose substitute products over our own. If this is the case then we may see the loss of jobs and an increasing CAD.

The chart above demonstrates that in the period from 1985 to 1998, Australia's rate of labour productivity improved at a rate that is average when compared to these countries. This graph also shows the contribution that “skill” has made to this improvement (the light purple part of the bars in the graph). In this case we can see that the rate of improvement in “skill” levels in Australia was very low, particularly when compared to countries such as Finland, France and Italy. It is possible that this suggests that some other countries are “catching up” to the skill levels evident in countries such as Australia, the USA and the Netherlands. These countries have experienced a fast rate of acceptance of information technology, and this has contributed to their ability to achieve productivity gains despite the small improvements seen in the skill measure.

However, we are already aware that although labour productivity is able to be measured relatively accurately, it is in some ways not as useful as the measure of multi-factor productivity. In this area, the Australian economy has performed extremely well. In fact, some countries (such as Spain, Japan and the United Kingdom) have experienced negative rates of change in multi-factor productivity between the 1980’s and the 1990’s. As noted previously, Australia’s rate of improvement in this area is second only to Finland during this period.

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