The other side of the productivity coin is capital investment – sometimes good workers should blame their tools

The productivity debate in Australia is massively distorted by a blind spot, revealed again by the lack of coverage of the annual national accounts figures released on Friday, which showed labour productivity increased but capital productivity fell.

Labour productivity and capital productivity (which measures the increase in output per dollar spent on capital expenditure) combine to produce the overall productivity measure known as “multi-factor productivity”. Australia’s multi-factor productivity has fallen seven out of the past 10 years, yet during that time labour productivity has continued to rise, while capital productivity has fallen.

And yet it is the labour side that gets the attention and criticism.

Imagine for a moment that labour productivity had fallen 3.8% in the past year as had capital productivity (the second biggest such fall in the past 18 years). Imagine as well that labour productivity was now 27% below where it was in 1995.

Were that to be the case our nation’s serious newspapers would be filled to overflowing with editorials about the urgent need for politicians to do something about productivity. There would be calls from business groups like the Business Council of Australia for industrial relations legislation to be changed urgently to arrest the slide. Conservative commentators would write long think pieces about how our workplaces need more flexibility in the workplace, (because more flexibility equals more productivity – proof not required, it’s just a fact).

The Coalition government would likely appoint a new “IR supremo”, and also get the Productivity Commission to look at IR legislation.

Of course you don’t need to imagine such a thing, because such commentary and policy has occurred for many years now. The problem is that while we have had the talk, we haven’t had that level of decline in labour productivity.

Labour productivity in Australia is now 48% above where it was in 1995. In the past year, gross value added (output in real terms) per hour of labour grew by 2.1% – well above the 35-year average of 1.6%. For the 18th year in a row, labour productivity in 2012-13 grew faster than capital productivity.

And in 2012-13, for the 11th consecutive year, capital productivity has declined.

While you ponder this over-a-decade-long drag on multi-factor productivity (the combination of both labour and capital productivity) wrought by capital expenditure, I encourage you to go and read the plethora of articles written on productivity since Friday, which berate CEOs for their decisions, because capital productivity concerns the investment choices made by executives. Actually, I don’t encourage you to do that – because you won’t find any. Capital productivity falls are never blamed on the CEOs.

The Business Council of Australia, for example, has only one mention of it on its website – a speech given by its vice-president, Graham Bradley, in 2012, in which he blames its decline on labour productivity and labour costs before quickly moving on to talk about workplace relations.

Business groups much prefer to talk about the performance of labour. While Bradley is right that capital productivity is influenced by labour productivity, it goes the other way as well. If your CEO invests in a poor IT system, or sub-standard equipment, then your productivity as a worker will suffer.

Similarly, if your CEO invests in mines, which are less productive, but now profitable because of higher mineral prices, then your productivity will fall as well.

It’s no surprise then that in the mining industry labour productivity has fallen in line with capital productivity since the beginning of the mining boom and the massive increase in capital investment. Mining CEOs have chosen to work less productive mines. It doesn’t matter how flexible the labour force is, you can’t change that fact.

But that doesn’t completely explain the 3.8% drop last year, as a number of marginal mining projects were shelved due to falling minerals prices. It also doesn’t explain the fall in capital productivity in sectors like manufacturing:

In the manufacturing sector, labour productivity has grown for 20 years, while capital productivity in the sector has fallen in that time.

Just imagine the outcry from the conservative media, business groups or the now minister for workplace relations, senator Eric Abetz ,if it were the other way round.

When capital productivity slumps, we’re told not to worry because capital expenditure will one day lead to productivity growth. Now, it might – although, after 11 consecutive years of decline, it’d be nice to see some evidence – but if we’re going to look at multi-factor productivity, surely we need to have a critical eye on the aspect which has most kept it flat over the past decade.

Instead, any fall in labour productivity – or even just not as fast an increase as in the past – is cause for mass alarm and many, many editorials.

But if we look at the past five years, Australia’s labour productivity has grown quite well compared with the rest of the OECD:

If we take a longer-term look, it’s clear there has been a turnaround in recent times. From 2000 to 2008, Australia’s labour productivity fell faster than in the G7 nations. Since 2010, however, Australia has improved, while the G7 keeps falling – and perhaps commentary here should reflect that:

But how has capital performed? Unfortunately, we don’t have good recent comparable capital productivity data, so let’s judge the performance of Australia’s companies by the measure that is used to judge all companies, and especially all CEOs – the share market.

In the past five years, Australian labour productivity outperformed that of the USA, UK, Japan, Canada, New Zealand, Germany and France, but our stock market has only outperformed France, and is neck and neck with Canada:

Its performance would be even worse if we excluded the share prices of the big four banks (which comprise 30% of the value of the stock market), as they have grown by an average of 171% in the past five years.

Perhaps it is time to find something to blame for all this. Luckily we have it! It must be the lack of flexibility in the labour market, or labour costs. It sure as heck couldn’t be poor business decisions by CEOs. They’re never wrong, are they?