The ideological obsession with reducing wages and conditions may improve profits in the short term but could end up having a disastrous impact on our productivity, writes Ian Verrender.

It's on again: the great productivity debate.

We all know the problem. If you believe the hype, productivity in Australia has been on the slide for more than a decade. And if you listen to the pollies and the business lobby groups, there is a very simple solution - cut wages and conditions.

Superficially, the evidence is overwhelming. Toyota, Ford, Holden and a myriad other businesses have decided to close down here because production costs are too high. It's a problem replicated across small and medium-sized businesses. Coffee shops can't afford to open on the weekend because of penalty rates and union featherbedding.

It makes for a compelling argument, particularly for an electorate that has grown accustomed to the five second sound bite, repeated ad infinitum.

Unfortunately, like almost everything that passes for political discourse these days, it ignores the evidence, overlooks the logic and ploughs on through to a predictable conclusion that is entirely wrong.

This may come as a surprise, given what you've heard lately, but labour productivity actually has grown throughout the past decade. It certainly has grown at a slower rate than through the 1990s, but the real culprit for our productivity slide is capital productivity.

That's right. You could argue that it is not the workers who have been dragging the chain, it is our corporate leaders. But even that is an oversimplification of the malaise supposedly eating away at the heart of the economy.

Distressing it may be, but a great many of our business and political powerbrokers either appear to have little, if any, understanding of productivity, or deliberately choose to misconstrue the idea.

Productivity is a measure of efficiency, not cost. And our leaders tend to confuse two very different concepts: productivity and profitability.

Consider this. If you were asked to dig up the local footie field and handed a shovel, it would likely take quite a few weeks, even months. Get on board one of Kerry Stokes' spanking new earth moving machines and you'd probably get the job done in a day.

The other way to look at it would be to ask how many shovel-wielding mates it would take to dig up that field in a day. Quite a few, I'd say. Using the earth mover rather than the shovel clearly lifts labour productivity, regardless of how much you are paid or the cost of the machine.

There's another important concept to consider as well. Labour is just one of what economists term "factors of production". The other two are land and capital.

During the 1990s, Australia's overall productivity (land, labour and capital lumped together) rose at an impressive 1.6 per cent average each year. In the decade to the end of 2010, however, it stalled and on some measures, went backwards.

But consider this. Labour productivity during the first decade of the new millennium grew at an annual average rate of 1.5 per cent.

Why has our productivity growth dropped so dramatically? Unfortunately the answer is complex and doesn't fit neatly into the infantile political debate now being waged in Parliament.

Part of the answer is the resources boom. Huge amounts of capital poured into Australia since 2002 to build new mines and expand old ones. Billions upon billions of dollars of capital was employed.

But it takes years for those mines to be built and only now are we starting to see the increase in production. So, huge amounts of capital was invested. But the production (there's the operative word) has been delayed. Labour productivity in the mining sector dropped alarmingly as well because an army of workers was building extra capacity rather than digging out and shipping ore.

As those mines come on stream, our productivity naturally will rise.

Another explanation is that the productivity gains of the 1980s and 1990s - from opening up the economy to greater competition and privatising government-owned monopolies - lifted Australia to a new level. But they were one-off gains that are difficult to replicate.

Right now, our businesses are investing minimal amounts in innovations that will improve their productivity, choosing instead to pay out increased amounts to shareholders in the form dividends. It's a phenomenon that doesn't bode well for future efficiency improvements.

The ideological obsession with reducing wages and conditions may improve profits in the short term but could end up having a disastrous impact on our productivity.

Unlike land and capital, labour is the only factor of production that comes with a human being attached. Highly emotional, they can either be incredibly loyal and diligent or vindictive and lazy. Take your pick.

If you want to extract the best performance and higher output from a worker, cutting pay and conditions probably isn't the best strategy.

As a general theme, it goes against every principle of the capitalist system that theoretically is all about incentive and reward for outperformance. That's the very argument our executives have used to justify the enormous and, at times, obscene salary increases they have delivered themselves during the past three decades.

You could argue Australia is a high cost place from which to produce things. Rio Tinto chairman Jan du Plessis noted just that at the company's recent annual meeting. But he also admitted the strength of the Australian dollar was the major contributing factor.

As a nation, we avoided a wages break-out during the greatest resource investment boom the country has ever seen, at a time when we were close to full employment. And as the Australian Bureau of Statistics noted just last month, wages growth has fallen to an all-time low.

But why let the facts get in the way?

Ian Verrender is the ABC's business editor. View his full profile here.