What's driving Australia's productivity malaise?

The Australian productivity problem uncovered

With the RBA almost certain to deliver a 25 basis point rate cut next Tuesday, attention is now turning to the Federal Government’s Economic Reform Roundtable scheduled for just over a week’s time. High on the agenda is productivity (or more precisely, the lack of), so much so that the Roundtable is sometimes referred to as the “Productivity” Roundtable. The problem is the lack of productivity growth experienced by the Australian economy over the last decade. From 2015 to 2025, labour productivity as measured by economy-wide gross value added (a.k.a. GDP at factor cost) divided by hours worked has barely grown, averaging just 0.4% per annum.

In contrast, over the first 15 years of the 21st Century, labour productivity growth averaged a healthy 1.6% comparing favourably with the US (1.6%), UK (1.2%), Canada (1.1%), Germany (1.1%) and Japan (0.8%). So, what has caused Australia’s miserable decline in productivity growth since 2015? Theories put forward to explain Australia’s weak growth can be placed in two broad categories: a lack of capital deepening, and sectoral effects. The lack of capital deepening refers to the weak rate of growth of business investment over the last decade. This means that expenditure on machinery, equipment and non-dwelling construction (i.e., the “tools” that workers have to do their jobs) has lagged the growth in employment, hence, the capital/labour ratio has declined and with it, productivity. The other explanation focuses on sector-specific factors, with the finger being pointed squarely on three sectors: the Non-market sector (Health, Education, and Public Administration), Mining and Construction. We will leave the capital-deepening problem for another Brief and focus our attention on the sectoral problem.

Let’s start with the numbers. The first observation is that each of these sectors has been a perennial productivity underperformer, over the last 10 years and over the longer run. For example, over the 15 years prior to the commencement of the last decade (i.e., 2000-2015), when economy-wide productivity grew by 1.6%, Mining productivity stalled (0% annual growth), the Non-market Sector grew by 0.8% and Construction grew by 1.4%. Over the last decade, Mining has continued to stall, the Non-market Sector grew by just 0.1%, while productivity in the Construction industry has fallen at a pace of 1.3% p.a. We can perhaps excuse the Mining industry for its poor performances as its productivity outturns are highly dependent on the timing of lengthy and lumpy investment booms. For example, over the first five years of the last decade (i.e., 2015-2020), Mining productivity boomed at a stonking annual rate of 5.0%. This is not surprising as this period comes after the end of the most recent mining investment boom, which saw an increase in the industry’s output as the build out of capacity came on-stream, and the reduction in the industry’s workforce as workers required to construct the mines left the industry.

The most recent five years has seen a sharp downturn in Mining productivity due to mine shutdowns (due to Covid, weather events and planned maintenance), and an uptick in labour intensive mining exploration and mining services activities. We can expect the cycle in the Mining industry to continue to impact the economy-wide rate of productivity and, therefore, we should probably look through the mining cycles. What about the Non-market sector? Here, the issue seems to be more structural than cyclical as productivity growth has fallen progressively from 0.8% over 2000-14, to 0.1% over 2015-2019, to -0.2% over 2020-25. In addition, the share of the Non-market sector of the labour force has progressively increased from 21% over 2000-14, to 28% as of the March quarter of 2025, as governments have ramped up spending on Health (including Aged Care) and Public Administration. As the population continues to age, we can expect this share to increase, and unless we see an ahistorical rebound in productivity in this sector, then we can expect the Non-market sector to continue to drag the economy’s productivity growth rate down. Could such a rebound occur? Here, AI-driven technology and robotics give hope that productivity gains could reverse the historical trend of this sector. 

Of course, it is well known that there are also measurement issues with this sector as the current methodology does not account for quality improvements in the output of the sector. The Productivity Commission has estimated that allowing for quality improvements substantially lifts measured productivity in the sector, but this work is yet to filter down to the official statistics. Finally, the Construction industry has the worst productivity track-record of any industry over the last decade falling by 1.3% p.a. The industrial relations issues facing the Construction industry are well documented. Progress on bringing a more rational approach to industrial relations is key to improving productivity in the industry and reviving non-dwelling construction, so important for many industries in the economy and, therefore, for economy-wide productivity.

In summary, the main sectoral headwinds to a revival in productivity growth created by Mining, the Non-market sector and Construction are a mixed bag of cyclical and structural origins. The cyclical nature of productivity growth in the Mining sector gives us reason to expect an uptick in Australian productivity growth over the coming five years as Mining begins to exit the downturn of the last five years. The Non-market sector presents a more structural challenge as this low-productivity sector increases its share of the economy to service our ageing population. However, partly offsetting the drag may be the introduction of new methodologies to measure productivity in this sector that recognise quality gains in its output and new technologies that lower the labour intensity of service provision. Finally, the underperformance of productivity in the Construction industry appears to be the consequence of policy choices. A more balanced approach to industrial relations in the sector could protect the health and safety of Construction workers, while simultaneously delivering positive productivity growth.