The Not‐So‐Strange Death of Multifactor Productivity Growth

• Author: John Quiggin
• Published date: 01 June 2018
• Date: 01 June 2018
• DOI: http://doi.org/10.1111/1467-8462.12275

Policy Forum: ‘Shifting the Dial’, The Productivity Commission’s

Productivity Review

The Not-So-Strange Death of Multifactor Productivity Growth

John Quiggin*

Abstract

The central theme of this article is the

observation that improvements in information

and communications technology (ICT) and in

labour quality represent ‘embodied’techno-

logical progress, as distinct from the ‘disem-

bodied’residual represented by multifactor

productivity (MFP) growth. The seeming

paradox of continued labour productivity

growth combined with static MFP may be

explained by the fact that technological

progress is now mostly embodied in improved

technology and better educated workers. The

contribution from microeconomic reform has

been, and is likely to remain, marginal.

1. Introduction

Shifting the Dial (Productivity Commission

2017a, hereafter the Report)isthef‌irst in a

planned series of f‌ive-yearly reviews of pro-

ductivity Australia. The Report starts from the

premise that Australia’s productivity growth is

too low to sustain improved living standards in

the long term. As the name implies, the central

thesis of the Report is that productivity growth

rates can and should be improved.

The Foreword (p. 7) states

For the generation of people born in 2017, if long run

productivity growth lifts sustainably by 0.5 per cent a

year, over their lifetime Australian production per

person would be about six times its current size, or

about 50 per cent bigger than if productivity remains

about average.

The key problem identif‌ied in the Report is that

the Commission’s preferred measure, multifactor

productivity (MFP) has been essentially static

since 2003. This observation is a noteworthy shift

away from the Commission’s long-standing view

that the slowdown in measured MFP growth was

primarily the result of measurement error,

compositional change and other extraneous

factors (Parham 2012). The Report (p. 29) states

that ‘Suggestions that mis-measurement of the

new economy are to blame appear simply

insuff‌icient to explain the weakness’,butdonot

note that the Commission itself was the most

prominent source of these suggestions.

By contrast researchers at the Common-

wealth Treasury have taken a more sanguine

view of the situation. Campbell and Withers

(2017) point out that labour productivity has

risen steadily, largely as a result of capital

deepening (more capital per worker) and that

this has been made possible by a steady decline

in the relative price of capital goods.

* Australian Research Council Federation Fellow, School

of Economics, University of Queensland, St Lucia,

Queensland 4072, Australia; email <j.quiggin@uq.edu.

au>. This research was supported by an Australian

Research Council Laureate Fellowship. I thank Nancy

Wallace for helpful comments and criticism

The Australian Economic Review, vol. 51, no. 2, pp. 269–75

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C2018 The University of Melbourne, Melbourne Institute of Applied Economic and Social Research

Published by John Wiley & Sons Australia, Ltd