Productivity and Education

Crown Conference Centre1st August 2011

Saul EslakeProgram Director, Productivity Growth - Grattan Institute

Presentation to theVictorian Association of State Secondary Principals

and Victorian Principals’ Association2011 Conference

What is ‘productivity’?

‘Productivity’ is a measure of how effectively or efficiently a workplace, a business or government agency, a region or a nation as a whole uses the resources at its disposal to produce goods and services which are in turn valued, in some way, by those who consume or use them

For individual enterprises, ‘productivity’ may refer to a measure of production or output per unit of some specific input

– eg litres of milk per cow or tonnes of grain per hectare– ounces of gold per tonne of ore extracted– motor vehicles produced per worker per day– ‘weighted inlier equivalent separations’ per occupied bed day (in hospitals)– incoming calls answered per hour (in a call centre)

For an entire economy, ‘productivity’ is measured as – output (gross product or value added) per unit of labour input (usually

hours worked) – labour productivity– or output per unit of labour and capital services input – ‘multi-factor’

productivity

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Why does productivity matter?

‘Productivity … isn’t everything, but in the long run it’s nearly everything’

- Paul Krugman, The Age of Diminished Expectations (1994)

‘Productivity is the prime determinant in the long run of a nation’s standard of living, for it is the root cause of per capita national income. High productivity not only supports high levels of income but allows citizens the option of choosing more leisure instead of longer working hours. It also creates the national income that is taxed to pay for public services which again boosts the standard of living. The capacity to be highly productive also allows a nation’s firms to meet stringent social standards which improve the standard of living, such as in health and safety, equal opportunity and environmental impact’

- Michael E Porter, The Competitive Advantage of Nations (1991)

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Senior Australian policy-makers see it the same way

‘[productivity] … is the only real basis for optimism about future income’

- RBA Governor Glenn Stevens, July 2009

‘there is only one source of ongoing higher rates of growth of real per capita incomes, and that is higher rates of growth of productivity’

- RBA Governor Glenn Stevens, July 2011

‘in the long run, productivity growth – producing more from the same inputs – is the only sustainable way for future generations to enjoy higher living standards’

- Treasury Secretary Martin Parkinson, July 2011

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Productivity is one of the “three P’s” of long-run economic growth

GDP = Population

x Labour force Population

x Employment

Labour force

x Hours worked

Employment

x GDP

Hours worked

( labour forceparticipation rate )

( 1 –unemployment

rate )

( labourproductivity )

( average hours worked )

Productivity isn’t everything …

Productivity is measured, at the aggregate level, as gross value added or GDP per unit of factor input(s)

– and we know that GDP – or even GDP per capita – are incomplete and inadequate measures of ‘well-being’

Pursuit of other appropriate or desirable objectives may detract from measured productivity growth

– for example, promoting greater labour force participation by people with low skills or who have been marginalized or excluded from the labour force

There may be a conflict between productivity and ‘allocative efficiency’– that is, shifting resources into ‘high productivity’ sectors like mining or

finance may lift measured productivity but fail to satisfy patterns of demand

.. But productivity growth can play a vital role in confronting some of Australia’s medium-term challenges

Demographic change– which will detract from economic growth through slower population

growth, lower levels of labour force participation and lower average hours worked

Helping non-resource trade-exposed industries survive the ‘resources boom’

– in particular those affected by a strong dollar (manufacturing, agriculture, tourism, higher education) and higher interest rates (construction, retailing)

Reconciling the looming conflict between environmental constraints on resource depletion and ongoing human aspirations for rising standards of living over time

– strong ‘multi-factor’ productivity growth offers the possibility of continued growth in per capita GDP with less intensive (and possibly even zero growth in) environmental resources

Note: ‘Selected sectors’ are agriculture, forestry & fishing; mining; manufacturing; electricity, gas, water & waste services; construction; wholesale trade; retail trade; accommodation & food services; transport, postal & warehousing; information, media & telecommunications; financial & insurance services; and arts & recreation services. ‘Market sector’ comprises these sectors plus rental, hiring & real estate services; professional, scientific & technical services; administrative & support services; and other services. Data are for financial years ended 30 June. Sources: ABS; Grattan Institute. 8

Australia’s labour productivity growth rate has slumped over the past decade ….

Whole economy

‘Selected sectors’‘Market’sector

% pa (5-year rolling averages)

Labour productivity growth

… despite a substantial increase in the amount of capital available to each worker, on average …

Capital-labour ratio

‘Selected sectors’‘Market’ sector

Note: ‘market sector’ and ‘selected sectors’ are as defined for previous chart. Data are for financial years ended 30 June. Sources: ABS; Grattan Institute.

2008-09 = 100

Note: ‘Selected sectors’ are agriculture, forestry & fishing; mining; manufacturing; electricity, gas, water & waste services; construction; wholesale trade; retail trade; accommodation & food services; transport, postal & warehousing; information, media & telecommunications; financial & insurance services; and arts & recreation services. ‘Market sector’ comprises these sectors plus rental, hiring & real estate services; professional, scientific & technical services; administrative & support services; and other services. Data are for financial years ended 30 June. Sources: ABS; Grattan Institute. 10

… implying that the slowdown in ‘multi-factor’ productivity growth has been even more pronounced

‘Multi-factor’ productivity growth

‘Selected sectors’ ‘Market’

sector

% pa (5-year rolling averages)

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Productivity growth has slowed in most OECD countries, but not by as much as in Australia

Labour productivity Multi-factor productivity

Note: OECD labour inputs measured as persons employed (as opposed to hours worked). Sources: ABS; OECD; The Conference Board.

OECD

Australia

% pa (5-year rolling averages)

Australia

OECD

% pa (5-year rolling averages)

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Relative to the US, Australian labour productivity is now lower than it was in the late 1980s and early 1990s

Australian labour productivity as a percentage of the US

Sources: The Conference Board Total Economy Database, January 2011, www.conference-board.org/data/economydatabase/; Grattan Institute.

%

P 13Sources: ABS, Grattan Institute.

Faster population growth has largely offset the impact of slower productivity growth on overall economic growth

Sources of real GDP growth (1989-90 to 2009-10)

Sources of real GDI growth (1989-90 to 2009-10)

P 14Note: ‘GDI’ (gross domestic income) is GDP adjusted for changes in the terms of trade.Sources: ABS, Grattan Institute.

… while the huge gains in Australia’s terms of trade have produced an acceleration in domestic income growth

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Perverse trends in mining sector productivity have detracted from Australia’s overall performance …

Mining sector factor inputs and outputs

Mining sector productivity

Source: ABS

Output

Capital

Labour

Index (2008-09 = 100)

Multi-factor

Labour

Index (2008-09 = 100)

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Utilities sector factor inputs and outputs

Utilities sector productivity

Source: ABS

Output

Capital

Labour

Index (2008-09 = 100)

Multi-factor

Labour

Index (2008-09 = 100)

… as have similar developments in the electricity, gas,water and waste services (utilities) sector

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But mining and utilities account for less than 12½% of gross value added, and less than 15% of ‘market’ GVA

Shares of total gross value added, 2009-10

Mining

Other 'market sectors'

Utilities

'Non-market'sectors

Dwel-ling

owner-ship

Source: ABS

Shares of ‘market sector’ gross value added, 2009-10

Mining

Other 'market sectors'

Utilities

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ABS national accounts & hours worked data can be used to construct ‘additive’ measures of labour productivity

Note: Aggregate hours worked for each sector derived by ‘grossing up’ estimates of average hours worked in the survey week for the middle month of each quarter. ‘Output’ is gross value added. Sources: ABS); Grattan Institute.

Estimates of the dollar value of output per hour worked, 2009-10

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These estimates produce quite similar estimates of aggregate productivity growth to those compiled by ABS

Estimates of market sector labour productivity compared

ABS index measure(left scale)

Grattan measure of gross value added in industry per

hour worked(right scale)

Note: left and right scales are equi-proportional. Sources: ABS; Grattan Institute calculations.

2008-09 = 100 2008-09 chain volume $ per hour

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Declines in mining & utilities sector productivity account for less than 10% of the drop in the overall growth rate

‘Market sector’

Excl. miningand utilities

Sources: ABS; Grattan Institute calculations.

% pa (5-year rolling average)

‘Market sector’ (10 industries) ‘Selected sectors’ (14 industries)

% pa (5-year rolling average)

‘Selected sectors’

Excl. miningand utilities

What else could explain the general slowdown in labour productivity growth over the past decade?

As the Australian economy moved closer to ‘full employment’ additional labour and capital inputs are likely to have been increasingly less productive

Capacity constraints – shortages of skilled labour, infrastructure bottlenecks etc. – resulted in increasing amounts of ‘down time’ detracting from productivity

Generally buoyant corporate profitability may have diminished the importance to management of seeking out productivity improvements

– according to a survey by Telstra, while 76% of large organizations regard improving productivity as ‘an important business priority’, only 24% have actually achieved significant productivity improvement over the last 12 months

Dearth of productivity-enhancing ‘micro-economic’ reforms since around 2000– most of the ‘low hanging fruit’ have been picked– and in the absence of any sense of ‘economic crisis’ there has been no political

imperative for productivity-enhancing reform Instead there’s been an increase in regulation motivated by an apparent desire

to eliminate risk irrespective of probability or cost– for example, airport security, corporate governance, access to children, speed limits

There’s been some slowing in the rate of diffusion of productivity-enhancing technologies since the late 1990s

– and Australia doesn’t rank as highly on these measures as it did at that time21

Australia’s World Economic Forum Innovation Index ranking

Source: World Economic Forum, Global Competitiveness Reports

Global Competitiveness Index: Innovation Pillar (12)

Growth Competitiveness Index: Innovation Sub-index

Australia’s ‘innovation ranking’ (as measured by the World Economic Forum) has fallen

Australia now typically ranks between 15th and 22nd in terms of innovation and take-up of new technologies

Global Comp. Report –

Innovation

Global Innovation

Index

BenchmarkingEU & US

Innovation

The Innovation Imperative in

ManufacturingEIU Report

How Canada Performs - Innovation

TopRankingCountries:

1. USA2. Switzerland3. Finland4. Japan5. Sweden6. Israel7. Taiwan, China8. Germany9. Singapore10. Denmark11. Canada12. Korea, Rep.13. Netherlands14. UK15. Belgium16. Luxembourg17. Iceland18. Norway19. France20. Austria21. Australia22. Ireland

1. Iceland2. Sweden3. Hong Kong4. Switzerland5. Denmark6. Finland7. Singapore8. Netherlands9. New Zealand10. Norway11. USA12. Canada13. Japan14. UK15. Luxembourg16. Germany17. Belgium18. Australia19. Ireland20. Korea, Rep.21. Austria22. France

1. Singapore2. Sweden3. Luxembourg4. Denmark5. South Korea6. USA7. Finland8. UK9. Japan10. Netherlands11. France12. Ireland13. Belgium14. Germany15. Canada16. Austria17. Australia18. Czech Rep.19. Estonia20. Spain21. Hungary22. Lithuania

1. Singapore2. South Korea3. Switzerland4. Iceland5. Ireland6. Hong Kong7. Finland8. USA9. Japan10. Sweden11. Denmark12. Netherlands13. Luxembourg14. Canada15. UK16. Israel17. Austria18. Norway19. Germany20. France21. Malaysia22. Australia

1. Japan2. Switzerland3. USA4. Sweden5. Finland6. Germany7. Denmark8. Taiwan9. Netherlands10. Israel11. Austria12. France13. Canada14. Belgium15. South Korea16. Norway17. Singapore18. UK19. Ireland20. Italy21. Australia22. New Zealand

1. Switzerland2. Ireland3. USA4. Japan5. Sweden6. Germany7. UK8. Netherlands9. Finland10. France11. Denmark12. Belgium13. Austria14. Canada15. Australia16. Italy17. Norway

Year: 2010-11 2009-10 2009 2009 2007 2010

Author: World Economic Forum

INSEAD ITIF Boston Consulting Group

Economist Intelligence Unit

Canada Conference Board

Countries: 139 132 40 110 82 17

Sources: INSEAD, Global Innovation Index 2007 and 2009-10.

Education can make an important contribution to lifting productivity growth – although it’s not clear that it has

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In principle, education should make a substantial contribution to improving productivity performance

– by increasing the skills and abilities of individual workers– by raising the flexibility of workplace teams– by allowing for the more rapid utilization and transmission of new skills and

production technologies, and– by fostering the creation of knowledge, ideas and technological innovation

International research suggests a positive association between educational attainment and economic growth

– OECD research suggests each additional year of schooling in the adult population boosts long-run economic growth by between ¼ and ¾ percentage points per annum, or by anywhere between 6 and 19% in total

However, research has struggled to identify any meaningful link between higher levels of educational attainment and the improvement in Australia’s productivity performance during the 1990s

– ‘there appears to have been no significant acceleration in workforce skills in the 1990s’ − Gary Banks, Productivity Commission Chairman (2003)

– ‘skill upgrading has played, at best, a modest role in GDP growth per employed person in … Australia’ − OECD ‘Sources of Economic Growth’ (2002)

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34

35

36

37

38

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90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 0910

12

14

16

18

20

22

24

26

28%% of 25-64 year olds with

bachelor's degree or higher(right scale)

% of 15-64 year olds who haven't completedYear 12 (left scale)

%

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There’s no question that formal levels of educational attainment among the Australian population have risen …

Measures of Australian educational attainment

Source: ABS Social Trends and Education and Work.

11.4

11.6

11.8

12.0

12.2

12.4

12.6

12.8

13.0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

%

Government

Non-government

All schools

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… and resources available for school education, in particular, have increased

Staff-student ratios, secondary schools

Source: ABS Social Trends. Series for all schools includes non-teaching staff.

More recent research suggests that the quality of education is more important than the quantity of it

Years of education vseconomic growth

Source: Eric Hanushek & Ludger Wößman, ‘The Role of Education Quality in Economic Growth’, World Bank Policy Research Paper 4122 (2007); The World Bank, Education Quality and Economic Growth (2007).

Test scores vseconomic growth

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‘one standard deviation in test scores … is associated with a two percentage points higher average annual growth rate in GDP per capita across 40 years’

Latest results from the OECD’s Program for International Student Assessment (PISA) reveal challenges for Australia

Average scores of Australian students in reading literacy and mathematical literacy have declined significantly over the past few years

There are some large ‘gender gaps’ in reading and mathematics– in reading literacy, females achieve at a much higher level than males– in mathematics, with males outperforming females

Students in remote locations have an average score in reading literacy almost two years of schooling lower than that of students in metropolitan schools

Despite the better than average scores, significant levels of educational disadvantage related to socioeconomic background exist in Australia

– the performance gap between students of the same age from different backgrounds can be equivalent to up to three years of schooling

– this gap places an unacceptable proportion of 15-year-old students at serious risk of not achieving levels sufficient for them to effectively participate in the 21st century workforce and to contribute to Australia as productive citizens

‘Australia’s high SES students on average achieve outstandingly good outcomes by international standards, whereas the outcomes are comparatively mediocre for low SES students’

– Peter Dawkins (former Secretary of Victorian Education Department , 2010)

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Australia was the only ‘high performing’ country to show a significant decline in reading literacy between PISA 2000 & 2009

Source: Thomson et al, Challenges for Australian Education: Results from PISA 2009, ACER.

350

400

450

500

550

600

Australia

Belgium

Brazil

Bulgaria

Canada

Chile

Czech R

ep.D

enmark

FinlandFranceG

ermany

Greece

Hong K

ongH

ungaryIcelandIrelandIsraelItalyJapanK

oreaLatviaLiech'stnM

exicoN

ZN

orway

Poland

Portugal

Russia

Spain

Sw

edenS

witzerland

US

A

PISA 2000 PISA 2009

% per annum

Mean reading literacy scores, PISA 2000 and PISA 2009

29

Mathematical literacy of Australian students declined significantly between PISA 2003 and 2009

350

400

450

500

550

600

Australia

Belgium

Canada

Czech R

epD

enmark

FinlandFranceG

ermany

Greece

Hong K

ongH

ungaryIcelandIrelandItalyJapanK

oreaLatviaLiechtensteiLuxem

bourgM

acaoM

exicoN

etherlandsN

ZN

orway

Poland

Portugal

Russia

Serbia

Slovakia

Spain

Sw

edenS

witzerland

ThailandTurkeyU

SA

Uruguay

PISA 2003 PISA 2009

% per annum

Mean mathematical literacy scores, PISA 2003 and PISA 2009

30Source: Thomson et al, Challenges for Australian Education: Results from PISA 2009, ACER.

Australian students’ scientific literacy was unchanged between 2006 and 2009

350

400

450

500

550

600

Australia

Belgium

Bulgaria

Canada

Chile

Taiwan

Croatia

Czech R

epD

enmark

Estonia

FinlandFranceG

ermany

Greece

Hong K

ongH

ungaryIcelandIrelandIsraelItalyJapanK

oreaLatviaLiechtensteLithuaniaLuxem

bourM

acaoM

exicoN

etherlandsN

ZN

orway

Poland

Portugal

Rom

aniaR

ussiaS

erbiaS

lovakiaS

loveniaS

painS

weden

Sw

itzerlandThailandTurkeyU

KU

SA

Uruguay

PISA 2006 PISA 2009

% per annum

Mean reading literacy scores, PISA 2006 and PISA 2009

31Source: Thomson et al, Challenges for Australian Education: Results from PISA 2009, ACER.

What could be done to improve Australia’s productivity performance?

Re-invigorated commitment to productivity-enhancing reforms– some sectors have previously been exempted from such reforms (health insurance,

international aviation, agricultural marketing, pharmacies, newsagencies, professional services; and hospitals, schools, public transport and policing)

– and achieving real progress in COAG regulatory reform agenda Taxation reform

– with a view to reducing the extent to which provisions in the tax system distort decision-making

Further promotion of education and skills acquisition– focussing in particular on engineering and science, skilled trades etc– may require significant reform of vocational education system and funding

Targeted infrastructure investment– need mechanisms to ensure the ‘right infrastructure in the right places’ with sensible

pricing and access Serious effort to improve Australia’s innovation effort

– not simply about R&D spending but about access to risk finance, linkages with research institutions, relevant skills and commercialization

Greater awareness of the productivity impact of policies pursued with other objectives in mind

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