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October 2017

An important report was released last week by the Productivity Commission. The report looks at the current and future factors that are, and will be affecting the productivity of the Australian economy, and draws recommendations for reform in a range of sectors.

The report has been a topic of commentary among journo-economists, most notably Jessica Irvine and Ross Gittins.

Both of those are generally positive about the report, and Gittins points out that this one, unlike some previous outputs of the Productivity Commission, is people-friendly rather than business-friendly. Irvine briefly touches on the problem of adequate (or, really currently inadequate) measurement of productivity.

The inadequacy is in that national accounting practices and productivity measurement methods have been structured at a time when manufacturing has dominated the economy. Given that the economy is continually moving more towards ‘softer’, service based sectors, there is a need for amending national accounting and productivity measurement practices to reflect that change.

Some of the shortcomings of the current productivity measurement practices relate to the incompleteness of the sets of inputs and outputs that are recognised and accounted for in the analysis. For example, the use of nature-provided inputs (e.g. water, ecosystem services) is typically ignored in the analysis. In addition, many outputs of the services sector of the economy (such as health care, education, scientific research, and information technology sector), as well as the services to society provided by other environmental assets are not well defined in terms of quantity, quality or both. This could lead to double counting, miscounting, omission, underestimation or overestimation problems in currently used productivity measuring frameworks. In addition, many inputs and outputs in these sectors do not have market prices in the traditional sense. And when prices do exist, they are often heavily regulated by the government, like in education or healthcare.

In this light, the need for more integrated and better indicators of productivity has been widely recognised. We need to be able to jointly consider the multiple problems that exist in productivity measurement and to come up with an integrated approach that accounts for a broader set of inputs and outputs into productivity measurement, including things like environmental impacts, natural capital use, and differences in quality of human capital. This will give us a ‘real’ productivity metric, one fit for the twenty-first century!