There are few aspects of the economy on which more bulldust is spoken than our productivity. The world abounds with people trying to tell us that our productivity performance is a real worry and the way to fix it is to cut their taxes or give them a government handout. Yeah, sure.

These snake oil salesmen (and they’re almost always men) have been having a field day lately. Did you know that last financial year, 2022-23, the productivity of our labour actually fell by 3.7 per cent?

Credit: Matt Davidson

Fortunately, some sense arrived this week. The Productivity Commission issued its annual productivity bulletin, providing “the most complete picture to date of the drivers of Australia’s productivity decline over 2022-23,” it said. We now have a clearer understanding of what’s behind the slump, we’re told.

But first, let’s be sure you know what productivity is. It’s a comparison of the economy’s output of goods and services – measured by real gross domestic product – relative to our inputs of raw materials, labour and physical capital (machines, buildings, roads, bridges and so forth).

Our productivity improves when we use the same quantity of inputs to produce a greater quantity of outputs. In other words, it’s a measure of our efficiency.

We can improve our technical efficiency by inventing better machines for workers to work with, thinking of better ways to organise our mines, farms, factories and offices, increasing the skills of our workers, and having the government provide us with better roads and public transport to go about our business.

If businesses aren’t increasing their investment in capital equipment and structures sufficiently, don’t be surprised if productivity is getting worse rather than better.

Usually, we focus on the productivity of our labour, measured by dividing real GDP during a period by the total number of hours employees and bosses worked during the period.

Over the past 28 years, the productivity of our workers increased at the average rate of 1.3 per cent a year. This improvement, when passed on to workers as higher “real” wages – wages growing faster than prices – is the main reason our material standard of living is much higher than our grandparents enjoyed.