Productivity matters and we need to lift it

This opinion article by Business Council chief executive Jennifer Westacott was published in The Weekend Australian on Saturday 10 August 2019 

Australians will have their own views about the federal election result, but there can be little doubt it has delivered a climate of unusual political certainty. This throws up a welcome challenge: how do we maximise this period of stability to set the country up for the next wave of prosperity?

For the Business Council, this centres on improving productivity. It’s time to put misdirected priorities in the rear-view mirror and coalesce around the practical bite-sized measures we can take now to drive higher living standards and increase wages growth.

After all, it is being the productive country – not just the lucky country – that will guarantee Australia can continue to be resilient, competitive and punch above our weight.

But first, we must shake off the collective complacency that 28 years of uninterrupted economic growth has given us.

There’s no better wake-up call than the latest round of data from the authoritative Household, Income and Labour Dynamics in Australia (HILDA) survey which this newspaper rightly devoted serious time and analysis to because it understood what it was telling us about Australia.

The HILDA data illustrates in stark terms what a lack of productivity means for Australians.

The income of middle Australian families, after taking into account taxes and inflation, was lower in 2017 than it was almost a decade ago.

Our productivity malaise is largely to blame – and it is forcing Australians to tread water.

In the 1990s, productivity growth ran at an average 2.2 per cent a year. This was also the pace of real income growth.

In the 2000s, real income growth ran at about the same rate, but slower productivity growth was offset by the record terms of trade.

Now, the terms of trade boom is over. Productivity growth has been around 1.2 per cent a year since 2010 and real income growth has also slowed to 1.2 per cent.

Productivity matters because it determines whether or not we can all get ahead.

Increasing productivity is about doing everything better. It is not about people working harder for less. Instead, it is about people working smarter and more effectively by making the most of every ingredient that goes into producing our goods and services.

Productivity happens when employers have the capacity to invest and innovate in expanding, training workers, updating machinery, and adopting new technologies. They’re able to produce, sell, and export more, allowing them to employ more workers, and pay them more.

It can involve nurses spending more time with patients and less time buried in paperwork, thanks to improved systems and processes.

Or, it’s nation building infrastructure that enables goods and produce from regional Australia to journey efficiently into lucrative export markets.

It’s investing in innovation – whether that’s developing a medical device, software for accounting, or phone apps to book travel.

This is how productivity improvements work in practice – they make our lives better.

Investment is one of the central drivers of productivity, but right now business investment as a share of GDP is at its lowest level in 25 years.

Prime Minister Scott Morrison recently called on business to help identify the regulations and bureaucratic barriers that impose “the largest costs on key sectors of the economy’’ and serve as a hurdle to investment.

To get things moving, we need to focus on taking action on the chunks of micro reform we can do now. Done together, they will help drive higher wages and higher living standards.

There are six key priorities to help jolt productivity growth which I will outline in a speech to the Australian British Chamber of Commerce in Perth on Tuesday.

The first is lifting business investment, which fell over the past year. In the absence of a corporate tax cut for all companies, we are proposing a broad-based investment allowance.

Say we have a banana grower in Cairns looking to invest in sheds for packing, packaging and grading. The whole fit out could come to $1 million. While this can be depreciated, with a 10 per cent investment allowance they would also get a $100,000 extra deduction this year. That’s money to reinvest into growing their business or employing more people.

Secondly, we need to get our infrastructure flowing. An initial step would be the Commonwealth and states agreeing on the extent and sequencing of national public infrastructure projects. A strategic and planned pipeline developed from the ground up can deliver what places and communities need.

Thirdly, let’s arm Australians with the skills they need to keep working now and into the future as technology changes.

There is much to do in this area but why not start by establishing a single information point for post-secondary education and skills. Students and workers needing to retrain would have the information they need at their fingertips about courses, cost and career prospects.

Fourthly, we need a coordinated assault on the deadweight of red tape and regulation that is keeping a lid on productivity and acting against job creation.

We could begin by scrapping outdated retail trading hours. Shoppers can go online 24-7 to buy anything, anytime, but in Western Australia some shops can sell light bulbs but not light fittings, and kitchen sinks but not dishwashers.

On a larger scale let’s speed up approvals for major projects by repealing appeals by non-impacted third parties under the Environment Protection and Biodiversity Conservation Act.

The EPBC Act requires projects to meet stringent and important environmental standards before approval. We need to question whether the current system delivers the best outcome for all Australians, especially in the regions, when activist organisations from the inner-city seek to tie up project approvals in the courts.

Fifthly, we need to find a way to get our electricity and gas bills down. Our focus should now be on an energy mix driven by technology change and innovation that delivers reliable and affordable energy and reduces our emissions. Part of this is opening up the supply of gas – a critical transition fuel for a lower emissions economy.

We have an array of mechanisms, systems, funds and schemes to draw on to achieve these objectives.

And finally, we need to urgently focus on ensuring our workplaces operate in the interest of employers, workers and enterprises. Our current system is too rigid and it is too hard to employ people. It cannot go on like this.

We continue to support enterprise agreements as the centrepiece of the relationship between workers and businesses, but we want it to work better. Workers on EBAs get paid more.

Non-managerial workers earn on average around $13 more an hour than workers on awards, and just over 50 per cent of non-managerial workers on EBAs earn over $1,600 a week compared to almost 20 per cent on awards.

But our paper, The state of enterprise bargaining in Australia, underscores the current problems. We currently have the lowest number of active federal enterprise agreements in 20 years. Productivity is overwhelmingly at the workplace level. And, EBAs are the best tool that both employers and workers have to figure how to be more productive, and then benefit from it.

To get the EBA system working better, we need to unscramble the complexity of EBAs. EBAs have become Downton Abbey-sized laundry lists, containing way too many items. This bogs down negotiations, agreements take too long to conclude, and it stifles the ability of both employers and workers to respond to changing circumstances.

We also need to act on the Better Off Overall Test. BOOT is a productivity killer. As the Productivity Commission found in 2015, the application of BOOT “discourages enterprise bargaining and creates uncertainty during the agreement approval process’’.

The test was originally intended to mean that your workforce was better off overall than under the award. In 2016, the Fair Work Commission found the test effectively meant that every individual worker and prospective worker had to be better off than the award.

In practise, to meet every individual circumstance that might arise, an employer may be in the situation where their EBA may need to be better than the award in almost all aspects.

In the real world, how is this practical?

If you have a complex workforce that offers flexibility and choice to your workers, you’ll have casual and permanent staff. But casual and permanent staff have different requirements, and they trade off different things for different benefits.

Say you are working in a 24-7 environment and your permanent workers want to work on weekends. They trade off their penalty rates for a higher salary overall. But how do you balance this out for casuals who don’t work 35 hours a week?

The problem with the way the BOOT is operating now is that it prevents trade-offs.

A company that cannot meet demand quickly, cannot rapidly change what it’s doing, and is strangled by an inability to make trade-offs, is a company that cannot thrive. When it cannot thrive, fewer people are employed and some may lose their jobs.

We support the PC’s recommendation of a no-disadvantage test This does what it says – overall workers don’t end up disadvantaged compared to the award. It also means that if workers place a higher premium on say flexible working conditions than weekend rates, that they could trade them off against each other, as long as their cumulative wages and conditions meant they weren’t disadvantaged.

We know from history that EBAs have driven higher wages and higher productivity. But right now, the proportion of people working under a federally registered EBA that has lapsed – but is still operational – has climbed over the past four years to almost 40 per cent of federally registered EBAs.

We can’t allow the EBA system to die the death of a thousand cuts. We all want a nation where all Australians can get ahead, sharing in the dividends of prosperity. A more productive society is inherently a fairer society.