Why I keep banging on about productivity

In healthcare, you don’t treat the fever and ignore the infection. You find the cause.

I learned that in a prior career as a nurse. Now, Australia’s economy has a fever. Wages are going backwards in real terms, inflation is sticky, interest rates have gone up three times this year and they may go higher.

Everyone is arguing about the symptoms and too few are talking about the cause. The cause is productivity growth, and Australia’s is in limbo.

Here’s the cost-of-living crisis in simple form: it’s the relationship between productivity, wage rises, and inflation.

Productivity → wages → prices

Imagine a worker produces $100 worth of goods in an hour.

If their productivity rises by 5%, they now produce $105 worth of goods in an hour.

The employer can afford to pay the worker more without necessarily raising prices.

So, wages could rise by roughly 5% without creating much inflation.

But there is a catch.

What if wages rise faster than productivity?

Suppose productivity rises 0.3% and wages rise 3.4%.

The employer has three choices: accept lower profits, raise prices (which contributes to inflation), or find ways to become more productive.

Productivity growth creates the economic room for wages to rise without pushing up prices; wages growing substantially faster than productivity can put upward pressure on prices, which causes inflation.

And once inflation takes hold, interest rates stay higher to contain it, households have less to spend, and demand softens. It’s a cycle, and we’re living in it.

And those numbers above? They are real. In the year to June 2025, which is the same 2024–25 period the Productivity Commission measured at 0.3% productivity growth, the ABS Wage Price Index rose 3.4%.

With higher inflation, our standard of living is going backwards.

The public debate treats wages and inflation as a tug of war. Pay people more, prices go up. Hold wages down, inflation eases.

But that explanation misses the point. The question isn’t “how do we keep wages down?” It’s “how do we make each hour of Australian work produce more?”

The answer to the pertinent question lies in tax reform that favours, rather than punishes, business; it is found in cutting the regulatory burden that forces small and mid-sized manufacturers to spend more time on compliance than on innovation.

The productivity question can be answered in energy policy that gives manufacturers a competitive cost base instead of one of the most expensive in the developed world; and the productivity challenge is assisted in procurement reform that values sovereign capability and quality over lowest price.

A word on the global influencers

The Productivity Commission says the world isn’t doing this to us. We’re doing it to ourselves by failing to create the conditions for investment. Putting this in a global context, capital is mobile and Australia’s conditions are not strong enough to win the competition for it.

The argument is confused by the Iran war. The cost-of-living crisis now has two engines: the domestic productivity failure that the Productivity Commission has diagnosed, and an imported energy shock.

The Iran war and the closure of the Strait of Hormuz have produced what the International Energy Agency called the largest supply disruption in the history of the global oil market. Australia imports 90% of its liquid fuel. Automotive fuel prices are up 24.2% through the year.

We can’t do much about geopolitical problems, but we can do something about domestic reform. We can look at tax settings, regulatory burden and energy policy. These matter more, not less, when the global environment is uncertain.

Domestic reforms are the levers the Productivity Commission keeps pointing to. They’re the levers that, from where I sit on the factory floor, would make the biggest difference to our economy by making a difference to productivity.

Productivity is the infection. Everything else is the fever.