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ProductivityScorecard

Labour productivity fell by 0.2% in the September quarter,driven by large falls in Queensland’s mining and agricultureindustries. This represents the fifth quarterly decline in thelast two years.

Despite the quarterly fall, year-on-year productivity growthimproved from zero in the year end June 2011, to 0.3% inthe year end September 2011.1 This result reinforces thepositive quarterly economic news, with gross domesticproduct (GDP) growing by 1% in the September Quarter.

Labour productivity is the output generated per hour of work undertaken. It is measured indollars of gross value added (GVA) per hour.

For the year to September 2011 national labour productivity growth remained sluggish, onlymarginally outpacing inflation to record a 0.3% increase in real (inflation adjusted) terms. Overthe past 15 years, only the 2004-05 year – which saw labour productivity fall by 0.6% – showed aworse labour productivity growth performance.

Annual change in labour productivity Year-end (September Quarter)

December 2011

PwC Productivity Scorecard 1

3.2

3.7

3.1

3.5

1.0

2.5

5.1

0.8

3.5

-0.6

1.71.5

0.5

2.1

0.60.3

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

1. The previous PwC Productivity Scorecard reported year on year productivity growth of 0.4%,. The Australian Bureau of Statistics has since updated relevant input data meaning outputand productivity figures were revised.

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-13.5

-2.5

3.6

-5.2

4.0

2.5

-0.7

2.4

-5.3

-1.1

0.3

6.3

-3.3

-3.1

3.0

1.1

-0.2

-15.0 -10.0 -5.0 0.0 5.0 10.0

Agriculture, Forrestry and Fishing

Mining

Manufacturing

Electricity, Gas, Water and Waste Services

Construction

Wholesale trade

Retail

Accomodation and Food Services

Transport, Postal and Warehousing

Information, Media and Telecommunications

Financial and Insurance Services

Rental, Hiring and Real Estate Services

Professional, Scientific and Technical Services

Administrative and Support Services

Arts and Recreation Services

Other Services

All Market Sectors

From an output perspective, the good news stories of the quarter have been mining and construction,which grew by 3.7% and 5% respectively. The labour productivity stories of these industries are, however,quite different.

Construction is unambiguously good news; growth in output being driven by strong labour productivitygrowth (4% for the quarter) and offsetting a surprising 2% reduction in labours hours; quite simply, gettingmore from less.

Mining, on the other hand, owes its output growth more to a sharp increase labour hours (7% for thequarter) than its productivity, which fell 2.5%.

Across the board, labour productivity increased in real terms in 8 of the 16 market sectors.

The bad news is the significant quarterly falls in agriculture and transportation, the latter representing aslow down from the strong growth achieved in the June quarter.

The September quarter is historically a less productive month for the sector – being the period in whichmany of Australia’s crops are planted and awaiting harvest which occurs later in the year – and the sectorhas a history of offsetting declining output through employing fewer labour resources (e.g. seasonalcontract harvesters). But a fall in international agricultural export prices has meant that, even inseasonally adjusted terms, the quarter experienced a lower value of outputs and even lower labourproductivity.

National Quarterly change in labour productivity by market sector(September Quarter 2011)

0.5

-1.0

-4.9

0.3

4.5

2.7

-0.7

3.6

-0.2

-6.0 -4.0 -2.0 0.0 2.0 4.0 6.0

NSW

VIC

QLD

SA

WA

TAS

NT

ACT

AUST

Quarterly change in market sector labour productivity (September Quarter 2011)

Given the sector productivity story, Queensland’s proportionately larger mining and agriculture sectorscontributed to its poor productivity performance and made it the primary driver of the nation’s overalldecline in labour productivity. Queensland’s labour productivity fell 4.9% for the quarter.

This isn’t all bad news. Hours worked grew 6.5%, rebounding to just short of its peak prior to thedevastating floods of late 2010 and early 2011. Major employment gains were seen in manufacturing,mining and agriculture, and also in the financial and insurance services sector.

But the state failed to achieve commensurate gains in output; labour productivity fell in each of thesesectors and by as much as 20% in mining and 24% in agriculture (seasonally adjusted). Indeed, output inall market sectors actually fell by 1.1% in spite of strong labour growth.

WA’s impressive labour productivity growth was largely driven by its information, media andtelecommunications and manufacturing sectors whose labour productivity grew by 32% and 21%respectively in the September quarter. Elsewhere, labour productivity in WA’s construction sector alsorebounded from the previous quarter.

Gains in productivity were also recorded in the smaller states – Tasmania’s by 2.7% and ACT’s by 3.6%;although the market sector in ACT, owing to its size, is subject to large statistical variations.

PwC Productivity Scorecard 3

The Australian tourism industry

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2. Tourism Research Australia 2011, State of the Industry 2010, Department of Resources, Energy and Tourism, Canberra

Tourism is an iconic sector withreal economic importance …

The Australian tourism industry is iconicand a source of national pride for manyAustralians; we value our leisureopportunities, and we like others to visit andenjoy our country, our people and ourexperiences.

The tourism industry is also a significant sectorof the economy and supports the livelihoods ofmany Australians, particularly in regionalAustralia. In 2009-10, tourism contributed2.6% ($33.9 billion) of Australia’s grossdomestic product (GDP) and directly employedalmost half a million people, with 46 cents inevery dollar of tourism expenditure beingspent in regional Australia.2

… and a diverse identity …

While ‘we know it when we see it’, thereis a challenge in defining what preciselyconstitutes the tourism industry.

The United Nations World TourismOrganization defines a tourist as a short-termvisitor travelling away from their usual place ofresidence for a period of less than one year andin the case of domestic overnight travel, travelsmore than 40 kilometres from home. Thisvisitation can be for leisure, business,employment or education. This definition isbroader than what we ordinarily consider to betourism – which many view as predominately aleisure activity – but acknowledges thatimportant contribution to tourism come from avariety of sources. For example, thecontribution of education and training to theAustralian tourism industry has almostdoubled since 2001-02, and now accounts forsome 8% of the industry.

Labour Productivity Focus:Tourism

One way for policy makers to understandtourism is to consider its supply and demand.

• Demand for tourism in Australia comes fromthree sources: international guests, domestichousehold tourism (primarily leisure andrecreation) and domestic business travel.These three account for 27%, 12% and 61%of the sector respectively, shares which havebeen relatively stable over the past decade, andyet there are important nuances associatedwith each. For example, the shorter termnature of domestic business travel means thatmore of its expenditure accrues to long termtransportation such as airlines (34%, relativeto 16% for all visitors).

• Supply comprises all of the inter-relatedactivities that are required to produce goodsand services for consumption by tourists.Outside of a few large players (most notably,Australia’s airlines), the sector ispredominantly comprised of small and diversebusinesses. Restaurants, cafes and bar, hotelsand accommodation, travel agents, touroperators and recreation/leisure activityproviders, transportation and retail; thesebusinesses form the backbone of the tourismsector and operate in an extremely competitiveand dynamic business environment.

Tourism is, in effect, a sector of sectors; adisparate collection of businesses broughttogether by a common customer base. For policymakers, this means that while ‘demand side’challenges may be the same (e.g. declining shareof global tourism, high Australian dollar) the‘supply side’ challenges will differ markedly.

2.6%of Australia’s

GDP

PwC Productivity Scorecard 5

… that is at the centre of the adverseimpacts of the mining boom.

While tourism in Australia continues to grow, itsrecent performance falls behind many other partsof the Australian economy:3

• between 1997–98 and 2009–10 total tourismvalue add rose at an annual average rate of 4.1%,while Australian GDP increased by an average of6.7%. As a result, tourism’s share of theeconomy has declined (figure below) by almost aquarter since is peak during the SydneyOlympics (not unexpectedly in the face of amining boom)

• during the 2003–04 to 2009–10 period, growthin investment by tourism-related industries hasbeen at around 1.9% per year, much lower thanfor all industries in Australia (3.9% per year)

Additionally, between 2000 and 2010 Australia’sshare of global tourist arrivals declined 14%(i.e. from 0.7% to 0.6%).

Part of the challenge for tourism relates to what areincreasingly recognised as adverse impacts of abooming mining and resources sector, includingabove average exchange rates and resource andlabour shortages.4 For many Australians these areundoubtedly positive developments, improving realhousehold income and real purchasing power.

Tourism as a percentage of grossdomestic product (GDP)

However, they create real challenges for other partsof the economy – particularly those participating inglobal markets or competing for scare labourresources. Tourism is chief amongst these. Withinternational visitors accounting for almost aquarter of all tourism consumption, few sectors aremore exposed to the declining internationalcompetitiveness driven by historically highexchange rates.

Similarly, few industries are more directly impactedby shortages of labour resources and lowunemployment than tourism, for which staff wagesare the largest expenditure item. Recruitment,retention and the skill capacity of staff are keyissues for Australia’s tourism businesses. Averageemployee turnover has been estimated to begreater than 50%, and many businesses identifyrecruitment, retention and skill deficiency as majorworkforce challenges.

Yet at the same time as economists andpolicy-makers begin to acknowledge the adverseimpacts of the mining boom, there is also a growingacknowledgment that some of its impact may behere to stay (at least for the medium term).For tourism, this implies a more permanent,structural adjustment for the sector to adapt tomacroeconomic conditions that may be the normfor many years to come.

Such change would include:

• capitalising on some of the opportunitiesthese conditions create – such as a growthin business travel, occasioned by the strongeconomic growth in regional areas of WesternAustralia and Queensland

• making better use of labour resources, toimprove productivity, reduce costs and allowthe sector to compete (particularly in regionallocations) with the employment opportunitiesoffered by the mining and resources sectors

• sustaining and promoting non-leisure tourism,such as education, through greater attention tothe needs and preferences of this market.

3.1 3.2 3.13.4 3.3 3.3

3.12.9 2.9 2.8 2.8

2.6 2.6

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

3. See: Tourism Research Australia 2011, Tourism’s Contribution to the Australian Economy, 1997–98 to 2009–10, Department of Resources, Energy and Tourism, Canberra;Tourism Research Australia 2011, State of the Industry 2010, Department of Resources, Energy and Tourism, Canberra

4. Tourism Research Australia 2011, Snapshots 2011: The Impact of the Mining Boom on Tourism, Department of Resources, Energy and Tourism, Canberra

14%decline in globaltourist arrivals

5. Bagwati 1984, Splintering and Disembodiment of Services and Developing Nations, World Economy, pp.133-144.

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Tourism’s labour intensityheightens the focus on labourproductivity ...

But not all tourism’s challenges stem from theseexternal, macroeconomic challenges; some ofthem – like the sector’s lagging productivitygrowth – are ‘home grown’ and exacerbate, ratherthan offset, the challenges of the mining boom.

On some level, tourism will always be a relativelylow labour productivity sector for two reasons.

First, many of the industries that comprise thetourism industry are inevitably labour-intensive,such as the hotel and accommodation, or café,restaurant and food services industries (whichmake up some 33% of the tourism industry). Theservices provided by these core businesses oftourism are ‘embodied’ services; a distinctionadvanced by Bhagwati, who speaks of ‘embodied’and ‘disembodied’ services, with embodiedservices being those that cannot separateproduction and consumption.5 While otherservices industry grow productivity through thecreation of knowledge (i.e. generating productivitygrowth and economies of scale through theproduction, use and dissemination of thisknowledge), for much of tourism the service is aface-to-face ‘embodied’ service delivery. Thiscontext substantially inhibits the scope for gainsin labour productivity.

The second is the disproportionate reliance onSMEs. SMEs are crucial to the sector’s success,and are often the agile, innovative and creativebusinesses that create the vibrant and diversesector Australia benefits from. However, theSMEs in these sectors have little room for furtherrationalisation, and thus suffer from a ‘costdisease’. Compared to other economic sectors,their productivity is low.

Compared to other industries, the tourismindustry has long been characterised by low wagesassociated with a relatively unskilled workforceand a high share of part-time employment. For along time, tourism businesses have been able torely on a seemingly inexhaustible pool of unskilledstaff for the core of the tourism workforce,including meeting the flexible and uncertainhours, weekend and after-hours shifts which thesector inevitably requires. However, asunemployment has decreased over the pastdecade and the mining and resources boomcreates labour shortages (including, or especially,in many regional locations), the low returns havemade it difficult for the tourism industry to attractand retain well-trained staff.

Tourism operator, small business owner,or both?

In today’s climate, the land of the regional tourismoperator is dominated by small locally run businesses.Their expertise lies in knowing their local product andbeing able to bring this product to visitors and delivera world class experience.

However, add to this the every day requirements ofrunning a small business. Tourism operators need tobe able to provide dynamic websites, flexible billingapproaches, office and people management as well asknowing their product back to front. It’s a lot to ask ofthe average Australian.

Gone are the days of being an expert in tourism; tosurvive as an individual operator in this environmentyou need to be a web designer, book keeper, marketer,HR specialist and office manager even before the firstcustomer comes through your door. This is a difficultask in an industry dominated by individuals with apassion for showing visitors the wonders that Australiahas to offer. Greater assistance from the government inthese areas could alleviate these problems and free upthe industry to spend the time doing what they dobest; showing off what this amazing country hasto offer.

PwC Productivity Scorecard 7

Ultimately, it is the productivity of tourism’slabour force that is driving these workforcechallenges.

… which is a challenge the sectoris failing to meet…

While labour productivity in the tourism industrywill always be lower than in the market sector as awhole (noted above), the sector has not grown theproductivity of its workforce to keep pace with therest of the economy.

Annual tourism labour productivity ($/hr, year ending June)

Over the period from 1994-95 to 2008-09 labourproductivity rose by 1.1% a year compared with1.8% a year for the market sector as a whole(top figure)

On a jurisdictional basis, those states that havegrown their labour productivity over the pastdecade (namely ACT and WA) have managedto harness the benefits of new and emergingmarkets; primarily business travel for theresources sector, in the case of WA, andgovernment and government-related travel in thecase of ACT. These jurisdictions have consistentlydemonstrated higher labour productivity thanother jurisdictions (bottom figure).

Quarterly tourism labour productivity by jurisdiction ($/hr)

25

35

45

55

65

25

35

45

55

65

YEJ95 YEJ98 YEJ01 YEJ04 YEJ07 YEJ10

NSW Tourism Vic Tourism QLD Tourism

SA Tourism WA Tourism Tas Tourism

NT Tourism ACT Tourism AUS Tourism

Tourism AUS market sectors

Tas

NSW Vic QLD

SA WA

NT ACT AUS

... and is not offset by betteruse of other resources.

Low and stagnant labour productivity has not beenoffset by more productive use of other resources.Research by Tourism Research Australia suggeststhat against other measures of productivity thetourism industryhas again performed poorly in recent years relativeto the market sector as a whole.6 TRA estimatedthat over the period 1997-98 to 2008-09:

• capital productivity, which is particularlydifficult to estimate because of the lack oftourism-specific investment, decreased 1.8% ayear compared with a decline of 1.2% a year forthe Australian total market sector’ (top figure)

• tourism multifactor productivity (MFP) roseby 0.2% a year, compared with 0.4% a yearfor the market sector as a whole (bottom figure)

Part of this story is the challenge of ageinginfrastructure. The failure to generate investmentin new, attractive infrastructure has left the sectorwith a legacy of historic assets that the current levelof investment is failing to replenish; diminishingthe attractiveness of our tourism locations andinhibiting the productivity ofthe sector.

Poor performance against these broader measuresof productivity creates a perpetuating challenge forthe sector. On the one hand, industrycommentators continually note the need for capitalinvestment – e.g. in the formof new and more productive tourist facilities –to improve Australia’s attractiveness as aninternational tourist destination and promote theproductivity of its workers. On the other hand,attracting this investment is undermined by therelatively low returns the sector affords, driven byits poor productivity performance.

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Annual growth in capital productivity

Annual growth in multifactor productivity

Do we have the infrastructure to supportregional Australia?

Despite our capital cities having world-class infrastructure,our regional destinations are not always so lucky. A tourismoperator could have the best product and service in theworld, however without sufficient transport, telephonyand internet connectivity, their competitive advantage issignificantly diminished.

The NBN goes someway towards rectifying this issue,however without significant private and public sectorinvestment into regional infrastructure beyond this, weremain at a significant disadvantage in comparison to ourkey competitors. This is inextricably linked with our supplychains and the logistics of running an effective business.Without suitable infrastructure, costs increase and theviability of regional products diminish.

-15

-10

-5

0

5

10

Tourism industry Market sector

70

80

90

100

110

6. Tourism Research Australia 2010, Tourism Productivity in Australia, Department of Resources, Energy and Tourism, Canberra

Tourism industry Market sector

PwC Productivity Scorecard 9

Again, the macroeconomic context of tourismexacerbates the sector shortcomings. Internationalcapital markets remain uncertain; with the hangoverof the global financial crisis and the ongoing crisis inEurope, funding for current and future investmenthas been more difficult and more costly to obtain. Atthe same time, recent and much publicised shocksfacing Australian and international tourism serve toraise the risk profile associated with investing in theindustry.

Productivity improvement is neededto address these pressures ...

All these pressures amount to ongoing productivityimprovement being a central challenge for tourisminto the coming decade. Tacking productivity is vitalfor the tourism industry to:

• moderate relative price increases generated by ahigh Australian dollar

• allow for a more attractive offering to itsworkforce, so that better labour conditions canalleviate the high labour turnover and skillattraction/retention challenges while growing theindustry’s ability to compete in competitivelabour markets

• deliver new, attractive and value-for-moneytourism experiences and attract fresh investment.

The productivity challenge for the Australian tourismindustry is two-fold. For some, improvingproductivity is almost synonymous with reducingcosts; but this is only half the equation. The solutionto the productivity problem lies in achieving bothsides; growing the industry’s value proposition whilegetting the most out of the increasingly costlyresources.

Australia is losing out to lower cost destinations

Among both domestic and international travellers we arelosing out consistently to better value destinations. Whywould a UK traveller come to an Australian beach when Ibizais so easy and accessible?

This is even more serious for the domestic market. This isevidenced by the significant number of Australians holidayingin Bali and South East Asia(with the emergence of low costairlines) and Australian skiers turning their back on theSnowy Mountains in favour of New Zealand where theirdollars go further. Our industry is pricing ourselves out of ourmarket. Domestic travellers represent more than 70% oftourism revenue to the Australian economy. We need tonurture this more to ensure we minimise the destinationswitching we have seen in recent years with low costinternational destinations.

The emergence of Tiger Airways, Jetstar and Air Asia X out ofQueensland is only exacerbating this problem. While theybring travellers in, they also provide a more cost effective wayfor Australians to travel overseas.

‘Australia continues to decline in the rankingsby four more places, and is now at 13th positionoverall. Australia’s T&T [Travel & Tourism]competitiveness continues to be characterizedby a number of clear strengths, including itsrich natural resources … And given thecountry’s distance from other continents andthe related importance of domestic air travel toovercome the large distances between majorsites, its competitiveness is also buttressed byexcellent air transport infrastructure (ranked3rd) as well as good general tourisminfrastructure (ranked 16th).The drop in ranksince the last edition can be traced in large partto a perceived weakening of the focus onenvironmental sustainability and increasedconcerns about the availability of qualifiedlabor in the country.’

World Economic Forum 2011, The Travel & TourismCompetitiveness Report 2011: Beyond the Downturn, p.xx

7. Tourism Forecasting Committee 2010, Forecast, 2010 Issue #2, Tourism Research Australia, Canberra

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This means offering additional and more valuedservices and a higher level of quality. While thisusually means increased costs, many domesticand international visitors are in a position topay higher prices. Often the limiting factor ofdemand in leisure sectors is instead the limitedavailability of time – occasioned by greaterworking hours and fewer holidays amongstwealthy nations – rather than money. The taskfor Australian tourism is to attract this market;and to this end, Tourism Australia’s ‘No leave,no life’ campaign is the right message.

This approach requires new levels of staffservice – implying new challenges for trainingorganisations – and new expectations ofinfrastructure (e.g. our relatively poor cityaccess by helicopter from airports).

On the other hand, a more concerted effortneeds to be made to design the touristexperience for the mass market. Key segmentsof the tourist market, particular low or mediumpurchasing power tourist, are indeed priceelastic – that is, price increases lead to aproportionately greater fall in demand, leavinga overall negative impact on industry profits.This type of consumer switches from services togoods. It is for this reason that we find a ‘self-service economy’ emerging in the core businessof tourism.

These twin targets for tourism productivityrequire entrepreneurship and innovation onboth levels. The tourism industry must focusnot only on operating more cost effectively, butalso to innovate into new markets which areless price sensitive.

The obvious target for both the mass marketand the premium market is the growing middleand upper classes of China. This is vital giventhat it is forecast that 27.9% of the growth intourism export dollars over the period 2009-20is forecast to come from China (almost six timesthe importance of the next individual country).7

High cost of entry

Given our geography, the cost of entry into Australia ishigh, particularly out of Europe and the America’s.This puts us at a natural disadvantage from a valueperspective in comparison with other destinations.Moreover, once in Australia the costs associated withdomestic travel are high (with air access the only viableoption for a number of major destinations).

This makes it difficult to compete for the Australianmarket, particularly at the low to medium end of themarket. Acknowledging this and building a productsuite to reflect the high costs associated with a visit toAustralia is key to our success.

Given our geography, many see a visit to Australia as aonce in a lifetime trip that requires an investment oftime and money. Our product needs to match theseexpectations.

Do tourism operators have the right skills torun a successful business?

Tourism is the lifeblood of regional Australia. Outside themajor Australian cities and mining communities, tourismdominates the employment and economy of regionalAustralia. However are our operators appropriately trainedto deal with visitors, both domestically and from abroad?Tourism thrives on having a marketable product, havingthe right people to present this product and a service levelthat matches the experience. Very little training orassistance is provided to regional operators, yet we expectthese operators to deliver a premium service offering equalto or better than any throughout the world. Is this arealistic expectation? Should more assistance be providedor made available?

As productivity rises, higher wages can be paid, improvingthe industry’s competitiveness in labour, capital and landmarkets. This is also a way to offset the effects of a higherthan normal currency. Finally, by making possible a higherreturn on investment, increased productivity also helps toattract more investment in tourism facilities.

The question remains; for the all Australia’stourism marketing efforts – from OprahWinfrey to the Best Job in the World campaign– what is the health of Australia’s tourismbrand, at home and aboard? In recent years, thereal challenge for Australian tourism has notbeen competing for the global tourist –international visitors have grown by a third overthe last decade – but keeping our own. For allthe focus on international guests – driven inpart by a misguided preference for exportrevenues – the backbone of Australian tourismremains domestic travellers.

The growing opportunity for Australians totravel overseas is, in most ways, an undoubtedlypositive development; it reflects risingAustralian affluence and the declining real costof long distance travel. Yet it points to broaderconcern for the health of Australia’s tourismbrand; if our own tourists are headingelsewhere, why wouldn’t our internationalvisitors do the same?

Australian tourism remains reliant on theAustralian tourism brand. Without it, noamount of productivity growth can generatecustomers to sell to.

... but productivity growth aloneis not enough

While it is tempting to view improved productivityas the solution to the tourism industry’s ills,productivity is not the be-all and end-all. Thereality of a global tourism marketplace remains;even if produced efficiently, goods and services willnot be profitable if they cannot be sold. In thisregard, productivity is no more than one of theprerequisites for success; the success of a businessdepends on its ability to adapt to demand and pricerequirements.

The tourism industry and Australian governmentshave long recognised the national tourism brand,bigger than any one tourism business. Australia’stourism industry is itself akin to one of itsbusinesses; if a hotel is able to brand, position andsell its services in highly competitive markets, itcan be just as profitable as businesses in moreproductive industries. So it is with Australiantourism as a whole.

Yet the wicked problem is forming a unified,attractive Australian tourism brand from adisparate ‘sector of sectors’.

PwC Productivity Scorecard 11

Productivity growth by jurisdictionand industry

The following tables provide estimates of changes in labour productivityfor the Australian Bureau of Statistics’ ‘market sectors’ by jurisdictionfor the past quarter (September 2011), past year and past five years.8

The charts show annual (inflation adjusted) labour productivitysince 2005.

Care needs to be taken with interpreting changes in labour productivity in small sectors in small jurisdictionsdue to the volatility of the results (and in some cases we do not report these results).

8. The market sector excludes sectors in which productivity growth is difficult to measure, such as public administration and safety, education and training,and health care and social assistance

Agriculture, Forestry and Fisheries

Mining

Change in labour productivity (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

6.6 1.9 -23.6 -22.4 -43.9 -17.4 10.2 - -13.5

1 yr 5.6 12.9 22.3 0.4 -20.5 26.4 93.9 - 10.9

5 yr 6.2 -0.1 -1.1 0.3 9.3 48.2 79.9 - 8.4

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

10.1 -8.8 -19.2 25.4 -1.8 1.4 11.1 - -2.5

1 yr -18.0 -4.8 -30.0 -26.3 -6.4 -17.5 -29.0 - -15.9

5 yr -43.7 -22.3 -33.5 50.3 -24.6 -41.0 -46.5 - -27.9

Change in labour productivity (%)

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0

5

10

15

20

25

30

35

40

45

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

0

50

100

150

200

250

300

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

06 07 08 09 10 11

06 07 08 09 10 11

Manufacturing

Electricity, Gas, Water and WasteServices

Change in labour productivity (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

6.1 1.5 -7.5 11.9 21.2 1.3 6.4 -25.4 3.6

1 yr 2.0 -0.3 -1.3 -0.8 9.6 -14.8 87.2 -32.5 1.1

5 yr 11.3 5.8 -7.1 9.8 30.8 3.3 61.5 -5.1 8.0

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

3.5 -10.0 -21.0 10.8 -2.0 22.1 8.6 -44.9 -5.2

1 yr 4.9 -15.5 -7.7 -17.5 5.4 0.8 -24.0 -41.3 -5.8

5 yr -21.8 -32.2 -15.6 -25.4 -20.6 -21.5 -25.2 -18.0 -23.5

Change in labour productivity (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

2.3 -3.0 8.3 8.7 7.2 10.9 -6.2 9.9 4.0

1 yr 6.4 0.2 5.3 -0.7 4.1 2.0 -8.7 -7.1 3.7

5 yr 14.3 -0.3 12.2 -5.6 7.6 -8.8 -27.8 3.0 7.5

Change in labour productivity (%)Construction

PwC Productivity Scorecard 13

50

51

52

53

54

55

56

57

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

0

20

40

60

80

100

120

140

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

43

44

45

46

47

48

49

50

51

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

06 07 08 09 10 11

06 07 08 09 10 11

06 07 08 09 10 11

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Wholesale Trade

Retail Trade

Change in labour productivity (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

15.9 3.1 -7.7 6.7 -11.5 4.8 -25.2 -28.9 2.5

1 yr 2.6 6.2 10.5 -5.1 8.0 -8.1 12.3 49.5 5.3

5 yr 7.1 7.4 -4.0 -10.8 15.6 18.5 56.6 51.0 5.3

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

2.7 0.5 -5.3 -2.2 -0.3 -6.6 -0.2 -8.6 -0.7

1 yr -4.5 0.0 -1.3 -3.9 -2.8 2.1 -8.2 18.3 -2.1

5 yr 11.3 2.3 14.6 17.0 11.1 13.3 23.3 36.1 10.6

Change in labour productivity (%)

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Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

6.3 6.1 6.3 6.5 -15.6 -5.1 -12.1 -33.3 2.4

1 yr -1.2 3.8 -1.6 -18.2 6.4 -13.7 -15.2 -8.0 -1.1

5 yr -6.5 -13.1 -23.4 -22.3 9.0 -7.3 3.8 -9.0 -11.9

Change in labour productivity (%)Accommodation and Food Services

58

60

62

64

66

68

70

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

26

27

28

29

30

31

32

33

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

24

25

26

27

28

29

30

31

32

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

06 07 08 09 10 11

06 07 08 09 10 11

06 07 08 09 10 11

15 PwC

Transport, Postal and Warehousing

Information Media andTelecommunications

Change in labour productivity (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

-6.7 -8.3 1.9 -10.5 -11.1 6.3 -7.1 25.6 -5.3

1 yr 0.5 -10.4 5.8 11.9 17.6 6.4 17.1 -8.3 1.4

5 yr -1.9 -8.4 12.0 29.2 -2.2 -4.7 -6.9 -11.4 1.0

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

-5.4 -9.5 3.0 11.8 32.4 26.2 6.0 13.3 -1.1

1 yr -1.1 8.7 -12.6 9.2 3.6 1.1 -12.7 18.5 1.1

5 yr 32.7 40.2 11.2 32.3 72.3 15.6 16.1 56.0 33.8

Change in labour productivity (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

6.9 1.9 -24.7 -7.0 -1.0 12.2 -43.2 40.8 0.3

1 yr -2.2 -4.1 13.6 -8.3 33.1 -4.2 34.0 10.1 0.9

5 yr 15.5 -5.3 54.5 -1.5 26.2 20.8 60.8 72.7 13.8

Change in labour productivity (%)Financial and Insurance Services

PwC Productivity Scorecard 15

52

53

54

55

56

57

58

59

60

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

0

20

40

60

80

100

120

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

130

135

140

145

150

155

160

165

170

175

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

06 07 08 09 10 11

06 07 08 09 10 11

06 07 08 09 10 11

16 PwC

Rental, Hiring andReal Estate Services

Professional, Scientificand Technical Services

Productivity growth (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

7.8 4.8 11.4 -7.9 5.0 4.7 -6.5 -21.6 6.3

1 yr -10.2 -16.5 -10.7 -1.0 6.5 -1.9 -9.6 -5.8 -9.5

5 yr -10.5 -9.3 1.2 -9.3 14.1 30.5 -12.5 25.6 -5.1

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

-5.5 1.4 -8.5 13.2 -11.6 -16.7 8.1 7.7 -3.3

1 yr 6.6 2.9 -2.0 3.7 21.5 1.3 8.2 23.7 5.8

5 yr -1.1 10.1 11.2 -7.1 38.6 17.7 17.6 42.5 8.7

Productivity growth (%)

16 PwC

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

-13.9 -5.1 10.1 -8.8 13.1 13.0 18.5 -21.8 -3.1

1 yr -5.5 -1.8 5.6 -6.1 2.3 3.5 32.7 -11.4 -1.5

5 yr -17.5 16.9 -11.4 -27.5 19.3 94.4 30.0 -1.9 -5.5

Productivity growth (%)Administrative andSupport Services

0

10

20

30

40

50

60

70

80

90

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

44

45

46

47

48

49

50

51

52

53

54

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

0

10

20

30

40

50

60

70

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

06 07 08 09 10 11

06 07 08 09 10 11

06 07 08 09 10 11

Arts and Recreation Services

Other Services

Change in labour productivity (%)

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

5.8 13.7 -9.8 -4.6 1.6 -15.2 -25.6 19.4 3.0

1 yr -8.8 4.3 1.8 -27.6 7.7 1.8 -27.1 23.8 -2.9

5 yr 3.1 -5.5 21.6 -27.0 20.7 -0.9 -10.2 -5.2 1.5

Period NSW VIC QLD SA WA TAS NT ACT Aust

SeptQtr ’11

-4.1 4.8 -6.7 -13.6 20.3 45.0 8.9 21.7 1.1

1 yr -12.9 -4.8 3.0 -11.0 4.8 21.0 4.5 -7.0 -5.0

5 yr -16.1 -3.4 26.9 2.5 -15.8 5.4 -27.1 -22.5 -4.9

Change in labour productivity (%)

PwC Productivity Scorecard 17

262627272828292930303131

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

30

31

32

33

34

35

36

37

Jun qtr06

Jun qtr07

Jun qtr08

Jun qtr09

Jun qtr10

Jun qtr11

06 07 08 09 10 11

06 07 08 09 10 11

The importance of productivity

‘Productivity’ is the amount of output per unitof input. The concept can be applied broadly,such that it ‘is what a workplace, a business orgovernment agency, an industry, a region or a nation‘gets’ by way of goods and services for what it ‘puts in’,in terms of labour, capital and other factors ofproduction’.9

The quest for improved productivity is not aboutmaking people work harder solely for the benefitof shareholders or government. Rather, productivity-induced efficiencies provide the potential for anindustry to increase its contribution to the Australianeconomy by increasing profits of its shareholders andthe wages of its workers, as well as to lower prices andresult in the better provision of goods and services toconsumers.

Furthermore, ‘high levels of productivity and/or highrates of rapid productivity growth are desirable becausethey enable societies to achieve not only higher materialstandards of living but also to make other (individualand collective) choices which enhance some of the non-material factors affecting the quality of people’s lives’.10

For example, improved productivity may mean moreefficient resource use, which may reduce pressures suchas environmental degradation.

The centrality of productivity, in one of the morefamous modern economics quotes, was reinforced in1992 when Paul Krugman wrote that ‘a country’s abilityto improve its standard of living over time dependsalmost entirely on its ability to raise its output perworker’.11 This sentiment has been echoed this year byAustralia’s most senior economic policy advisers:

• The Governor of the Reserve Bank of Australia, GlenStevens, recently stressed that ‘there is only onesource of ongoing higher rates of growth of real percapita incomes, and that is higher rates of growth ofproductivity’.12

• The Secretary of the Commonwealth Treasury,Martin Parkinson, observed that ‘in the long run,productivity growth – producing more from thesame inputs – is the only sustainable way for futuregenerations to enjoy higher living standards’.13

• The Chairman of the Productivity Commission, GaryBanks, noted that ‘The imperative must be to driveproductivity improvements and efficiencythroughout the economy, through actions that caneffectively foster competition, facilitateorganisational flexibility and adaptability, and buildcapability. Whatever the economic question,‘productivity’ is generally the answer’.14

Measuring productivity

Labour productivity is the most commonly usedproductivity measure mainly because it is relativelyeasy to comprehend and to compute. For example, arough estimate for an economy can be obtained bydividing GDP by official estimates of total hoursworked.

The Australian Bureau of Statistics (ABS) publishesannual labour productivity measures (value added perhour worked) by jurisdiction and industry.

While labour productivity is an accessible and insightfulperformance measure, it is not a complete measure ofproductivity becauseit does not take account of:

• capital accumulation in increasing outputs, which isparticularly important duringa resources boom

• the proportion of the population actually employedproductively

These limitations can be addressed through ‘multifactorproductivity’ measures.

18 PwC

The Productivity ImperativeBackground

9. Saul Eslake and Marcus Walsh 2011, Australia’s Productivity Challenge, Grattan Institute Report No. 2011-1,p.410. Ibid.,p.5.11. Paul Krugman 1992, The Age of Diminished Expectations: US Economic Policy in the 1980s, MIT Press, Cambridge, p.9.12. Glen Stevens 2011, ‘The Cautious Consumer’, address to the Anika Foundation, 26 July.13. Martin Parkinson 2011, ‘Sustaining Growth in Living Standards in the Asian Century’, address to the Seventh Economic and Social Outlook Conference, Melbourne, 30 June, pp.11-1214. Gary Banks 2011, ‘Australia's Mining Boom: what's the problem?’ address to the session 'Managing the Growth Shock' at the Economic and Social Outlook Conference, Melbourne, 30 June, p.10.

Multifactor productivity is a measure of the outputobtained from a ‘unit bundle’ of both capital andlabour — which entails complex techniques formeasuring and aggregating capital services andthen combining these with hours worked. The dataneeds for this technique are substantial and subjectto significant estimation risk.

The estimates of quarterly labour productivityby industry and jurisdiction in PwC ProductivityScorecard should be seen as a complement to longerterm multi-factor productivity analyses.

The productivity challenge

The evidence suggests that there are twoproductivity challenges.

The first challenge is that Australia’s productivityperformance, however measured, has deterioratedsubstantially since the late 1990s. In terms ofsimple decade-average comparisons, Saul Eslakereports that:15

• Labour productivity

- for the Australian economy as a whole grew atan average annual rate of 1.5% over the tenyears to 2009-10, compared with 2.1% perannum over the ten years to 1999-2000, 1.4%per annum over the ten years to 1989-90 and2.8% per annum over the ten yearsto 1979-80

- for twelve of the industry components of the‘market sector’ for which the AustralianBureau of Statistics has estimates going backbefore 1994-95 grew at an average annualrate of 1.9% during the 2000s, compared with2.6% in the 1990s and 1.6% in the 1980s

• Multi-factor productivity

- for the Australian economy as a whole wasunchanged over the course of the 2000s,compared with growth averaging 1.6% perannum in the 1990s, 0.7% per annum in the1980s and 1.5% per annum in the 1970s

- for the ‘market sector’16 grew at an averageannual rate of 0.2% in the 2000s, comparedwith 1.4% in the 1990s

On its own, the decline in productivity performanceis concerning.

The concern is magnified because our productivityperformance is slipping behind that of our advancedcompetitors: ‘Australia ranked 11thout of 25 OECD countries in descending orderof labour productivity growth in the 1990s, and 17thout of 34 countries in the 2000s’.17

The concern is further magnified because, when theresources boom eventually runs its course, if wehave not seen sustained productivity growth in non-resource industries, then we will be relying onsmaller and less productive industries toimplausibly sustain our national standard of living.

The PwC Productivity Scorecard

The PwC Productivity Scorecard publishes PwCderived labour productivity measures (based onABS data) on a quarterly basis:

• for the market sector – this includes:

- Agriculture, Forestry and Fishing

- Mining

- Manufacturing

- Electricity, Gas, Water and Waste Services

- Construction

- Wholesale Trade

- Retail Trade

- Accommodation and Food Services

- Transport, Postal and Warehousing

- Information Media and Telecommunications

- Financial and Insurance Services

- Rental, Hiring and Real Estate Services

- Professional, Scientific and TechnicalServices

- Administrative and Support Services

- Arts and Recreation Services

- Other Services

• by state, territory and nationally

15. Saul Eslake 2011, ‘Productivity’ presented to the annual policy conference of the Reserve Bank of Australia, HC Coombs Conference Centre, Kirribillii, Sydney, 15-16 August, p.216. The market sector excludes sectors in which productivity growth is difficult to measure, such as public administration and safety, education and training, and health care and social assistance17. Saul Eslake 2011, ‘Productivity’ presented to the annual policy conference of the Reserve Bank of Australia, HC Coombs Conference Centre, Kirribillii, Sydney, 15-16 August, p.4

PwC Productivity Scorecard 19

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