Productivity is the efficiency with which an economy transforms inputs (such as labour and capital) into outputs (such as goods and services). When a nation achieves productivity growth, it is able to produce more goods and services from the same quantity of labour, capital, land, energy and other resources. In turn, improved production efficiency can generate higher real incomes and lead to long-term improvements in Australia's living standards. While education and training improve the quality of the labour force over time, and are a key input into productivity growth, lack of innovation, research, development, or investment in assets can reduce productivity growth and thus Australia's ability to compete in the international market.

The most comprehensive Australian measure of productivity available is multifactor productivity. It gauges the efficiency with which combined labour and capital inputs are transformed into outputs. In the short term, this reflects the impact of an array of factors, such as the utilisation of available labour and capital, economies of scale, and resource reallocation. In the long-term, it represents improvements in ways of doing things (technical progress), which is the ultimate source of economic growth and higher living standards.

Australia's productivity varied in the different growth cycles of the last decade, although negative growth in multifactor productivity in more recent years is stronger than the positive growth at the start of the decade. (Endnote 1)

Across the productivity growth cycle of 1998-99 to 2003-04, output growth (3.5%) was higher than growth in inputs (2.7%) meaning that there was an an overall positive growth in multifactor productivity (0.8%). However, in the most recent productivity growth cycle, 2003-04 to 2007-08, growth in inputs (4.5%) was stronger than growth in outputs (3.4%) and multifactor productivity therefore experienced negative growth (-1.0%).

For more in-depth discussion about how productivity relates to progress and whether it is improving in Australia, please see the Productivity chapter in Measures of Australia’s Progress, 2010 (cat. no. 1370.0).

ENDNOTE

1. The headline indicator for the dimension of Productivity has changed since the last release. The new measure, multifactor productivity in the market sector based on quality adjusted hours worked, is a refinement of the measure used previously and is considered the most appropriate measure.