41853 – Productivity: Doing More with the Same | Australian Property Network™

41853 — Productivity: Doing More with the Same

Overview

Productivity is the amount of output the economy gets from a given amount of input: an hour of work, a dollar of machinery, or the two combined. It is the least visible of the fundamentals in this series and, over any period longer than a business cycle, the most important. Wages, profits, tax revenue, and the capacity to pay for housing all grow, in the long run, only as fast as output per hour grows. The Reserve Bank of Australia (RBA) states the point without qualification: productivity growth is “the main driver of higher living standards in the long run”.²

The Australian record is the reason this entry exists. Output per hour worked in the June quarter of 2026 was almost exactly where it stood at the end of 2019. Every dollar of real growth since then has come from more hours, not from getting more out of each hour, and the Productivity Commission’s September 2026 assessment is that the economy is “barely 1% above our 2015–19 average level of productivity”.⁴ This entry explains what productivity measures, how the Australian Bureau of Statistics (ABS) estimates it, what the thirty-year market-sector record shows, and why a stalled productivity trend matters more for property than any single quarter of growth or inflation.^1,3

Scope & Boundaries

This entry covers:

Labour productivity and multifactor productivity, and the difference between them
How the ABS measures each, and why the market sector is the reference aggregate
The market-sector record from 1994–95 and the whole-economy record from 1978
The productivity stall since 2016 and the post-pandemic fall
Why productivity sets the ceiling on real wages, borrowing capacity, and construction costs

This entry does not cover:

Wages and the real wage record — addressed in 41854
GDP and the composition of growth — addressed in 41855
Hours worked, participation, and the labour market — addressed in 41856

Scope Note

This entry is educational background within an editorial essay series. Its charts use the Australian Bureau of Statistics productivity estimates and national accounts, cited in full at the end of the page. APN’s certified readings of Australian economic conditions are maintained separately in the 21200 series.

Key Concepts

Labour productivity and multifactor productivity

The RBA’s definition is the standard one: “productivity refers to how much output can be produced with a given set of inputs”, and it rises “when more output is produced with the same amount of inputs or when the same amount of output is produced with less inputs”.² Two measures are in general use. Labour productivity is output per worker or, better, per hour worked; it rises when workers become more skilled, when technology improves, when firms are managed better, and, importantly, when workers are simply given more capital to work with. Multifactor productivity (MFP) is output per unit of labour and capital combined, so it strips out the effect of giving each worker more machinery and measures what is left: the gain that “cannot be explained by changes in inputs”.² MFP is the closer measure of genuine efficiency, and it is the one that has done worst.

How the ABS measures it

The ABS publishes productivity two ways. The national accounts carry a quarterly index of GDP per hour worked for the whole economy, available from 1978. The annual productivity release estimates labour productivity and MFP for the market sector, the sixteen industries whose output is sold at market prices and can therefore be measured with confidence, from 1994–95.^1,3 The distinction matters because a large and growing share of employment is in health, education, and public administration, where output is largely measured by inputs and productivity growth is close to unmeasurable by construction. The Productivity Commission’s five-year inquiry made the point directly: over 35 years “the expansion of employment in the services sector has been mainly in government subsidised and regulated services, like health care and social assistance”, where productivity “can be hard to measure and achieve”.⁵ The market-sector series is the cleaner reading, and it is the one the first two charts use.

Chart 1

Market-sector productivity, 1994–95 to 2024–25 (index, 2023–24 = 100)

Source: ABS Estimates of Industry Multifactor Productivity, Table 2, market sector (16 industries), hours worked basis. Labour productivity is gross value added per hour worked; multifactor productivity is output per unit of combined labour and capital inputs.

The market-sector record

Over the thirty years to 2024–25, market-sector labour productivity grew 1.7 per cent a year and MFP 0.7 per cent a year; the gap between the two is capital deepening, the extra machinery, buildings, and software per hour of work. The growth was front-loaded. In the second half of the 1990s labour productivity rose 3.0 per cent a year and MFP 1.8 per cent, the payoff from the previous decade’s reforms to tariffs, financial markets, competition policy, and wage setting. From 2000–01 to 2004–05 the rates were 2.1 and 0.8. From 2004–05 to 2009–10, at the height of the mining boom, labour productivity managed 1.6 per cent a year while MFP fell slightly, because the boom’s enormous investment in mines and gas plants added capital far faster than it added output. The 2010s began well, with 2.2 per cent labour productivity growth a year to 2014–15 as that investment came on stream, and then stalled: 0.9 per cent a year from 2014–15 to 2019–20, and 0.2 per cent a year over the five years since.¹

Chart 2

Market-sector productivity, annual change, 1995–96 to 2024–25 (per cent)

Source: ABS Estimates of Industry Multifactor Productivity, Table 2, market sector, hours worked basis; year-on-year change in the index. The 2022–23 fall in labour productivity is the largest in the series.

The pandemic bubble and what followed

The years 2020–21 and 2021–22 look strong on the chart, and were largely an illusion. Lockdowns removed hours in the least productive parts of the economy first, so output per remaining hour rose without anyone becoming more productive. When those hours came back, measured productivity fell: market-sector labour productivity dropped 3.5 per cent in 2022–23, the largest fall in the series, and MFP fell 0.9 per cent. The two years since have not recovered the ground. In 2024–25, in the ABS’s words, “market sector MFP fell 0.5%” and “market sector labour productivity decreased 0.2%”, with output growing 0.9 per cent, “the second slowest growth since the time series commenced in 1994-95”, while combined inputs grew 1.4 per cent. MFP fell in nine of the sixteen market-sector industries, with the largest fall in mining.¹ Labour productivity in 2024–25 was 2.7 per cent below its 2021–22 level; MFP was 1.3 per cent below.

Chart 3

Output, hours worked, and output per hour, 1978 Q3 to 2026 Q2 (index, 1978 Q3 = 100)

Source: ABS Australian National Accounts, Table 1: GDP chain volume measures, hours worked index, and GDP per hour worked index, all seasonally adjusted, rebased to the September quarter 1978. The gap between the top two lines is productivity; it stops widening after 2019.

The whole-economy record since 1978

The quarterly national accounts tell the same story over a longer span and for the whole economy, not just the market sector. Real GDP grew 3.0 per cent a year from the September quarter of 1978 to the June quarter of 2026; hours worked grew 1.7 per cent a year; the difference, GDP per hour worked, grew 1.3 per cent a year and was 82 per cent higher at the end than at the start. By decade the productivity contribution was 1.4 per cent a year in the ten years to 1988, 2.0 per cent in the ten years to 1998 (the best decade in the series), 1.2 per cent to 2008, and 1.3 per cent to 2018. From the December quarter of 2019 to the June quarter of 2026 it was zero: GDP grew 2.1 per cent a year and hours grew 2.1 per cent a year. GDP per hour worked peaked in the March quarter of 2022, at the tail of the lockdown distortion, and by the June quarter of 2026 was 5.0 per cent below that peak; in the year to March 2023 it fell 5.1 per cent, the largest annual fall in the series. In the year to June 2026 it fell 0.2 per cent.^3,4

Chart 4

GDP per hour worked, annual change, 1979 Q3 to 2026 Q2 (per cent)

Source: ABS Australian National Accounts, Table 1, GDP per hour worked index, seasonally adjusted; change on the same quarter a year earlier.

Why it matters for wages and prices

The link between productivity and pay is arithmetic, not ideology. If output per hour rises 2 per cent, firms can pay 2 per cent more per hour without raising prices, because each hour now produces 2 per cent more. If output per hour is flat, every increase in hourly pay is an increase in the cost of producing a unit of output, and it goes either into prices or out of profits. The RBA puts it plainly: “Productivity growth enables firms to increase wages for workers”, because unit labour costs “decrease as labour productivity increases”.² Sustained real wage growth therefore requires productivity growth; over any long period the two move together, and the real wage stagnation described in 41854 is the mirror image of the productivity record described here. The Productivity Commission’s September 2026 wording is the same: productivity is “the clearest path to sustainably improving Australians’ real wages and broader living standards”.⁴

Regulatory & Legal Framework

No law targets productivity, and no agency is responsible for delivering it. The ABS measures it, in the annual productivity release and in the quarterly national accounts, to the concepts and methods it publishes for the national accounts as a whole.^1,3 The Productivity Commission, the Commonwealth’s independent research and advisory body, reports on it: a five-yearly inquiry, most recently Advancing Prosperity in March 2023, and a quarterly Productivity Insights update, the latest of which is quoted in this entry.^4,5 The Commission’s role is to advise; it has no regulatory power.

Productivity enters policy through two other doors. The RBA’s inflation target assumes a rate of productivity growth in judging how fast wages can rise without lifting prices, so a lower productivity trend lowers the wage growth the Bank can accommodate at any given inflation rate.² And the Commonwealth Treasury’s Intergenerational Report, which projects the budget forty years ahead, rests on an assumed long-run productivity growth rate; the 2023 report lowered that assumption from 1.5 per cent a year to 1.2 per cent, and even the lower figure is well above what has been achieved since.⁶ Most of the levers that affect productivity in practice sit outside macroeconomic policy altogether: competition law, planning and zoning, occupational licensing, tax design, education, and the pace at which firms adopt technology.

Practical Application

Productivity sets the ceiling on borrowing capacity. A household’s capacity to service a mortgage grows with its real income, and real income across the economy can grow no faster than output per hour for any length of time. A productivity trend of 1.3 per cent a year, the average since 1978, doubles real incomes in a little over fifty years; a trend of zero, the record since 2019, means that any real wage growth must come from a shift of income from profits to wages, which cannot continue indefinitely. Long-run assumptions about house prices that rely on rising real incomes are, whether they say so or not, assumptions about productivity.

Construction is where the problem is most visible. Building a house is labour-intensive, and the hours per dwelling have not fallen the way hours per car or per tonne of iron ore have. When construction productivity is flat, every rise in construction wages passes straight into the cost of a new dwelling, which is one reason the price of building a new home rose so much faster than general inflation in 2021–23, as shown in 41852. Improving productivity on building sites, through prefabrication, approvals reform, and scale, is the only route to lower real construction costs that does not involve lower wages.

Reading the releases. The quarterly national accounts figure for GDP per hour worked is volatile and moves with the composition of hours, as 2020–22 demonstrated; a single quarter means little. The annual market-sector release is the better guide to the trend, and the number to watch in it is MFP, because labour productivity can be lifted for a while simply by investing more capital per worker, whereas MFP cannot. A market-sector MFP series that is lower in 2024–25 than it was in 2021–22 is the single most important fact in this series for anyone thinking about incomes, rents, and prices a decade out.^1,4

Cross-Series References

41854

Wages and Real Incomes

Why real wages track productivity over decades, and what happened to pay when the trend stalled.

41855

Economic Growth and GDP

Total growth versus growth per person, and where output per hour fits in the arithmetic.

41856

Employment and the Labour Market

The record hours worked that every productivity figure on this page is divided by.

21200

Economic Factors

APN’s certified readings across the economic indicators, updated as each release lands.

Sources

1. Estimates of Industry Multifactor Productivity, 2024–25 — Australian Bureau of Statistics
2. Productivity — Reserve Bank of Australia, Explainer
3. Australian National Accounts: National Income, Expenditure and Product — Australian Bureau of Statistics
4. Productivity Insights: Quarterly Productivity Bulletin, September 2026 update — Productivity Commission
5. Advancing Prosperity: 5-year Productivity Inquiry report (March 2023) — Productivity Commission
6. 2023 Intergenerational Report — Commonwealth Treasury
7. Estimates of Industry Multifactor Productivity, Table 2, market sector productivity indexes (data cube) — Australian Bureau of Statistics
8. Australian National Accounts, Table 1, Key National Accounts Aggregates (GDP, hours worked, and GDP per hour worked) — Australian Bureau of Statistics

This entry is part of the Understanding Money editorial essay series and is presented for general educational context. APN’s certified readings of Australian economic conditions are maintained in the 21200 Economic Factors series.

41853 – Productivity: Doing More with the Same