The Productivity Commission and National Competition Policy
I spent a good deal of my academic time in the 1990s arguing with the Industry Commission (now the Productivity Commission) about their estimates of the benefits of microeconomic reform and, in particular the ‘Hilmer reforms’, enshrined in National Competition Policy. My main target was their estimate that NCP would raise Australia’s national income by 5.5 per cent relative to the level that would be obtained without reforms. I suggested that the likely benefits were less than 1 per cent.
In their latest report, available as a PDF download, the PC splits the difference, claiming a net benefit of 2.5 per cent. Reading a bit more closely, the ground they’ve conceded is even greater. The PC estimates cover not only NCP but the entire program of microeconomic reform including tariff reform, financial deregulation, labour market reform and so on. And, whereas the earlier estimates were for a five-year time frame, with more to come in future, the PC implicitly concedes that Australia’s productivity growth, after rising substantially between 1993-4 and 1998-9 fell back to the historical average rate, or below, from 2000 on.
One point on which the PC is holding its ground is that of work intensity. I’ve argued consistently that the upsurge in measured productivity in the middle and late 1990s was due, at least in part, to increases in the pace and intensity of work. They say
Further, contrary to the contention of some commentators (see, for example, Quiggin 2001), greater work intensity â€” manifest in longer working hours and an increased pace of work â€” does not provide a credible explanation for the sustained improvement in Australiaâ€™s productivity performance. The impacts of changes in hours worked are explicitly accounted for in measures of productivity growth. And claims that the productivity improvement would be temporary because of an unsustainable pace of work are inconsistent with the extended period of strong productivity growth that has been observed in Australia.
This argument fails because the supporting premise “an extended period of strong productivity growth” is false. As I’ve already observed, above-average productivity growth ceased after 1998-99. This is exactly consistent with a once-off increase in work intensity.
There’s some fancy footwork going on with levels and rates of change here. I’ve asserted that productivity growth based on increased work intensity is unsustainable in the sense that while you can increase work intensity for a few years, the process has to come to a halt. If the higher levels of intensity are maintained, productivity growth will return to its previous rate, but the increase in productivity level will be maintained. A stronger notion of ‘unsustainable’ is that the increase in effort will be reversed, and productivity growth will be below-average until the temporary increase in levels is lost. There is some evidence of a reduction in work intensity over the past few years, but it’s clear that much of the increase in the 1990s has been sustained.
What’s left in the case for microeconomic reform is not the productivity gains that were originally promoted but the proposition that microeconomic reform has contributed to our good macroeconomic performance over the past fifteen years. There are a lot of problems with this claim. Most obviously, we were well into the micro reform push when the 1989-90 recession began. More importantly, our current strong performance seems heavily dependent on low interest rates, and it’s hard to see how these can be sustained with a large trade deficit and an expanding current account deficit. Still, this is one area where I’ve been overly pessimistic in the past, and we’ll just have to wait and see whether we can get back on to a sustainable trade path without a recession or serious slowdown.
fn1. Actually, this isn’t quite right. In the early 1980s, microeconomic reform was promoted on macroeconomic grounds, as providing the increased flexibility that would permit a sustained macro expansion without running into export bottlenecks and current account deficits (at that time, assumed to be unsustainable). These claims were abandoned after the 1989-90 recession and attention focused on productivity growth.