Structural change and productivity Flashcards
What is structural change?
The changes in the distribution of output, income and employment across industries, sectors, regions and states overtime.
Changes to the structure of the economy
- Agricultural activities dominated during the country’s pre-industrial phase
- Agricultural → industrial economy
- Development of manufacturing
- The economy then began to focus on skill and technology intensive sectors
- In the long term, the services area dominates and the manufacturing industries declines
Stats for the changes in our economy
- At its highest, manufacturing accounted for nearly 25% of output, yet it is just 10% today
- After WWII agriculture accounted for 35% of total output, but only accounts for 5% now
- Mining’s share of output has increased as mineral deposits were developed in WA and QLD
- Services now account for 77% of output, from 50% in 1950
Endogenous influences
When changes arise as part of normal economic activity
Individual firms/industries
- Individual firms innovate, seeking higher profits
- Industries are collections of firms, so any changes made by one firm are likely to be felt across an industry as competitive forces play themselves out
Impacts of structural change
- Structural change impacts on business products and process. Changing patterns of demand and supply bring new challenges along with opportunities, such as finding and training skilled workers, trying to access overseas markets, and managing exchange rate risk.
- In any industry, business profitability and longevity depends upon understanding changes in markets, bring proactive and adaptable to change and not being ‘caught’ in the declining phase of the product life cycle.
- Structural change is accompanied by changes in the occupational landscape. In general, it results in increased demand for skilled workers, depending on the sector and the type of skills in demand
Economic activity and productivity
- The same endogenous forces that drive structural change are also drivers of growth
- Economic growth also drives the process of structural change as higher per capita led to changing preferences
Productivity
- Refers to the efficiency with which people or firms convert productive resources into outputs of goods and services
- These goods and services are produced by the combining productive factors – land, labour, capital and enterprise
Labour productivity
- Total output per hours worked
Capital density
- The amount of capital per unit labour employed
- Increasing capital density improves labour productivity because workers have more capital equipment at their disposal
Multifactor productivity (MFP)
- Usually measured as the output that results from a ‘unit bundle’ of labour and capital
- Captures the broad technological advances that increase the amount of output produced form a given amount of labour and capital
- This might include factors such as improvements in management and production process, increased scale, skill accumulation and improvements in the effectiveness with which labour is combined with capital and put to work in firms and industries throughout the economy
- Also known as total factor productivity
MFP reflects
factors not directly associated with labour or capital
Reasons for the productivity boom
- Opening of the domestic economy to the discipline of international markets after protection was dismantled
- The cost reductions information
- Communications technology brought to finance, transport, wholesaling and communications sectors
Reasons for the slowdown in productivity during the 2000s
- The influence on information and communications technology (ICT) on productivity wanted
- The inability of industrial relations laws and workplace regulations to support market forces in the labour market
- Government regulation and excessive ‘red tape’
- Capacity utilisation problems (skills shortages and bottle necks)
- The GFC of 2008 slowed the world economy and ushered in a number of significant behavioural changes around the willingness of households to save borrow, and of financial institutions to lend
- Industry specific factors such as falls in agricultural output due to drought
Productivity performance seems to have improved over the last 5 years
- Labour productivity grew at an average of 2% (2008-09)
- 0.1% over the previous 5 years
Importance of productivity improvements (last few years)
- The mining boom is over
- The size of the working age population is expected to decline
- This has focused attention on the drivers of productivity and what can be done to increase it
Multifactor productivity over the past few years
- Shrunk to 0.1% p.a.
- Was 0. 7% in the previous 5 years
- Could be due to firms ‘tightening up’ after the GFC
- Expansion of output as mineral projects come on line
Productivity varies greatly across the sectors of the economy
- Attributed to the amount of capital equipment at a worker’s disposal
Drivers of productivity
- Investment in physical capital and infrastructure
- Innovation
- Investment in human capital through education and training
- Enterprise (management and entrepreneurship)
- Competition
- Investment in physical capital and infrastructure
- E.g. machinery, equipment and buildings
- More capital equipment at worker’s disposal = more output per hour
- Innovation
- Exploration of new ideas
- 3 types:
o Product: innovations in the nature of products and services
o Process: innovations in productive methods and process
o Organisational: implementation of new methods in a firm’s business practices, workplace organisation or relations with other firms in the supply chain
- Investment in human capital through education and training
- Develops worker’s skills – their ability to be creative, use capital equipment and to implement innovations
- Enterprise (management and entrepreneurship)
- Combines other factors of production
- Determines a firm’s ability to improve efficiency, recognise opportunities and adapt to market changes
- Competition
- Creates incentives to innovate, and ensures that resources are allocated to the most efficient firms