On the 4th of June this year, the ABS published its quarterly report on Australia’s economic growth. The statistics were tepid—0.2% growth in the March quarter, or 1.3% for the year ending in the March quarter. Hidden behind the main drivers of this sluggish growth—global uncertainty, extreme weather, level government spending—was another factor that led a recent policy brief by the federal Parliamentary Library to conclude that Australia’s “long-term economic prosperity” is “under threat”.
[Nathan is currently studying a Bachelor of Engineering and a Bachelor of Commerce at Monash University. As a writer for ESSA, he is fascinated by the quirks of human decision-making, and the insights behavioural economics offers into everyday life. With a strong interest in psychology, public policy, and market dynamics, Nathan enjoys exploring the ways in which economic theory interacts with the realities of human behaviour—both in the marketplace and beyond.]
This factor is productivity growth, and the numbers for the past year are just as disappointing as economic growth: a 1.0% fall in labour productivity and a 2.5% rise in real unit labour costs. And this is not an isolated data point; productivity growth in the decade of 2010-20 was the weakest it’s been in 60 years.
The reasons for this are complex. Undoubtedly the COVID-19 pandemic played its part, but there are deeper, more structural factors at play, and one in particular that starts long before workers get into the office: education. Teacher shortages, underfunding, falling standards—these are all problems that currently plague our education system; and with governments scrambling to deploy action plans to address the issues, what are the likely effects on future productivity growth and our economic prosperity?
Cracks in the education system
The issue of teacher shortages in the Australian education system is well-documented. The federal government predicts that in 2025 there is a shortfall of around 4100 teachers around the country, while 20% of graduates leave the profession in the first three years. In 2024 there were roughly 1500 unfilled teaching positions in Victoria alone, forcing teachers to take on extra responsibilities, classes to merge, and placing increased pressure on an already strained system.
This issue is only compounded by teachers moving from public schools to private schools, creating a dearth of staff in the public sector that stems from ever contentious issues of public school funding. A 2023 government report found that only 2% of public schools are fully funded—meaning only 2% actually receive the funding that they are entitled to under agreements with both the state and federal government. In contrast, 98% of private schools are funded above what they are entitled to.
The impact of all this on student outcomes is no less than what might be expected. The latest NAPLAN results show that 1 in 3 Australian students are not meeting basic literacy and numeracy standards, with the effect of school underfunding disproportionately impacting rural students and Indigenous Australian students—a reflection of how inequity in the system negatively impacts overall outcomes. On an international level, results from the international assessment PISA in 2022 has shown that Australian students are up to a year behind compared to students in 2000 in areas such as science, reading, and maths, although, perhaps comfortingly, Australia’s position amongst the OECD countries has remained steady for the past seven years.
The consequences for productivity
Educational outcomes are essential for future labour productivity. This is especially the case in a world where technology is minimising the prevalence of manual work in favour of non-routine, cognitive jobs. The economy is, therefore, increasingly demanding of its workers’ higher-order thinking skills as well as their ability to adapt to jobs yet to be created.
Already the past 30 years have shown the importance of education in lifting labour productivity—the Productivity Commission estimates that 20% of productivity gains since 1994 have been due to increased labour quality, which is reflected in workers’ skill and experience. This is because higher educational outcomes have been associated with not only improved general skills—literacy, numeracy, cooperation, communication, decision making, critical thinking—but also increased innovation, which in turn leads to improved multifactor productivity, in which more capable labor operates capital more productively.
In December 2024, the federal government tasked the Productivity Commission with five inquiries aimed at investigating ways to improve productivity, one of which is building a more skilled and adaptive workforce, beginning with improving student educational outcomes. The need for such an inquiry is clear; it is only by increasing economic output per unit of economic input that Australia retains or improves its international competitiveness, increases its productive capacity, sustains wages growth, and ultimately achieves sustainable economic growth in the longer term. And if educational outcomes stagnate, or even start to fall, due to a leaky education system, the quality of tomorrow’s human capital—the social and economic value of a person’s abilities—will fall behind that of other countries, and, with it, our ability to fully harness the technologies of tomorrow.
Conclusion
Nobel laureate Paul Krugman once said, “Productivity isn’t everything, but in the long run, it’s almost everything.” This statement is rooted in the fundamentals of macroeconomics: higher output per unit of inputs means an increase in an economy’s productive capacity; lower unit labour costs mean real wages can grow without inflationary pressures; and, together, the two outcomes lay a foundation for strong and sustainable economic growth and, ultimately, higher living standards.
Education is not the only factor affecting productivity growth—it is one of many. But the issues plaguing the underlying education system are also clear, structural, and need to be addressed. Otherwise, the economy’s supply of skilled, enterprising, problem-solving labour is under threat—and with it, the possibility of sustained productivity growth.
References
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