christopher kent : australian economic growth – the how, what and where address by mr christopher kent, assistant governor ( economic ) of the reserve bank of australia, to the national rsl clubs conference, hobart, 11 march 2015. * * * i thank kathryn davis, david jacobs and james wang for excellent assistance in preparing these remarks. accompanying graphs and the table can be found at the end of the speech. introduction i ’ d like to thank the board and members of the rsl & services clubs association for their invitation to speak here. i want to consider three closely related questions i am often asked : 1. how can the australian economy become more productive? 2. what will help generate additional growth ( in demand ) needed to boost employment? 3. where is that growth going to come from? in particular, which industries will have the profitable opportunities that will lead to more employment and drive investment? it is hardly surprising that australians are interested in these questions given the rise in the unemployment rate and sub - trend growth of the economy over the past couple of years. how to be more productive? from the middle of the previous decade, australia enjoyed a sharp run - up in the prices of our key commodity exports. this led to an unprecedented boom in mining investment. the benefits were spread beyond the narrow confines of the mining industry in numerous ways, with strong growth in employment and wages across a range of industries around the country. 1 but now that commodity prices and mining investment have turned down, it is natural to ask : how are we going to sustain and build on our standard of living over the longer term? this boils down to two essential elements. we can work more ( i. e. raise our labour force participation ). we can also work more efficiently. in other words, we can boost our ( labour ) productivity, which is the source of sustainable gains in wages and profits ( in the absence of a resurgence in commodity prices ). 2 i ’ ve spoken elsewhere about participation, so let me focus here on productivity. 3 there are a number of sources of growth in labour productivity ( i. e. output per hour worked ) : • technological progress, which supports new business processes and new production techniques as well as more efficient use of productive resources. in other words, an expansion of the technological, or productive frontier see, for example, bishop j and v rayner ( 2013 ), “ industry dimensions of the resource boom : “ an inputoutput analysis ”, rba research discussion

was time from the mid 2000s during which productivity growth was considerably slower than its longer - term average. this slowdown was also common to a number of economies. 7 however, productivity growth has picked up in australia over more recent years. some of this reflects the move from the investment to the production phase of the mining boom, which has seen a strong rise in output combined with a reduction in employment in resource - related activity. but the pick - up in productivity growth is broadly based across other sectors of the economy. this may, in part, reflect the response of businesses to rising competitive pressures following the period when the exchange rate had risen to very high levels, growth for cross - country evidence on the links between reforms to product and labour markets and productivity, see kent c and j simon ( 2007 ), “ productivity growth : the effect of market regulations ”, rba research discussion paper no 2007 – 04. see gruen d ( 2001 ), “ australia ’ s strong productivity growth : will it be sustained? ”, address to ceda / telstra economic and political overview, sydney, 2 february ; connolly e and l gustafsson ( 2013 ), “ australian productivity growth : trends and determinants ”, australian economic review, 46 ( 4 ), pp 473 – 482 ; and d ’ arcy p and l gustafsson ( 2012 ), “ australia ’ s productivity performance and real incomes ”, rba bulletin, june, pp 23 – 35. gruen d and s shrestha ( eds ) ( 2000 ), the australian economy in the 1990s, proceedings of a conference, reserve bank of australia, sydney. connolly e and l gustafsson ( 2013 ) and d ’ arcy p and l gustafsson ( 2012 ). bis central bankers ’ speeches of non - mining activity had been relatively weak and wage growth relatively strong. responding to those pressures is not easy. a common theme from the bank ’ s liaison program in recent years has been the heightened focus on reducing costs and improving productivity in response to the subdued growth in demand. in more extreme cases, however, it involves businesses that are not sufficiently productive going out of business and workers losing their jobs. what more could be done to secure strong productivity growth? as others have noted before me, the experts at the productivity commission have put together a “ list ” of what could be done. 8 the list describes how improvements to incentives, capabilities and flexibility could enhance productivity. again, the idea