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Authors: Graeme Davis and Jyoti Rahman
Productivity is the key driver of economic growth and prosperity over the long run. It is possible to think of Australia’s productivity growth as consisting of two elements: Australia’s productivity catching up to its steady state level relative to the global technological frontier; and an outward movement of the frontier.
The United States is often seen as a reasonable proxy for the global technological frontier. Over the past four decades, Australia’s productivity has been mostly between 75 and 85 per cent of that of the US. This productivity gap can at least in part be explained by a combination of differences in: capital per worker; educational attainment; microeconomic policies; and the geographic and historical context in which the two economies operate.
Economic reforms of the recent decades have helped improve Australia’s productivity level relative to the frontier and narrow the productivity gap. This narrowing of the gap has manifest itself as an increase in Australia’s productivity growth rate. Additional reforms could help narrow the productivity gap further. However, in the long run, Australia’s productivity growth will be primarily determined by technological progress at the frontier.