Don’t expect great productivity if we continue to make business easier

The proportion of workers who started a new job in the last quarter fell from 8.7% in the early 2000s to 7.3% in the decade to the end of 2019.

Another indicator of dynamism is the “creation rate”, ie the number of new companies created each year. It fell from 13% in 2006 to 11% in 2019.

Credit:Joe Benke

Over the same period, the number of old business closures fell from 10% to 8%. Our companies are therefore living longer and aging.

The neoclassical model assumes a high degree of competition among firms. It is the pressure of competition that encourages companies to improve the quality of their products and to offer an attractive price. It encourages companies to develop New some products.

Competition encourages companies to think of new ways to produce their products, run their businesses and use their people more efficiently, says Leigh.

“In competitive industries, companies are forced to ask themselves what they need to do to gain market share from their competitors. This could lead to more research and development, importing good ideas from overseas, or adopting smart approaches from other industries.

Lax regulation of mergers and acquisitions has allowed too many of our big companies to get big and lazy, even raising their prices and profits. But don’t tell anyone I said it.

“Customers benefit, but so does the whole economy. Competition encourages companies to increase their productivity,” he says.

As Leigh notes, the opposite of competition, monopoly, is much less appealing.

“Monopolists tend to charge higher prices and offer worse products and services. They might choose to reduce research, preferring to invest in “moats” to ward off competition.

“If they have a lot of money in hand, they might think that if a rival emerges, they can just buy them out and maintain their dominance in the market. Monopoly [economic] rents lead to higher profits – and higher prices.

Taken literally, ‘monopoly’ means a single seller, but economists use the word more broadly to refer to a few large firms – ‘duopoly’ or, more commonly, ‘oligopoly’.

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An indicator of the degree of “market power” – that is, pricing power – is the share of a market that is controlled by a few large firms. At the beginning of this century, the market share of the four largest companies in an industry averaged 41%. In 2018-2019, it had risen to 43%. Thus, across the economy, from baby food to beer, the top four companies hold a high and growing share of the market.

And the problem is even greater when we remember that rival firms often have large shareholders in common. For example, the major shareholders of Commonwealth Bank are Vanguard and Blackrock, which are also major shareholders of the other three major banks.

But the strongest sign of a lack of competition is the size of a firm’s “margin” – the price it charges for its product, relative to its marginal cost of production. In the manual, these markups are very slim.

The Treasury estimates that the average profit margin increased by about 6% in the 13 years to 2016-17. This matches the trend seen in other wealthy economies. And rising margins have happened across entire industries, not just market leaders.

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It appears that the increase in market power has reduced the rate at which labor flows to its most productive use, which in turn has reduced the rate of labor productivity growth by 0.1 percentage point percentage per year, as approximated by Leigh.

If so, that would explain about a fifth of the slowdown in productivity improvement since 2012. their profits. But don’t tell anyone I said it.

Ross Gittins is the economics editor.

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