AUSTRALIAN NATIONAL UNIVERSITY Microeconomic reform and Workshop productivity growth Proceedings July 1998 © Commonwealth of Australia 1998 ISBN 0 646 33560 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, the work may be reproduced in whole or in part for study or training purposes, subject to the inclusion of an acknowledgment of the source. Reproduction for commercial use or sale requires prior written permission from AusInfo. Requests and inquiries concerning reproduction and rights should be addressed to the Manager, Legislative Services, AusInfo, GPO Box 84, Canberra, ACT, 2601. Inquiries Paul Gretton Professor Steve Dowrick Productivity Commission Department of Economics PO Box 80 The Faculties Belconnen ACT 2616 Australian National University Canberra ACT 0200 Telephone: (61) 2 6240 3252 Telephone: (61) 2 6249 4606 Email: [email protected] E-mail: [email protected] The views expressed in these workshop proceedings are those of the authors and do not necessarily reflect those of the Productivity Commission or the Australian National University. References to the views printed in this publication should be attributed to the authors and not the Productivity Commission or the Australian National University. An appropriate citation for this paper is: Productivity Commission and Australian National University (PC and ANU)1998, Microeconomic reform and productivity growth, Workshop Proceedings, AusInfo, Canberra. Information about the Productivity Commission and its current work program can be found on the World Wide Web at http://www.pc.gov.au Foreword In February 1998, the Australian National University and the Industry Commission (now incorporated into the Productivity Commission) jointly held a workshop on microeconomic reform and productivity growth. We were delighted that this cooperative venture was successful in drawing together a group of participants with evident theoretical and policy-advising expertise. The particular focus of the workshop was on the nexus between microeconomic reform and productivity performance. This is an important issue given the role of productivity growth in raising living standards and the current public debate about the role of microeconomic reform. The workshop provided much food for thought — making it clear that there are no easy or ready-made answers to establishing this nexus. To capture the diversity of views and perspectives represented at the workshop, this volume brings together the papers presented, discussants’ comments on those papers and summaries of discussion to each session. It is intended that the exchange of views at the workshop and their publication in this volume will stimulate and guide development of research into this important field. We are grateful to everyone who participated in the workshop, particularly those who prepared the papers contained in this volume. We are also grateful to those involved in organising the workshop and editing the proceedings. The organising group comprised Jeff Borland and Satish Chand as well as Steve Dowrick from the Australian National University and Paul Gretton, Ian Monday and Lynne Williams from the Productivity Commission. The editorial committee comprised Paul Gretton, Steve Dowrick and Lynne Williams, with support from Damien Eldridge, Greg McGuire and David Cobau. In addition, we are grateful for financial support provided to the workshop by the Department of Industry, Science and Tourism and the Australian Bureau of Statistics. Gary Banks Professor Steve Dowrick Chairman Head, Department of Economics Productivity Commission Australian National University iii CONTENTS Abbreviations xiii Definitions of productivity measures xviii Part A Introduction 1 Introduction 3 Gary Banks Part B Concepts and measurement issues 2 Construction and use of measures to guide microeconomic reform 13 Catherine Morrison Discussants 35 Tim Coelli, Ian Castles General discussion 45 3 The effects of microeconomic reforms on product and factor markets 49 John Freebairn Discussants 65 Stephen King, David Borthwick General discussion 76 4 A growth theory perspective on the effects of microeconomic reform 79 John Quiggin Discussants 100 Graeme Wells, Dean Parham General discussion 115 v WORKSHOP ON MICROECONOMIC REFORM AND PRODUCTIVITY GROWTH Part C International developments and experience 5 Explaining the pick-up in Australian productivity performance 121 Steve Dowrick Discussants 144 Malcolm Dowling, Tony Urbanski General discussion 151 6 Microeconomic reform: the New Zealand experience 155 Brian Easton Discussants 182 Winton Bates, Richard Snape General discussion 191 Part D The Australian perspective 7 A general review of productivity analyses in Australia 195 Peter Dawkins and Mark Rogers Discussants 229 Philip Hagan, Philip Lowe General discussion 237 8 Trade liberalisation and manufacturing industry productivity growth 239 Satish Chand, Paulene McCalman and Paul Gretton Discussants 272 Neil Vousden, Ron Bewley General discussion 280 9 Economic policy issues of reform in the utilities and services industries 283 Peter Forsyth Discussants 301 Denis Lawrence, Roger Carrington General discussion 311 vi CONTENTS 10 The effects of microeconomic reform in telecommunications 313 Robert Albon Discussants 331 Henry Ergas, Graeme Woodbridge General discussion 342 11 Effects of the labour market on microeconomic reform in Australia 343 Judith Sloan Discussants 354 Tom Karmel, Steven Kates General discussion 362 12 Microeconomic reform and displaced workers — an introduction 365 Jeff Borland Discussants 400 Don Siemon, Michael Gadiel General discussion 408 Part E Summing up 13 A summing up 413 R. G. Gregory Part F Appendix A Workshop participants 433 vii WORKSHOP ON MICROECONOMIC REFORM AND PRODUCTIVITY GROWTH Boxes 2.1 Shadow values 17 2.2 Environmental factors and biases 20 8.A1 The iterative ordinary least squares (OLS) procedure 267 Tables 4.1 Estimates of the benefits of microeconomic reform 95 5.1 Error correction estimation of productivity in the non-farm market sector, 1964–65 to 1996–97 126 5.2 Panel estimation of the proximate causes of growth, 21 OECD countries, 1960 to 1973, 1973 to 1979, 1979 to 1990, 1990 to 1996 130 5.3 Contributions to annual growth of real GDP in Australia, relative to average OECD growth of 3 per cent per annum, 1960 to 1996 132 5.D1 Comparative levels of labour productivity, selected OECD countries, 1870 to 1992 148 6.1 Economic performance, New Zealand, Australia and the OECD, 1985 to 1996 157 6.2 Economic performance for New Zealand, Australia and the OECD, 1978 to 1985 163 6.3 Average annual growth rates of GNP, employment and labour productivity, United States and Western Europe, 1973 to 1995 171 6.4 Views of quality of service changes by main income of household, New Zealand, 1993 176 6.D1 OECD estimates of growth in multifactor productivity, New Zealand, Australia and the OECD, 1960 to 1996 182 6.D2 Relationship between reform and MFP growth in OECD countries, 1960 to 1996 186 7.1 Determinants of productivity 196 7.2 The annual percentage change of productivity in the market sector, 1964–65 to 1995–96 198 viii CONTENTS 7.3 Australia’s productivity performance, 1960 to 1996 199 7.4 Relative labour productivity in manufacturing, 1993 200 7.5 Labour productivity growth by sector, 1974 to 1979, 1979 to 1983, 1983 to 1988 201 8.1 Assistance levels relative to the manufacturing average by manufacturing industry subdivision, 1968–69 to 1994–95 242 8.2 Variables used in regression analysis 249 8.3 ANZSIC-based industry classification for the manufacturing sector 250 8.4 Estimated coefficients on labour and capital for the traditional neoclassical production function by manufacturing industry subdivision, 1968–69 to 1994–95 252 8.5 Average labour and capital cost shares by manufacturing industry subdivision, 1968–69 to 1994–95 254 8.6 Estimated coefficients on labour and capital using modified data by manufacturing industry subdivision, 1968–69 to 1994–95 255 8.7 Extended production function using modified data by manufacturing industry subdivision, 1968–69 to 1994–95 259 8.D1 Estimated industry-specific effects of trade liberalisation 278 11.1 Forms of labour market regulation in Australia 348 11.2 Effects of enterprise agreements on workplace outcomes 349 11.3 Labour intensity, union membership, agreement coverage and employment distribution, by industry sector, 1996 350 12.1 Average rate of job separation — retrenchment by years of tenure, Australia, 1995 377 12.2 Labour market outcomes for displaced workers — case study findings, Australia 380 12.3 Non-employment durations for displaced workers — case study findings, Australia 383 12.4 Job characteristics for displaced workers who are re-employed — case study findings, Australia 385 ix WORKSHOP ON MICROECONOMIC REFORM AND PRODUCTIVITY GROWTH 13.1 Annual average growth in output, employment and labour productivity, Australia and New Zealand, 1979 to 1990 and 1990 to 1997 423 13.2 Annual average employment growth, Australia, 1970 to 1990 and 1990 to 1997 424 Figures 1.1 Annual growth in trend multifactor productivity, 1964–65 to 1995–96 6 1.2 Average annual multifactor productivity growth for Australia and the OECD, 1970 to 1994 7 2.D1 Allocative efficiency and total factor productivity index numbers 39 3.1 The effects of microeconomic reform on multifactor productivity 51 3.2 Efficiency costs and distributional effects of monopoly 54 3.3 Partial equilibrium model of benefits of productive efficiency improvements 57 4.1