David French | 12/03/2012 2:25:39 PM

This article was originally published as 'Productivity' in The Morning Bulletinon 03 March 2012.

The RBA has frequently argued that the booming resources industry was putting pressure on inflation, and that interest rates needed to increase in order to dampen demand. I disagree. The origins of the mining boom lie offshore, and so domestic monetary policy is not an appropriate tool. The only real answer is to reduce supply constraints by improving productivity – in effect doing more with less.

Economists have not been good at explaining productivity, and consequently most people think it involves closing factories and cutting heads. That can happen, but more powerful sources of productivity improvements do exist. While employing better machinery and other equipment is obvious, it is the legion of small things that interests me most.

Take for example, the unwillingness or inability of people to move to better roles elsewhere? If labour moved more freely, then people who did lose jobs through factory closures would easily fill roles in other growing industries and regions. Enjoying higher salaries, and often better lifestyles, everyone gains.

What about compliance matters? Compliance and safety is now, itself an entire industry. Gazillions of pages of manuals and other documents lie dormant, held only as protection against the next audit. Unless the compliance activities are actually improving day to day operations, they are a waste of money. Think of it this way – a year ago in Brisbane, with dam levels rising rapidly, rain pelting down and lives already lost, operators didn’t seem to even bother to open the manual. And at the first sign of trouble administrators ran for the hills, initially creating traffic jams, then leaving the city deserted and at risk.

Then there’s general happiness, and pride in your work. What if these policies that are not being used are stifling creativity, and making workplaces less happy. What is that doing to dedication to task? What of the many, many people who feel trapped in jobs they hate? What if they could easily move to better roles, study or start their own businesses? Think of the unleashed potential.

These are policy matters that Government needs to pursue. In this climate, they are so much more relevant than blunt monetary policy, and enable the economy to do more with existing resources. Through that and without a recession, they ease long-term pressure on inflation and interest rates.

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