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Monday, July 30, 2012


There's been a debate about productivity in Australia.  The big end of town wants to make it easier to cut wages and sack workers (even though the top ecehelons of business have been getting 20% a year increases in remuneration for 2 decades now).  Other, more thoughtful observers point to other factors.

Ross Gittins of The Age/Sydney Morning Herald has this to say:

The debate over our seemingly weak productivity performance has come full circle, reverting to the explanation the big end of town was happy to accept under John Howard: almost all the weakness is explained by the special circumstances of the mining and utilities industries, which are nothing to worry about.

According to estimates by Reserve Bank researchers, after you exclude mining and utilities, labour productivity in the market sector improved at annual rates of 1.8 per cent over the 20 years to 1994, 3.1 per cent over the 10 years to 2004 and 1.7 per cent over the seven years to 2011.


Starting with electricity, it's long been the case that we've needed to invest in sufficient generating and distribution capacity to cope with occasional peaks in demand that far exceed the average level of demand. These days, such peaks in demand come on hot summer days, when everyone turns on their air-conditioners.

It costs a fortune to install the extra capacity - particularly, the power-cable capacity - needed to ensure that a lot of people turning on their air-con on just a few days of the year does not lead to the thing every state government dreads: blackouts.

But all this capital spending - and the political pain of 18 per cent increases in power bills - could have been avoided had state governments got on with installing smart meters in homes. This would have allowed the introduction of prices that vary with the time of day.

Significantly higher prices at the time of year when people are tempted to put on their air-conditioners would prompt many to think twice. It would also be easy to encourage big industrial users to reduce their demand for relatively brief periods when household air-con was at full blast.

With water, bills are composed of a fixed charge plus a usage charge that varies with how much water you use. In (simple) theory, the usage charge should reflect the long-run marginal cost of an extra unit of water. The fixed charge is whatever additional amount is needed to cover the water company's full costs (including a reasonable return on capital).
In practice, however, the usage charge is usually too low to have much effect on consumption behaviour. And the simple theory doesn't apply well to commodities that have to be stored.

As usual, in the last drought we relied on water restrictions, but they weren't sufficient to fix the problem and we ended up building desal plants in every mainland state capital, only to mothball them when the drought broke.
The economists' study of the price elasticity of demand for water leads them to argue that, had user charges been raised high enough, supply could have been better conserved and the building of desal plants avoided.

User charges could have been increased to the point where they raised more revenue than was needed, thus allowing the fixed charge to be a subtraction from the total user charge. Tooth argues that such an arrangement would have been fairer in its treatment of low-income users.

If all those jumping on the productivity bandwagon were more genuine in their concern to raise efficiency, they'd have a lot more to say about efficient pricing.

Well yes.  Exactly.  If a flexible price system is good enough for those at the bottom of the heap, it's surely good enough for those at the top too.

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