Don’t expect great productivity if we keep making things easier for business

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”: the number of new companies created each year. It went from 13 percent in 2006 to 11 percent in 2019.

Credit:joe benke

During the same period, the number of old businesses that closed fell from 10 percent to 8 percent. Therefore, our companies live longer and age.

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

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

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

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

“Customers benefit from this, but so does the entire economy. Competition creates the incentive for companies to increase productivity,” he says.

As Leigh points out, the opposite of competition, monopoly, is much less attractive.

“Monopolists tend to charge higher prices and offer worse products and services. They might choose to reduce research and prefer to invest in “moats” to keep the competition out.

“If they have a lot of cash on hand, they might think that if a rival comes along, they can just buy it and maintain their market dominance. Monopoly [economic] rents lead to higher profits and higher prices.”

Taken literally, “monopoly” means just one seller, but economists use the word more broadly to refer to a few large companies: “duopoly” or, more commonly, “oligopoly.”


One indicator of the degree of “market power,” also known as pricing power, is how much of a market is controlled by a few large companies. At the beginning of this century, the market share of the four largest companies in an industry averaged 41 percent. By 2018-19, it had risen to 43 percent. So across the economy, from baby food to beer, the top four companies have a high and growing share of the market.

And the problem is even greater if you remember that rival companies often have large shareholders in common. For example, Commonwealth Bank’s largest shareholders are Vanguard and Blackrock, which are also the largest shareholders in three other large banks.

But the strongest sign of a lack of competition is the size of a company’s “markup”—the price it charges for its product, relative to its marginal cost of production. In the textbook, these margins are very thin.

The Treasury estimates that the average profit margin increased about 6 percent during the 13 years to 2016-17. This fits in with the trend in other rich economies. And the rise in margins has occurred across entire industries, not just the market leaders.


It appears that the rise in market power has reduced the rate at which labor flows to its most productive use, which in turn has reduced the growth rate of labor productivity by 0.1 point. percent a year, according to Leigh’s rough calculations.

If so, this would explain about a fifth of the slowdown in productivity improvement since 2012. Lax regulation of mergers and acquisitions has allowed many of our big companies to get fat and lazy, even as they raise their prices and Profits. But don’t tell anyone I said it.

Ross Gittins is the economics editor.

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