More hours, not more per hour: why flat productivity matters

Australia's economy grew over the year to June 2026, but it did so mostly by working more hours. That pattern gets less attention than the headline growth figure. In our view it matters more for wages, interest rates and living standards over the next few years.

This is an analysis. It draws on official figures and sets out our interpretation, which readers may weigh differently.

The numbers behind the pattern

The Productivity Commission's September productivity update, released on 3 September, reports that output rose 2.1% over the year to June 2026 while hours worked rose 2.3%. Labour productivity, output per hour worked, fell 0.2% for the whole economy over that year.

The Australian Bureau of Statistics' June quarter national accounts tell the same story from another angle. GDP per hour worked was flat in the quarter, and GDP per person was flat too, rising 0.7% over the year.

The Commission is blunt about the longer view. It says productivity is the main driver of long-term prosperity, and that productivity overall is barely 1% above its 2015–19 average level. It also reports that productivity in the non-market sector, which includes much of health, education and public administration, is now below its level of March 2007.

Why flat productivity matters for wages

Over time, wages can rise faster than prices only if each hour of work produces more. When productivity is flat, a rise in wages above inflation has to come from somewhere: lower profits, higher prices, or a smaller share for someone else.

The Reserve Bank's August Statement on Monetary Policy forecasts Wage Price Index growth of 3.3% through to mid 2027. With productivity roughly unchanged, wage growth of that size raises the cost of labour per unit of output. Businesses may absorb some of that in their margins, but some is likely to show up in prices.

That is one reason, in our reading, that the Reserve Bank lists considerable uncertainty about productivity growth and spare capacity as one of its three key risks. If productivity stays flat, the economy can grow less quickly without adding to inflation than it could if productivity were improving.

Why it matters for interest rates

The Reserve Bank's task is to bring inflation back to the 2–3% target range. Its August forecasts assume less than one full cash rate increase by the end of 2026 and see trimmed mean inflation easing from 3.6% to 2.4% by mid 2028.

Those forecasts rely partly on judgements about how much the economy can produce without overheating. Weak productivity lowers that speed limit. If the Reserve Bank concludes the limit is lower than it thought, it may judge that rates need to stay higher for longer to keep demand in line with supply. The reverse is also possible: a pickup in productivity would give more room.

This is not a prediction of any particular decision. It is an explanation of why productivity figures sit closer to monetary policy than they might appear.

Why it matters for living standards

Growth driven by more hours and more people increases the size of the economy. It does less for the typical person. GDP per person rising 0.7% over a year in which total output rose 2.1% shows the difference.

In the long run, higher living standards come from producing more per hour: better tools, skills, organisation and technology. Danielle Wood made that argument as chair of the Productivity Commission in her National Press Club address in August 2025, a year before these latest figures. The new data suggest the problem she described has not yet turned around.

What could change the picture

Three things are worth watching.

First, revisions. Productivity is measured with error, and quarterly figures are often revised. One weak year is a signal, not a verdict.

Second, measurement in the non-market sector. Output in health, education and public services is hard to measure, and in parts of those sectors it is estimated from inputs such as hours worked. That makes the non-market figures less certain than the market sector ones.

Third, investment. The Reserve Bank forecasts business investment growth of 6.5% over the year to June 2026, slowing after that. Investment in equipment and technology is one of the main routes to higher productivity, though the payoff usually takes years.

Our view

The June figures describe an economy that is growing but not getting more efficient. That combination makes it harder to bring inflation down without slowing activity, and it limits how much wages can rise in real terms. The most useful question for the next set of figures is not simply whether the economy grew, but whether each hour of work produced more than it did a year earlier.

This analysis is general information and our interpretation of published data. It is not financial advice.