Over the past decade, the Australian economy has recorded some of the poorest productivity growth in the world and the nation’s poorest productivity growth on record.
Last week, I presented five reasons why Australia’s productivity growth has declined, namely:
- The mining boom of the 2000s and the associated surge in the Australian dollar contributed to the contraction of Australia’s manufacturing sector.
- Capital shallowing, driven by record immigration without a corresponding acceleration in infrastructure and business investment.
- Explosive growth in the non-market economy, facilitated by the expansion of the NDIS.
- Soaring energy costs, driven by gas policy failures and net-zero policies.
- Poor tax policies encouraging housing speculation over productive investment.
The lion’s share of my discussion focused on the problem of capital shallowing, which caused the growth in labour productivity and per capita GDP to fall as immigration/population growth rose.
In March 2025, RBA’s Head of Economic Analysis, Michael Plumb, acknowledged that Australia’s high immigration policy had eroded productivity through ‘capital shallowing’.
“The slow growth in labour productivity over recent years has reflected slow growth in both MFP and the amount of capital available to each worker”, Plumb said.
“Slow growth in the amount of capital available for each worker in the Australian economy—or a lack of ‘capital deepening’ – has contributed to slow growth in labour productivity”…
“In other words, overall investment has not kept pace with the strong employment growth”, Plumb said.
In April, former RBA governor Phil Lowe told The AFR that capital shallowings were a key driver of Australia’s sluggish productivity.
But why has productivity stalled? Depressed business investment, says Lowe. Workers have less capital to work with, reducing how much they can produce from each hour they put in…
As the economy’s overall capital stock struggles to grow faster than it depreciates, the previous sharp growth in the ratio of capital to labour has flattened since 2015…
Policy-makers have mismanaged bringing in more people over the past decade. “We haven’t set up a climate to encourage business investment to build the capital stock for new workers,” says Lowe, particularly for housing…
Ross Gittins singled out persistently high immigration and capital shallowing as a driver of Australia’s productivity stagnation in March 2025:
“Almost to a person, economists are great believers in high rates of immigration. Immigration, they keep telling us, is great for economic growth. It’s true. There’s no easier way to grow an economy than to increase the number of people in it”…
“As all the economists were taught at uni but keep forgetting to mention to the punters, the claim that immigration raises our material standard of living – which is the oft-stated benefit of economic growth – comes with a big proviso”.
“Which is? Productivity. If you get more people, but fail to provide them with the same capital equipment as the rest of us have – extra machines for the extra workers, extra houses for the extra families, and extra roads, public transport, schools and hospitals for the extra families – everyone’s standard of living goes down, not up”.
“In economists’ jargon, you have to ensure immigration doesn’t cause a decline in the “capital-to-labour ratio”. As well as the spending on “capital deepening” needed to raise our productivity, you also need spending on “capital widening” merely to stop our productivity worsening”.
“Guess what? We’ve had years of high immigration without the increased capital spending to go with it. Part of the problem is that the level of government with control over immigration, the feds, is not the level of government with responsibility for ensuring adequate additional investment in public infrastructure, the states”.
Independent economist Gerard Minack expertly explained Australia’s immigration-driven capital shallowing dilemma last year.
Minack noted that Australia’s “net investment spending (investment net of depreciation) is running at levels previously only seen at the nadir of the 1990s recession”.
This “investment spending has been stretched thin by population growth”.
“The fast population growth of the past 20 years, combined with the decline in investment spending over the past decade, has led to a collapse in the growth of per capita capital stock”.
“Less deepening means less productivity growth”, noted Minack.
“Low investment and fast population growth is crushing productivity growth leading to structurally weak income growth”.
In the latest Joe Walker podcast, former Treasury secretary Ken Henry identified capital shallowing as a major cause of Australia’s productivity decline:
Productivity’s got, I mean, there’s several ways of thinking about it, but the way I like to think about it, the easiest way to compartmentalise various components is it’s got two principal drivers.
The first being capital deepening – so just augmenting labour with capital assistance. And that could include AI assistance, right? And that makes each hour worked more productive, right? So that’s capital deepening. And capital deepening is obviously driven by having a rate of national investment that is matched to the rate of workforce growth, obviously, right? And so if your rate of workforce growth stays constant and your level of investment plummets, you’re going to suffer capital shallowing eventually.
And by the way, that is what Australia has suffered in the last 10 years, capital shallowing. It’s an extraordinary thing, capital shallowing, and it’s a consequence simply of the collapse in the investment rate. You experience capital deepening when the investment rate is sufficiently high relative to the rate of workforce growth, right? And that’s what Australia has experienced for most of the post-war, I mean post-World War II period, is capital deepening.
The other part of productivity growth, which we refer to as multifactor productivity growth, is probably better described as the stuff we don’t understand.
Australia experienced the fastest population increase in the advanced world between 2000 and 2023, as illustrated below.
According to the ABS Population Clock, the nation’s population has grown by 8.7 million this century, representing a 46% increase.
There is little wonder, then, that Australia’s capital stock has failed to keep pace, lowering productivity growth.
Australia is trapped in a productivity death spiral because the federal government has operated an excessively high immigration program that has outrun business, infrastructure, and housing investment.
As a result, the longer-term outlook for Australian productivity remains poor.
The 2024 Population Statement from Treasury’s Centre for Population projects that Australia’s population will balloon by 13.5 million people in only 40 years:
This 13.5 million projected population increase will be driven by permanently high net overseas migration of 235,000 annually, which is more than double the 90,000 average net migration in the 60 years following World War II.
This 13.5 million projected population increase is equivalent to adding another Sydney, Melbourne, and Brisbane to the nation’s current population in only 40 years.
All of the housing, infrastructure, and business investment in these three major cities would need to be replicated in only 40 years to maintain current productivity growth, let alone increase it. That is an impossible task.
Instead, capital shallowing will persist as the population continues to grow faster than business, infrastructure, and housing investment.
Having identified the problem of capital shallowing, Australia’s economists should recommend slowing immigration to a level that is compatible with the rate of investment.
Otherwise, productivity growth and living standards will continue to stagnate.
