Australia’s history demonstrates that there is no reason in-principle why Australia cannot enjoy the world’s highest standard of living, underpinned by world-beating productivity.
This means narrowing, if not closing, the gap with US productivity. Economic theory predicts long-run convergence in living standards (unconditional convergence), with productivity growth playing an important role in driving that convergence. In terms of labour productivity, Australia is around 20 per cent below the level of the United States.
This report examines the long-run relationship between Australian and US productivity and living standards. Statistical tests of the relationship between US and Australian living standards are consistent with the long-run convergence predicted by economic theory and provides evidence for a long-run relationship between Australian and US productivity.
The report argues that the relative openness of the Australian economy over time is an important determinant of productivity by allowing it to import productivity trends from the global frontier represented by the United States.