One of the cheerful things about a boom in commodity prices is that it masks some of the more worrying trends in the economy. Take, for instance, our poor performance on the productivity front.

Indeed, as this chart from the Reserve Bank’s latest Statement on Monetary Policy shows, high commodity prices mean that the amount of income we get per working hour has been rising at a splendid rate, even though our actual output per working hour has pretty much stagnated.

As the Reserve Bank comments: “The growth in employment and total hours worked since mid-2010 has been strong relative to the observed increase in output, with the result that estimated growth in labour productivity has been weak.”

But this is not just a recent trend. The Reserve Bank notes that, although we made strong strides in boosting productivity during the 1990s, our performance since then has been lacklustre. “Over the past decade, output per hour worked has grown by an average of 1.2% per year, compared with 2.1% over the preceding decade.”

Still, the strong rise in commodity prices has meant that our real incomes have been rising nicely despite our poor productivity performance. As the Reserve Bank points out, “growth in real incomes over the past decade has been held up by the rise in the terms of trade”.

The problem is that we can’t rely on commodity prices to keep rising and boosting our real incomes. When the surge in commodity prices comes to an end, we’ll be faced with the bitter realisation that we’ll have to increase our productivity if we want to continue to enjoy rising real incomes.

Of course, it’s possible that our recent poor performance on the productivity front is only temporary. High commodity prices have sparked an investment boom, with tens of billions of dollars pouring into new resources projects each year. But these large investment projects invariably involve a lengthy construction phase. When huge projects such as the $43 billion Gorgon LNG project and the $14 billion Pluto project come on stream, we’ll undoubtedly see a strong lift in output levels.

But there are other, more profound, reasons for our waning productivity performance.

In the first place, the measures of productivity levels have been weighed down by the billions of dollars that have been spent upgrading our electricity transmission grids. The investment has been necessary because more households are installing air-conditioning. As a result, the demand for electricity, particularly on very hot days, has hit new highs. In order to avoid black-outs in these demand peak periods, companies have invested huge amounts in improving the electricity transmission infrastructure.

The problem is that the electricity transmission grid has been upgraded so that it can meet peak demand. But this means that it’s massively underutilised most of the time. As a result, this huge investment in upgrading electricity transmission grids has not resulted in a strong lift in output.

Falling unemployment levels are also likely to be a factor for weaker productivity levels. In general, the more productive employees tend to be those already employed in the workplace. As the demand for workers grows — Australia’s unemployment rate is now less than 5% — more people who were in the ranks of the unemployed are able to find jobs. Unfortunately, these last workers tend to be less productive than the first workers, which is why they were unable to find employment in the first place.

But there’s no doubt that the core reason that our productivity is ebbing is that we’ve lost the zeal for micro-economic reforms.

The strong growth in productivity we saw in the 1990s largely reflected the major economic reforms introduced by the Hawke-Keating governments during the 1980s. These included internationalising the Australian economy, by floating the dollar, deregulating the financial system, and slashing tariffs on imported goods. The privatisation of government-owned enterprises — banks, telecommunication companies, airports and airlines — also resulted in a huge boost to productivity levels.

But the drive for further micro-economic reform has abated, particularly at the state government level. By and large, politicians have preferred to walk away from pushing through with tough reforms.

Our poor performance on boosting productivity won’t matter so long as we’re able to reap the benefits of high commodity prices. But eventually this good fortune will subside.

At that point, we’ll face the choice of either embracing the tough reforms needed to lift our productivity levels, or accepting that our income growth will be much more sluggish in future. Unless we boost our productivity levels, we’ll inevitably end up with higher inflation (and interest rates), or smaller wage increases. Neither will be a cause of much national cheer.

*This article first appeared at Business Spectator