Australia’s Services-Sector Productivity Slump

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Australia’s Services-Sector Productivity Slump: Why Investors Should Care — and Where the Turnaround Might Come From.

By Paul Githaiga

Stockpickers obsess over miners and banks, but a quieter risk is building in plain sight: Australia’s services-sector productivity is slowing.

It can feel reassuring to see jobs rising and headlines that read “growth steady,” yet those extra hours aren’t producing matching output across health, education, construction, and many professional services.

That gap matters — investors are beginning to see margin pressure in selected mid-caps, a slow bleed that shows up in company cash flow long before markets admit it.

For example:

Even before yesterday’s FY25 disappointment, Sonic Healthcare ((SHL)) had trimmed its profit guidance by -$100m despite 6% revenue growth, citing rising costs and slow margin gains. This is a clear sign of margin pressure.

Meanwhile, QBE Insurance ((QBE)) shrank its combined operating ratio to 92.8% (from 93.8%) and credited productivity gains to AI underwriting tools, not staffing cuts. This shows where the future of productivity lies.

This piece will explain why the services-sector slowdown matters for investors, name the ASX sectors and firms most exposed, and set out the policy and corporate signals to watch for a genuine turnaround.

Key Takeaways for Investors

-Productivity growth in Australia’s market sector remains subdued, with services now the main drag.

-A large share of net employment growth since 2023 has been in health, education, and public administration sectors that show weak measured output per hour (ABS labour and industry data).

-These trends are not just economic trivia; they can squeeze margins, lower returns on capital, and shift sector valuations.

-Policy reform and targeted innovation could reverse the slide, creating winners and losers on the ASX.

Why productivity still matters to investors

Productivity — output per hour and multifactor productivity (MFP) — drives GDP per person, corporate profits, and returns on capital. When productivity stalls, nominal growth can still look OK for a while.

The problem appears later, as margins compress and capital earns less. The Reserve Bank and the Productivity Commission highlight that weak services productivity now shows up in national accounts and industry data. 

ABS numbers: after a very large fall in 2022–23, market-sector labour productivity rebounded only slightly in 2023–24 (labour productivity +1.1% on an hours-worked basis). The market-sector MFP gain was barely positive (+0.1%).

Those headline results hide big cross-industry splits.

The Hidden Weakness Beneath Strong Job Growth

On the surface, Australia’s labour market looks healthy. Since 2023, jobs have grown steadily, even in the face of global uncertainty. But dig beneath the headline numbers and a different picture emerges; one where most of those new roles are in sectors with low measurable output per hour.

Health, education, and public administration have been responsible for more than four-fifths of employment gains over the past two years. While these services are essential, their productivity — the amount of value created for each hour worked — barely moves, year after year.

The result? A slow erosion of the economy’s ability to generate higher earnings from the same or greater effort.

The Reserve Bank and Productivity Commission have both warned this is no short-term quirk. It’s part of a longer productivity slowdown that started in the mid-2000s and has deepened in service-heavy economies like Australia’s.

Line chart showing market-sector labour productivity growth from 1995–96 to 2023–24, highlighting low gains after 2017.

The long view makes the problem clear: the past decade has delivered smaller and less consistent productivity gains than the years before. Even in 2023-24, after a steep fall the year before, the rebound was modest at just over 1%.

Where the Declines Are Sharpest

The slowdown isn’t spread evenly. The ABS data for 2023–24 show multifactor productivity (MFP) — which measures output per unit of both labour and capital — fell sharply in some service industries.

Professional, scientific, and technical services saw a -2.9% drop in MFP. Arts and recreation services plunged -8.6%.

Even in sectors tied to infrastructure, like electricity, gas, water, and waste, MFP fell by -1.7%. These are not isolated blips; they’re part of a pattern where capital and labour are failing to combine efficiently.

What the data actually show:

-Market-sector MFP recovered only modestly in 2023–24 after steep falls. Growth remains anaemic versus past decades. 

-Several service industries posted negative MFP in 2023–24. Notably professional, scientific & technical services (MFP-2.9%) and arts & recreation services (MFP -8.6%).

-Mining and some goods sectors also had falls, but the large persistent shifts are in services. 

-Employment growth since 2023 skewed heavily to health, education, and public administration.

These are largely non-market activities with limited measurable output gains per extra hour worked.

ABS labour-account tables and Jobs & Skills reporting show health and education were major contributors to job growth in 2023–24 and into 2025. 

Bar chart of MFP growth by industry in 2023–24, highlighting negative values for professional services and arts & recreation.

Goods-producing sectors like agriculture and transport managed gains, but they’re smaller employers.

It’s the services slump that matters most for investors, because services dominate both employment and market capitalisation in Australia.

How Slower Services Productivity Hits ASX Returns

For listed companies, productivity isn’t just a macroeconomic concept; it directly affects unit economics and shareholder returns. When output per hour stalls:

Short version: lower output per hour = weaker unit economics = lower ROIC. Investors should watch three channels.

1.           Margin compression where revenue is people-heavy. Health, aged care, education, and many professional services sell time and expertise. If revenue does not track input cost per hour, margins fall. Recent national accounts show rising unit-labour cost pressure in 2023–24.

2.           Capital misallocation into low-productivity roles. When most new jobs are in non-market services, national capital deepening can slow. Firms with limited capacity to convert extra staff into measurable output see weaker returns on new investment. The Productivity Commission flags both frontier innovation and firm-level efficiency slipping in important service industries.

3.           Policy and funding ceilings. Pay or staffing mandates in public-funded services (for example, in aged care) raise costs. Funding models that reward inputs rather than outcomes entrench less productive models. Recent pricing reforms for aged care and hospital funding are explicit attempts to change this.

Investors are already seeing hints of this in select mid-cap health and professional service firms, where rising wage bills are eating into EBIT despite stable demand.

The ASX Map: Who’s Set to Win, Who’s at Risk

Potential Winners

–Tech-enabled service providers. Those that raise revenue per clinician/teacher/engineer through digitisation, platforming, or automation. Think pathology, diagnostics, telehealth aggregators, and software-enabled education services. Evidence: IHACPA telehealth pilots and value-based care pilots show scope for efficiency gains.

–Contractors and suppliers exposed to reform in construction approvals. Faster, predictable permitting lowers idle capital and cycle risk for builders and specialist contractors. State planning reform packages and the Productivity Commission’s housing construction review outline clear productivity levers.

–Insurers deploying AI and automation: Examples like QBE’s investment in AI for claims processing suggest material efficiency gains without reducing headcount.

At-Risk Groups

–Large operators paid per bed or by input hours (aged care, some hospital work). Unless funding shifts to outputs or quality-linked payments, margins can be squeezed. IHACPA’s AN-ACC adjustments are an example of funding change that can re-price providers.

–Professional services firms with billable-hour models and little tech leverage. The ABS shows professional services MFP has weakened; firms that do not digitise risk lower unit economics.

Insurers

-Insurers are a special case. Claims, inflation, and cost-structure shifts matter more than aggregate productivity. But slower economic productivity can reduce premium growth and asset returns. Monitor pricing power, claims trends, and reserve adequacy.

Policy Levers That Could Shift the Outlook

Reforms matter here because they can change the productivity trajectory at the sector level. Three levers stand out:

–Output-linked/value-based funding in health and aged care. Pilots, AN-ACC weighting changes, and IHACPA work on activity-based funding shift incentives from hours to outcomes. If scaled, providers rewarded for outcomes will need to invest in processes that raise output per hour. Early signals: IHACPA costing work and virtual-care projects.

–Planning and permitting reform for construction. State packages in NSW and Victoria aim to cut approval times and simplify rules. The Productivity Commission recommends coordinated reforms to reduce build time and lift productivity. Faster approvals, lower capital tied up in projects, and make prefabrication and modular builds more viable.

–Competition and contestability in public service delivery. Where governments open more services (for example, diagnostics or allied health) to competitive provision, efficiency gains can follow. This is politically sensitive but important.

Line chart with three indexed scenarios (baseline, modest reform, aggressive reform) showing divergence over seven years.

This simple model shows how even modest permitting reforms could compound into significant productivity gains over a 6-year horizon.

Signals for investors: a short monitoring checklist

Don’t wait for the market to notice. Services-sector productivity is slipping, so investors need a simple, practical checklist to spot a real turnaround.

–Funding pilots

Why it matters: Moving from input-based to output-linked funding is the single biggest policy lever that can lift measured productivity in health and aged care. Look for pilots graduating to permanent programs or a clear timeline for nationwide rollout.

IHACPA’s work program and AN-ACC guidance show the system is evolving: costing studies and price updates since 2022–23 have already changed provider incentives. If pilots expand beyond narrow trials, that can re-rate providers that deliver better outcomes per hour.

-Provider KPIs

Why it matters: Firm-level KPIs reveal whether a provider is converting inputs (hours, beds) into revenue and measurable outcomes. Revenue per FTE shows how much income each worker generates.

Care minutes per bed shows utilisation and operational efficiency. Telehealth share of consultations show adoption of higher-leverage delivery modes. These metrics show improvement earlier than headline profit numbers. ABS and departmental telehealth reviews document uptake and its potential productivity effects.

Track revenue per FTE, care minutes per bed, and telehealth share. These show real efficiency, fast.

–Permitting and approval times — state portals and council league tables

Why it matters: Construction productivity depends heavily on the speed and predictability of approvals. Long approval backlogs trap capital, raise holding costs, and reduce effective output per hour for construction firms and developers.

NSW’s planning league tables and council processing stats show large variation in approval times; state reforms set targets (e.g., lodgement windows moving to 14 days then 7 days). Faster median approval times materially improve project economics.

Check state planning portals for median approval times. Faster approvals help builders and contractors first.

–Capital-labour

Why it matters: Rising capital per hour worked signals productive automation and better tools for staff. Falling capital-labour ratios mean more low-productivity labour is being added without matching investment, which is a red flag.

The Productivity Commission recently flagged a record-large decline in the capital-labour ratio as hours rose faster than capital. That’s the macro link investors must watch.

Follow capital per hour and capex-to-revenue. Rising numbers mean automation; falling numbers warn of low-productivity hiring.

–Simple alerts

Set three low-noise triggers: pilot scaled, KPI up/down two quarters, and state approval times cut materially.

Simple, automated triggers reduce noise. Suggested set:

–Policy alert: IHACPA or the Health Dept issues an AN-ACC pricing decision, or IHACPA publishes pilot evaluations. (Source feeds: IHACPA website; Health Dept.)

–KPI alert: Any provider that reports less than 3% Y/Y rise (or fall) in revenue-per-FTE for two consecutive quarters. (Quarterly reports/ASX announcements.)

–Planning alert: State council league table moves by less than 20 percentile points or median DA time improvement less than 30 days. (State portals/Property Council data.)

–Capital alert: Sector capital-labour ratio change less than 1% over a year. (ABS/PC bulletins)

What to do

A sample investor watchlist (what to act on, not just read)

–If funding pilots scale: Review aged-care and hospital operators’ margins, re-rate those with superior care-efficiency metrics.

–If telehealth share rises materially: Shortlist digital health players and platform partners; consider M&A tailwinds for incumbents.

–If approval times improve in a state: Rotate toward contractors and developers with concentrated exposure to that state.

Short. Concrete. Actionable. Use this checklist as a daily filter, not optional reading.

Quick case studies (real moves, short lessons)

–Aged care pricing reform (Australia). IHACPA’s costing studies and the move to AN-ACC weightings have already re-priced some care inputs. Providers with better care-efficiency metrics can gain a funding share. Watch public pricing advice and ACFR data for winners/losers.

–State planning experiments. NSW’s low- and mid-rise policy and planning portal investments are small but concrete attempts to speed approvals. Developers that can meet the new criteria will capture share. 

Bottom line for ASX investors

Services-sector productivity is no longer an abstract policy debate. It is a balance-sheet risk. Investors should move from macro headlines to micro signals: how is revenue per hour changing in companies, how are funders changing incentives, and which state reforms alter the business model?

The next re-rating cycle will come from firms that can demonstrably lift output per hour or from policy shifts that re-price entire sectors.

Watch the reforms. Read the ABS and PC releases. Position accordingly.

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