Education not immune from productivity debate

While much of the national conversation on productivity focuses on the market sector – where outputs are tangible and monetised – the non-market sector, including education, health, and social services, remains less understood and often undervalued. 

The current productivity debate is too often fixated on how the non-market sector compares with the market sector, reducing the issue to cost ratios. But this framing risks distorting the very notion of productivity and distracts from the more important question: how can we improve productivity within the non-market sector?

A common narrative portrays the non-market sector as inherently unproductive. This view is often justified by Baumol’s cost disease, an economic concept explaining why wages in labour-intensive services like education and health rise in line with wages in more productive sectors, despite limited productivity growth within those services. 

This dynamic can create the impression that investing heavily in the non-market sector comes at a high opportunity cost, diverting scarce labour and capital from the market sector where productivity gains are clearer and faster. 

However, this zero-sum framing overlooks the bigger picture. The non-market sector is not merely a cost centre competing for resources; it is a critical driver of human and social capital formation, which expands our economy’s productive potential over the long term. 

Education equips individuals with skills and knowledge that fuel innovation, adaptability and economic growth. Social services strengthen community cohesion and wellbeing, underpinning labour market participation and productivity in the market sector.

Rather than viewing the non-market sector as a drag on growth, we should recognise it as an essential contributor to expanding Australia’s production possibility frontier. 

Productivity improvements in this sector are not just desirable – they are vital. Yet, these improvements require a shift from simplistic cost-cutting or size comparisons to a focus on quality and the leveraging of technology.

Measuring productivity in the non-market sector remains a challenge. 

The gold standard is cost per unit of outcome, but outcomes in education, health, and social care are varied, complex, often intangible, and, usually, only visible in the long run. Outcomes may also be easier to achieve for some cohorts or in some contexts than in others. They evolve over time, reflecting changing social values and expectations. 

Moreover, greater investment in things like student-teacher ratios, nurse-patient ratios and the like are a reflection of safety and quality improvements – things hard to capture in traditional productivity measures.

Australia’s school education system offers a motivating example. Over the past decade, we have seen a deliberate reduction in the ratio of students to staff in schools, which, while beneficial for student engagement and support, implies a lower level of productivity when measured as output per teacher or per dollar spent. 

At the same time, the volume and complexity of teachers’ work have increased significantly. Schools are expected to provide broader service offerings beyond traditional teaching – such as student wellbeing programs, parental engagement and tailored learning support – which reflect society’s evolving expectations and investments in education. 

Beyond academic marks, education delivers a broad range of social and developmental benefits that are difficult to measure and weigh. How should we balance cognitive skills with social, emotional and creative development? These questions highlight the need for thoughtful, evolving productivity measures that reflect the sector’s multifaceted goals and how these change over time.

Driving improved productivity in the education sector means rethinking what teachers do and focussing on quality of outcomes. 

At its core, teachers are highly skilled professionals whose time should be devoted primarily to instruction and student support. Administrative burdens and routine tasks, which have increased in recent years, detract from this focus and lower morale. In at least one system, more than three quarters of teachers report that administration and compliance workload has been getting worse for some time, and half believe that it is unmanageable.

Broadening and more effectively utilising school support staff who can handle non-teaching tasks, and leveraging technology to automate administrative processes, are practical ways to enhance productivity. For example, the Parents Gateway app, developed in Singapore, was found to enable teachers to spend only 15 minutes rather than four hours gathering parental consent forms during the school year.

Improvements in non-market sector productivity do not stay confined to schools or hospitals. They spill over into the market sector by raising the overall productive capacity of the nation. Better-educated, healthier and more resilient citizens are more innovative, adaptable and productive in every field of endeavour. This virtuous cycle means that good investments in the non-market sector amplify economic growth far beyond their immediate boundaries.

Australia’s future prosperity depends on getting the most from every sector of the economy. By shifting the debate from the relative size of the non-market sector to the practical levers for improving its productivity, we can unlock new sources of value for all Australians. 

The school education system offers a compelling example: by rethinking roles, embracing technology, and developing better measures of success, we can build a more productive, equitable, and resilient society – one that benefits both the non-market and market sectors alike.