Regional Productivity Solutions Report

Productivity growth has slowed since the mid-2000s, reflecting global trends but also, domestic structural challenges. Over the past 30 years, Australian annual labour productivity growth has slowed markedly, declining from 2.3% in 1995-2005 to 1.4% in 2005-2015, and further to 0.3% in 2015-2025.

Key challenges include:

• Flat private investment and weaker capital deepening.
• Declining economic dynamism and reduced labour mobility.
• Growth in non-market sectors, including the expansion of employment in care services.
• Housing constraints that divert capital from productive uses and limit workforce mobility.

Measured by headline labour productivity, regional Australia delivered higher output per hour worked of $129.7 than metropolitan Australia, $103.1 in 2023-24.

The regional economies in Queensland, Western Australia and South Australia recorded higher labour productivity than their capital cities, and regional Victoria and regional New South only slightly trail Melbourne and Sydney.
Using the RAI’s regional typologies, the regions with the highest labour productivity are remote Heartland regions and Industry and Service Hubs. Connected Lifestyle Regions record similar labour productivity results to capital cities. Regional Cities record the lowest labour productivity.

There is significant dispersion in productivity performance across Australia’s regions, driven by differences in industry composition, scale, infrastructure, and access to labour and capital.

• Across Australia’s 425 regional LGAs, the average headline productivity of the top five LGAs is 23 times higher than that of the bottom five, at $1,192.1 per hour worked compared to $51.4 per hour worked in 2024.
• Using ‘local-industry’ measures of regional output and productivity – which remove income flows leaving the region, such as taxes and dividends, and reduce the effects of commodity prices – the disparity narrows but remains significant, with a fivefold gap.

Regions with highly capital-intensive industries (such as mining) often record very high productivity using headline measures, while metropolitan areas and many service-based regions tend to exhibit stronger productivity outcomes when assessed using local-industry measures.

Australia lacks official productivity measures at the regional level.

• The ABS does not produce regional productivity measures below the national or state level.
• Regional productivity estimates in this report are calculated as regional output divided by hour worked and are produced by the National Institute of Economic and Industry Research and Economy.id.

The absence of official regional productivity measures can limit insight into the drivers of regional productivity differences and place-based policy development. National and sectoral averages mask substantial spatial variation and risk enforcing one-size-fits-all problem definitions and policy approaches.

It would be beneficial to collect data and produce labour productivity and multi-factor productivity measures at the regional level to provide broader insights into the productive use of all factors of production - labour, capital, intermediate inputs, energy, etc. These measures and techniques can also allow for analysis of the impact of factors such as climate change and drought on productivity.

Regional economies and their industry mix is tied to local geography, resource endowment and comparative advantage. Productivity is generated within regional economies through the interaction of firms, workers, infrastructure, and institutions.

Many of Australia’s major income generating and globally traded industries – such as agriculture, mining, energy, tourism, manufacturing, logistics, as well as emerging industries - are heavily located in regional Australia. Lifting regional productivity growth in these regions and industries is critically important for growing Australia’s national income. Productivity growth in regional Australia is also important for lifting living standards, for example, by improving service delivery.

Effective policy requires recognising regions as the primary unit for understanding and improving productivity outcomes.

 Core drivers include environmental conditions, distance to market, demographics, labour mobility, skills, industry structure, innovation systems, infrastructure, housing, education and care services, and regulatory settings.

The strength, interaction, and constraints of these factors differ across regions, meaning productivity challenges are not uniform.

National productivity growth can be accelerated by supporting growth in Australia’s high productivity regions, as well as improving productivity performance in lower productivity regions.

Australia’s national and state productivity agendas have historically focussed on economy-wide and sectoral policies, with less focus on regional productivity.

While regional development programs exist, they often do not explicitly target productivity or align with broader productivity policy objectives or programs.

This creates a persistent gap between regional policy and productivity policy, with regional and place-based considerations rarely considered as priority areas for reform.

Regional productivity should be embedded in national and state productivity agendas. Investment in regional productivity growth should be informed by locally collected data and evidence and developed in collaboration with regional stakeholders.

Place-based policy allows interventions to be tailored to local conditions, targeting the specific drivers and barriers in each region. This has been emphasised by recent OECD and other international studies.

Effective approaches require recognition of functional economic regions (rather than administrative boundaries), tailoring policy tools to local contexts, coordinating investments across different priorities areas and different levels of governments and empowering local and regional institutions and stakeholders.

Case studies in this report provide examples of place-based productivity policy making:

• Cairns and Far North in Queensland – cultivated a vibrant innovation ecosystem by taking advantage of its natural endowments.
• Eyre Peninsula in South Australia – lived with decades of water scarcity but employed world-leading practices and research in dryland agriculture.
• Peel in Western Australia – building on existing strengths while developing new industries to become a food product manufacturing hub.
• Wodonga / Parkes – regional logistics hubs developed through long-term planning, strong local government–industry partnerships, and targeted state infrastructure investment.