Sydney Morning Herald: Matt Wade

Have you noticed all the attention the care industry has been getting lately? Debate rages over whether there is a child-care crisis, and aged-care services - especially standards in some of the homes for the elderly - have attracted a lot of scrutiny.

One reason care is in the limelight is we are paying for more of it. In the past most care was provided in the home, normally by women. But as the proportion of women workers has risen, care has been increasingly outsourced to the market. The emergence of the child-care company ABC Learning Centres is symbolic of this change. It was listed on the stock exchange six years ago and has rapidly grown into a global business worth almost $3 billion.

The care industry - which includes child rearing, aged care, disability services, social work, health care and even education - also attracts attention because of its strong emotional dimension. It affects vulnerable loved ones such as young children, aged parents and sick relatives. So it's fair to assume most people would like to see the care industry operating well.

And yet, some economists who specialise in the care sector are worried about its future. Why? Because it has a labour productivity problem. As John Howard and Kevin Rudd keep reminding us, Australia's ability to keep funding our comfortable lifestyles as the population ages will depend on the strength of productivity growth in the decades ahead.

But economists who study the care industry believe it is probably impossible for it to achieve productivity growth rates anything like most other parts of the economy. A British expert on the economics of care, Professor Susan Himmelweit, says that "pure productivity increases are likely to be indirect small and one-off " in the care sector.

It's an industry with a "cost disease". In the 1960s there was concern that all service industries would be troubled by cost disease. Some economists assumed that because many service industries had few inputs apart from labour, productivity growth would lag manufacturing where new technologies were expected to boost the output of workers. What they didn't bargain on was the arrival of information technology.

The introduction of computers and the internet transformed many service industries, especially jobs in clerical, retail, wholesale and financial services. A study by the Reserve Bank published in 2000 showed that wholesale and retail were among the largest contributors to labour productivity growth during the 1990s.

Even so, some activities resist labour productivity growth no matter what new technologies come along. The US economist William Baumol famously used the example of a string quartet playing a piece of music to illustrate this. Neither cutting the number of players or playing faster can raise productivity. Capital investment, technological improvements and better organisation might improve the quality of the music produced, but they could not reduce the number of people needed, and the time they took to play it. Baumol used this observation to explain why productivity rises more slowly in the arts than the rest of the economy.

At the moment, the care sector is more like a string quartet than a dress shop. The information revolution hasn't cured its cost disease because it faces some of the same limitations on productivity growth as a string quartet. Jobs such as nursing, child care and aged care can't easily be delivered over the phone or online. They require direct supervision and empathetic contact.

The term "care" implies there is a person-to-person relationship between the carer and the one being cared for. There is a limit to how many people can be cared for at the same time, so at some point spreading care over more people reduces quality. As a result the time taken to produce care is likely to stay the same, over time, while the time taken to produce a typical bundle of other goods and services will fall. This has significant implications for care providers in both the private and the public sectors.

For companies in the care business, higher relative costs will mean lower relative returns for shareholders compared with firms in other industries. As a result care providers will be under long-term pressure to reduce costs by controlling wages. One strategy may be to employ younger, less well-trained workers.

In Australia a lot of care services are provided by the public sector, especially state governments. But public sector care-givers are under similar cost pressures to their private sector counterparts. Low productivity growth in the care sector will result in a relative increase in public spending on care. That will expose state care providers to accusations of waste and inefficiency.

Sure enough, the Menzies Research Centre, the Liberal Party think tank, published a paper this month criticising state governments for spending on services $43.4 billion of the $47.4 billion extra revenue they received between 1999-2000 and 2005-06. Most of the money went on payments to government employees. While many of those workers were not part of the care sector, the report illustrates the political pressure state governments will face as they grapple with the cost disease of the care services. The State Government's policy to keep wage costs to 2.5 per cent growth each year, announced in the budget, is another indication of how public sector care providers are under pressure to keep a cap on wages.

Himmelweit says considerable "instability" in the care sector is inevitable without permanent and growing funding. The only option for many care providers, both public and private sector, may be to reduce standards. If that happens, the recent public interest in child care and aged care suggests many voters will be looking for someone to blame.

Ross Gittins is on leave.