Over the past 15 years, the Australian economy has undergone a transformation. The government has introduced reforms in the financial system, business regulation, and industrial relations, and reduced trade protection. In parallel, business practices and relationships between employers, employees, and unions have seen significant change. Yet despite these efforts, the nation's relative economic prosperity has not altered since 1970. Its gross domestic product is still 30 percent behind that of the United States, the most prosperous country in the world (Exhibit 1).

This prosperity gap has two main causes: poorer labor productivity in the Australian economy, and lower employment per capita. If Australia is to raise its standard of living, it must address these issues—productivity in particular. To investigate what actions by corporations and government might promote productivity growth, the McKinsey Global Institute compared Australia's performance in labor productivity and employment with that of other leading economies.¹ It focused on five industries: processed food, construction, retail, banking, and aviation (see case studies on pp. 98-102). Together, these industries make up about 18 percent of the economy (Exhibit 2).

The nature of the challenge

The principal research findings were:

• Australia trails behind the global benchmark, the United States,...