The care industry is one of the unsung heroes of the Australian economy. When we talk about care, we often focus on the social services – health, aged, disability and childcare – it provides to the community. But it is underappreciated how important care has become as an industry to Australia’s wider economic performance.
Over the last decade the care industry has emerged as an economic powerhouse. It is the fastest growing industry in Australia, expanding three times the rate of other industries. In 2024 it became Australia’s largest employer – accounting for one-sixth of the workforce – and the second largest in dollar terms behind mining.
But despite rapid growth the care industry is facing difficult conditions. Productivity has reversed, falling by 5% in the three years since the pandemic. Business profitability has slumped to some of the lowest levels recorded and private sector investment has gone backwards. As delivery costs have risen with falling productivity government spending on care services has surged, leading to mounting pressures on the federal budget.
This research note – the first in a series of three on the care industry – explores the challenges facing Australia’s care industry today. At the centre lies of the story lies declining productivity, which exacerbates the financial, investment and funding challenges confronting the industry. Returning care productivity to a growth path is essential to put the industry on a sustainable long-term footing.
The solutions to care productivity challenges are multifaceted, but regulatory reform must play a central role. Targeted reforms to industry regulation would enable care businesses to make the investments needed in technology uplifts to raise productivity. With well-designed regulatory reform, the care sector can convert its rapid expansion into sustainable productivity gains and longterm economic resilience.
Care is one of the most important industries in Australia as it plays a large and increasing role in the national economy. In 2025 it was Australia’s second largest industry by dollar terms, contributing $222 billion or 10% value add. It is also the largest industry in workforce terms, employing 2.4 million people or 16% of the total labour force.
It wasn’t always thus. A decade ago, care accounted for 12% of the workforce. But the industry has grown rapidly: output has lifted by 5.7% per year and the workforce 5.4%, triple the pace of other industries. Growth has accelerated in the years after the pandemic, with the workforce expanding by a remarkable 10% in 2023 alone.
High growth in the care industry is driven by two factors: demography and policy. Over the long-term demographics is the principal driver, with an aging population steadily increasing demand for aged, medical, disability and health services. In the short-term policy change is a critical factor, with increased government funding for medical and disability services leading to an upswing in activity in the years since the pandemic.
This expansion has been crucial for Australia’s wider economy. Since 2022, the care sector created 525,000 new jobs – around onethird of all employment generated in Australia. With privatesector job growth sluggish for much of this period, the care workforce acted as a stabiliser, preventing a weaker labour market and a more fragile postpandemic recovery.
While the care industry has delivered remarkable growth over the last decade, its productivity performance leaves much to be desired. Indeed, care is one of the major contributors to the productivity crisis currently afflicting the Australian economy.
The industry faces unique challenges in raising productivity levels. As its name suggests it is very labour-intensive, requiring close person-to-person interactions for the delivery of most services. This makes it less amenable to automation than other industries which can more easily substitute technology for labour. As a result, its longrun productivity growth is structurally lower: averaging 0.5% per year during the 2010s compared with 1% across the rest of the economy.
On top of these longterm constraints, the sector has experienced an acute productivity fall in recent years. Productivity began declining rapidly just after the pandemic and dropped by 4.6% over the last three years. This reflects the rapid expansion of the care workforce since the pandemic, which has grown much faster than industry output. Never before has the industry seen such a sudden and large decline. While productivity has also fallen below trend across other industries during this period, the fall in care has been more pronounced and is yet to show any sign of recovery.
These twin productivity challenges in care are a leading cause of Australia’s broader productivity woes. Productivity growth in other industries has been cancelled out by losses in care, leaving Australia with zero overall productivity growth since 2019. With care now accounting for a tenth of economic activity and a sixth of the labour force, addressing the industry’s productivity crisis must be a national policy priority.
A corollary of collapse in care productivity has been on the financial performance of businesses, which has declined markedly in the years since the pandemic.
Productivity is the ultimate well-spring of economic performance: the amount of output generated for a given amount of inputs determines how much businesses can pay in wages, earn in profits, and reinvest in growth. When productivity declines something in that equation has to give, and in recent years that has been financial performance.
The chart below shows the average operating margins (gross profits as a share of income) for the branches of the care industry since the mid-2000s. Since the pandemic they have dropped dramatically:
This phenomenon – of booming activity alongside declining profitability – could be described as a ‘profitless boom’. While the workforce has grown, output per worker has declined. Outside the health and disability sectors, government funding has not kept pace with costs, leaving providers to bear the costs of falling productivity on the business bottom line. The result is the lowest margins ever recorded in the care industry.
Compounding these problems is a marked decline in private sector investment in care services. Despite being the fastest growing industry in Australia it has some of the weakest investment performance.
During the early phase of the pandemic, investment in care fell sharply, declining by around 20% in 2020. This mirrored the experience of other Australian industries, as pandemicera restrictions suppressed private sector investment intentions. However, and unlike most industries, care investment did not rebound as conditions eased, resulting in a prolonged period of weakness.
While the workforce expanded rapidly after 2022 investment levels remained suppressed and have only just returned to a growth trajectory. In real terms, capital expenditure by the care industry in 2025 ($9.4 billion) was stuck at roughly at the same level as 2019. The workforce had increased by 37% over the same period, resulting in far less investment per employee.
This decline in private sector investment reflects the mounting financial pressures on the industry. With profitability significantly lower than its pre-pandemic levels, existing businesses have fewer financial resources to invest in expansion, while new investors see fewer opportunities than in the past.
In turn, lower investment compounds the industry’s productivity woes. Raising productivity in a labour-intensive industry requires capital expenditure to introduce new equipment and technology that augments labour. Falling investment alongside rising labour utilisation has seen care move in the opposite direction, becoming more labour-intensive and less efficient.
Together, these factors have created a vicious cycle between investment, financial performance and productivity. Insufficient investment results in falling productivity, which in turns weakens business margins, reducing the capacity to attract further investment. Without change that breaks this pattern, the cycle is likely to continue with increasing demands on public expenditure to fill the gap.
Another consequence of rapid growth alongside falling productivity is rising pressure on the federal budget.
The care economy is unique because it is largely governmentfunded. Much of its activity is classified as “nonmarket”: public hospitals, Medicare, and the NDIS are directly funded by government, while child and aged care services rely heavily on consumer subsidies. As service delivery and funding are tightly linked, rapid expansion automatically drives up federal expenditure.
In 2024-25, the Commonwealth spent $369 billion across health, aged care, disability, and childcare, accounting for 48% of all federal spending. Since the pandemic, carerelated expenditure has grown an average 8.4% per year, more than double the 3.9% annual growth in other spending.
These increases, however, have been uneven between the different branches of care. In real (inflation adjusted) terms, by 2024-25 health spending was 10% above its prepandemic trend, driven by higher hospital and medical services expenditure. Disability spending was 43% above trend, driven by expanded NDIS eligibility and program scope. Aged- and child-related care funding, by contrast, are tracking slightly below their longterm trajectories.
Overall, real spending on care functions was $36.2 billion higher in 2024-25 than implied by its pre-pandemic trend, with around two-thirds of the increase due to disability and a third due to health. This is equivalent to a 4.7% increase in total federal spending due to these two care functions alone.
Falling productivity is part of the explanation for these cost blowouts. When productivity declines, service delivery becomes more expensive. In sectors directly funded by government – like public hospitals and disability services – increased costs flow onto the budget. In indirectly subsidised sectors like childcare and aged care, cost pressures instead fall on providers and consumers, which is why spending growth in those areas has been more contained.
These increases are not fiscally sustainable. The federal budget is forecast to be in structural deficit through the rest of the next decade, in large part due to care spending. Analysis of Parliamentary Budget Office data indicates that care function spending is currently on track to grow by 6.2% p.a. over the next decade, almost twice as fast as the 3.8% p.a. rate for non-care functions. The levels of funding increases seen over recent years cannot be sustained without significant increase to taxation and/or continued deterioration in public finances.
The current trajectory of the care industry is not sustainable. It is growing rapidly due to demographic and policy drivers, but is also experiencing falling productivity, historically low profitability, under-investment in future capacity, and is becoming an increasing strain on the federal budget. If these conditions persist the industry cannot sustainably deliver the quantity and quality of care services the growing and aging Australia population will need.
As falling productivity lies at the heart of this story, raising productivity is the solution. But this will be a complex policy exercise. The different branches of care each provide distinct services, have diverse workforce requirements, and face differing regulatory regimes. Inflexible regulatory regimes are frequently the major barrier to innovation and productivity and require careful and case-specific redesign. There is no silver bullet or single reform which can restore care productivity to growth.
But there are many practical policy steps which undertaken together can help. In our recent advocacy1, the Australian Industry Group has identified a suite of regulatory reforms which would improve the capacity of care businesses to raise productivity through investment and technology. These include:
Each of these reforms aims to unlock greater uptake of investment into the care sector. By linking funding schemes to longer-term capability uplifts (and not simply activity delivery), and streamlining regulations which inhibit technology adoption and innovation, they create conditions enabling business to invest in productivity uplifts.
With care now central to the Australian economy we cannot afford to overlook its productivity crisis. Without reform, the industry risks becoming under-invested, financially fragile and a persistent drain on public finances. Addressing the care industry’s productivity challenge must therefore become a priority for policymakers, industry leaders, and government funders. Australia’s longterm economic health now depends on the sustainability of its care sector. With reform, the care sector can convert rapid expansion into sustainable productivity gains and longterm economic resilience.
Please consult Australian Industry Group’s resources on the care industry.
Jeffrey Wilson is Head of Research and Economics at the Australian Industry Group.
He leads our economics team and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities.
Dr Wilson specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.
