Unless this is turned around, Australians' living standards will suffer as a result, the Productivity Commission warned in its annual bulletin.
Multifactor productivity - a measure of how much an economy produces with a given set of inputs - has languished over the past two decades.
It grew at just 0.1 per cent between 2022/23 and 2023/24 in the market sector - industries where prices are set by market forces.
That's below the 20-year average of 0.3 per cent and far below the 1.6 per cent annual rate recorded between 1994/95 to 2003/04.
This matters because without productivity growth, you can't sustainably increase the population's quality of life.
You can grow the pie by increasing the population or the hours each person works, but over the long-term, growing productivity is the only way to grow each person's slice.
In a research article, Productivity Commission economists Lawson Ashburner and Vincent Wong found Australia has become worse at finding new and better ways to organise labour and capital.
Essentially, technological innovation is falling behind.
But Australians are also becoming less efficient at using technologies already at their disposal.
"Inefficiency crept into the economy in the 2000s and has persisted since," Mr Ashburner and Mr Wong said.
"This inefficiency is now substantial - multifactor productivity would have been about seven per cent higher in 2023/24 without it."
So, what's causing the economy to be less efficient?
One factor identified by the research paper could be stricter regulation.
Over-regulation hampers efficiency because it can prevent firms adopting new technologies and using resources efficiently.
"Indeed, even well-designed regulation might reduce multifactor productivity in pursuit of other social, environmental or economic goals that are not captured by output," said Mr Ashburner and Mr Wong.
Education is another possible driver.
"More educated and experienced workers can, in theory, produce more per hour worked, even with the same amount of capital per worker," they said.
Since the mid-1990s, productivity growth in the business and distribution services sectors - where the skills of the labour force have increased faster relative to the rest of the workforce - has outstripped productivity growth in sectors like construction.
The federal government says its work to reform merger laws, drive competition, remove nuisance tariffs and boost skills with fee-free TAFE will help turn productivity growth around.
Removing non-compete clauses is also on the government's agenda because they limit worker mobility and constrain competition, says Assistant Treasurer Andrew Leigh.
Work out of the US, where non-competes have been banned completely, showed it would improve business start-up and patenting rates.
"In a full employment economy, you don't typically hire staff off the unemployment queue. You typically hire staff from other employers," Dr Leigh told AAP.
"So if I want to start a FinTech firm, I'm going to be looking for coders and managers who are currently working for other firms in the industry. And if I can't get those people, then I may not be able to start my firm."
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