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Game over ?

November 9th, 2005

Among the many long-running policy debates in which I’ve been involved, the most drawn-out (except maybe for the one about private infrastructure and PPPs) has concerned micro-economic reform and productivity growth. For the last decade or so, the Productivity Commission and others have been claiming that reform has generated a surge in productivity growth, notably multifactor productivity growth (the term ‘multifactor’ refers to the fact that capital as well as labour inputs are taken into account) estimated by the Australian Bureau of Statistics.

One reason the debate is so drawn out is that the ABS presents estimates for ‘productivity cycles’, which are supposed to smooth out year-to-year fluctuations. Until very recently (in fact, until two days ago), the most recent cycle for which estimates were available ended in 1998-99, and this showed strong MFP growth. Arguments that this was a cyclical recovery or the result of increased work intensity were waved away.

The latest National Accounts, released on Monday, should settle the question once and for all. ABS now identifies the period from 1998-99 to 2003-04 as a complete productivity cycle and reports that ‘During the most recent MFP growth cycle (1998-99 to 2003-04) MFP grew annually, on average, by 1.0% – slightly lower than the long term average between 1964-65 to 2003-04 of 1.2%.’ The acceleration of productivity growth in the mid-1990s was not sustained.

The results for 2004-05 are even worse. Productivity actually declined 1.7 percentage points. For the entire period since 1993-94, when the productivity surge supposedly began, the average rate of productivity growth has been 1.2 per cent, the same as for the entire period since 1965. The ‘productivity surge’ of the mid-1990s was, at best, a temporary blip.

As I say, this should settle the question once and for all, but my experience in such debates is that it won’t. It will be interesting to see what counterargument is offered now.

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  1. Dave Ricardo
    November 9th, 2005 at 09:15 | #1

    “It will be interesting to see what counterargument is offered now.”

    Allow me to open the batting.

    This shows how much we need the Work Choices reforms, in order to improve productivity.

  2. November 9th, 2005 at 09:19 | #2

    The wedge the terms of trade has driven between the domestic income and production accounts is probably significant in these results. Record levels of labour force participation are surely a desirable development in their own right.

  3. Uncle Milton
    November 9th, 2005 at 09:33 | #3

    The terms of trade rise will have increased the ratio of national income to national product, but should have no effect on the ratio of national product to the quantity of labour and capital.

    Increased employment is desirable, but why hasn’t production increased at the same rate? You could argue that, having employed all the very producive people, the not so productive people are now finding jobs and this lowers average productivity. If so, this is a failure of our educational system. Real reform there would fix the problem at the bottom so we could sustain improvements in productivity, and not have them peter out when we start to run out of skilled, educated workers.

  4. jquiggin
    November 9th, 2005 at 09:48 | #4

    On terms of trade, Milton is right. There’s no obvious reason why terms of trade should affect real productivity either way.

    The way I put this in my Fin piece, to come out tomorrow is that strong terms of trade have allowed good economic outcomes despite poor productivity

    On Milton’s point the ABS stats include quality-adjusted estimates which suggest that average worker quality is increasing. I’ve added a link.

  5. November 9th, 2005 at 10:07 | #5

    How will it affect the current round of propaganda from the Business Council of Australia which is asking us to “lock in prosperity” – and of course its demands for the acceptance of WorkChoices?

  6. November 9th, 2005 at 10:10 | #6

    “but should have no effect on the ratio of national product to the quantity of labour and capital.”

    Agree, but this strikes me as an important limitation of the data. Increased capital intensity may be driven in part by lower prices for imported capital goods that are substituted for domestic production, weighing on the domestic product account.

  7. Dogz
    November 9th, 2005 at 10:25 | #7

    From the link:

    The average annual MFP growth rate of 1.0% over the most recent cycle reflected an average rate of growth of 2.2% in labour productivity and -0.7% in capital productivity.

    How does this compare historically? Was the productivity growth of 1.2% from 1963-2003 underpinned by labour, capital, or both? Why is labour productivity outstripping capital productivity? That suggests (to this non-economist anyway) that the microeconomic reforms are having the desired effect in terms of labour productivity, but something needs to be done about capital productivity.

    I’ve always felt like the favourable tax treatment for investment property ownership is stupid, because it encourages unproductive capital investment in property. So, can the decline in capital productivity (and hence overall productivity) be attributed partly to the housing/investment property boom?

  8. jquiggin
    November 9th, 2005 at 10:40 | #8

    “Can the decline in capital productivity (and hence overall productivity) be attributed partly to the housing/investment property boom?”

    Quite possibly, though capital productivity has generally declined over time. Certainly the subsidies are bad policy, and contribute to recent poor export performance, which has been partly disguised by the terms of trade bonus.

  9. Andrew Reynolds
    November 9th, 2005 at 12:13 | #9

    PrQ,
    I would argue that a reduction in regulation is a desirable outcome in its own right. If that also happens to produce an increase in productivity and wealth, great, but that is not and should not be regarded as the be all and end all of justification.
    The reason for deregulation should be to increase in the ability of people to choose their own way in life, free of as many impediments as possible, not merely to allow them to consume more goods and services, but to decide what they want to do. Regulation, by its very nature, reduces this ability.
    The only significant problem would be if it acted to reduce overall wealth, but, even then it may well be justifiable. Fortunately, but not co-incidentally, it has not.

  10. conrad
    November 9th, 2005 at 13:03 | #10

    If the statistical technique used by the ABS is smoothing out year-to-year fluctuations, then it is a bit of a cheap shot to report a single year that gives a negative number, particularily when it is the last point in the series — and therefore presumably more subject to change if someone decides the length of the productivity cycle should be a bit different.

    As I seem to remember you have arguing before, part of the labour productivity gain is simply people working more hours — do you know what proportion of the productivity gain is attributable to this ?

  11. Blame the workers
    November 9th, 2005 at 16:03 | #11

    Uncle Milton,

    your comments about the “less productive workers” finding work under the current environment and thereby “lowering the productivity average” while they may seem reasonable enough are so simplistic it is insulting. The search for improving the productivity of a company is an entire field of research in its own right. Much of the findings of this field are that MANAGEMENT techniques are a key driver in productivity. Are you going to suggest that the lower productive workers have made their way into management under our current employment boom?

    In your simplistic world, I could equally suggest a point of view where workers have been disenfranchised by the huge divide occuring between the upper levels of management and workers with respect to reward for effort, or even perceived reward for effort, which would easily account for this “drop in productivity”.

    Unfortunately your point of view seems to be preferred by those in power, simply because they are on the up side of the scenario i have suggested, so they couldn’t possibly subscribe to that viewpoint. It’s always easier to blame somebody else isn’t it? Therefore, it must be the slack workers that we should be able to dismiss out of hand with the Howard government’s new labour reforms who are to blame when our productivity seems to drop, not the underperformance of management nor the impact their actions have.

    So please Uncle Milton, as well as many of the other posters here who think that workers should shoulder the blame for productivity performance figures, go take a long hard look in the mirror before you point the finger. Accountability is a word that applies to all members of society, not just those beneath you.

  12. Uncle Milton
    November 9th, 2005 at 16:29 | #12

    Blame,

    I don’t know why you think I’m blaming the workers for disappointing productivity growth. What I wrote was “this is a failure of our educational system”. How this translates to “pointing the finger” at “slack workers”, is beyond me.

  13. Blame the workers
    November 9th, 2005 at 16:39 | #13

    Uncle,

    The fact that you cannot see that your example, which as you say, was an attempt to illustrate the “failure of our educational system”, squarely accuses workers of bringing down the productivity performance is disturbing. You have directly implied that lower skilled workers are entering the workforce under the employment boom and postulated that this is what may be bringing down the productivity in the workforce. Without this point in your argument, you have nothing to blame the education system for. In your argument, how else could our education system be failing us?

  14. November 9th, 2005 at 16:41 | #14

    Dave types, tongue in cheek:

    This shows how much we need the Work Choices reforms, in order to improve productivity

    Only problem with this is that no economist has found that the Howardian proposals are likely to improve productivity. On the contrary, apart from a few trivial one-offs, they have virtually universally found that the massive Howardian re-regulation of labour law on behalf of employers will make no difference or worse to long-run productivity.

  15. Uncle Milton
    November 9th, 2005 at 16:50 | #15

    Blame

    I think it is fairly obvious that some workers have more skills than others and that employers will have a preference for hiring workers with more skills. That doesn’t mean I am seeking to lay blame on less skilled workers. It’s not their fault that they are less skilled on average, but that doesn’t make it any less true.

    Think of it this way. As a cricket batsmen, through no fault of my own, I have far less skill than the batsmen in the test team. If I were to be brought into the test team, the number of runs per batsmen would surely fall.

  16. Dave Ricardo
    November 9th, 2005 at 17:12 | #16

    “the massive Howardian re-regulation of labour law on behalf of employers will make no difference or worse to long-run productivity.”

    Maybe, maybe not, but according to Andrew, the goodness lies in the act itself, regardless of its consequences.

  17. Blame the workers
    November 9th, 2005 at 17:13 | #17

    Uncle,

    Your latest cricket example further illustrates the simplistic nature of your assessment. You would never get a place in the Australian Test team as you would never meet the selection criteria. Your latest example implies that Companies are forced to employ people that are not qualified for the positions they are employed for. This was not implied in your initial post and I am fairly sure that it was not your intent to make that claim. If you were to reply to me that this was your intent, then this point at least has more merit than your original post which inadvertently or otherwise tarnished all workers, as being responsible for lowering the overall productivity numbers.

  18. November 9th, 2005 at 17:16 | #18

    What Andrew hasn’t figured yet is that this is not ‘deregulation’, but a massive exercise in re-regulating (on behalf of one class). I mean, what part of “670-pages of new regulation” doesn’t he understand?

  19. Uncle Milton
    November 9th, 2005 at 17:22 | #19

    Blame,

    the cricket example was there just to illustrate the point that if you change the skill composition of the workforce, average productivity in the workforce can be affected. This is just arithmetic – that’s all. I suggested the cause was the education system. I didn’t blame the workers or tarnish them in any way.

  20. ab
    November 9th, 2005 at 17:27 | #20

    Blame,

    “your original post which inadvertently or otherwise tarnished all workers”

    Actually, his original post only tarnished low-skilled workers, and only then if you engage in some heroic leaps of logic.

  21. Andrew Reynolds
    November 9th, 2005 at 17:33 | #21

    cs,
    If 670 pages replaces or simplifies over 4,000 award documents that may well be considered to be a reduction in regulation. I have not read the 670 pages, so I may stand corrected when some real analysis comes out, but I also hazard a guess that you have not either, nor will you have read the 4,000 plus awards currently out there.
    .
    Blame the Workers,
    If you cannot understand that employers will try to hire the workers better suited for a particular position first then it is not the workers who are at fault, it is simply the fact you cannot understand basic common sense.
    For example, I used to be a driller’s offsider; I got pretty good at that so I became a driller. I was indifferent at that at first, but got better as I became more experienced. Assuming a constant rate of pay through that period (not the case, but assuming) would an employer have been more sensible to hire me at the start or once I was a better driller? When drillers were not longer needed due to a drop in exploration due to a drop in the gold price and I moved back to the city and got a job in an office I was not as good at what I did as I later became. Same story. No matter how good the management practices were it still takes time to improve my skills in a given position.
    No blame, it is simple logic.

  22. Blame the workers
    November 9th, 2005 at 17:41 | #22

    Uncle,

    You’re jumping all over the place. Now you’re changing the “skill composition”. Skill composition has nothing to do with productivity. How that skill is utilised is what affects productivity. This i believe is a role for management, not workers. The only way you’re argument can hold water is if you say that the “problem at the bottom” is that the new workers to the work force, which you have speculated are bringing down the productivity of our nation, are so unskilled that they do not meet the selection requirements of any given company and as such it is impossible for them to be productive. Only under these circumstances can you then blame the education system for “failing us”. I am giving you a life line Uncle, i suggest you take it, because everything else you’ve said, intentionally or otherwise is nothing short of insulting to any worker that enters the workforce.

  23. jquiggin
    November 9th, 2005 at 17:43 | #23

    Andrew, I think it’s clear from the example of WorkChoice that micro reform does not necessarily enhance choice for everyone. The legislation criminalises all sorts of things simply on the basis that the government thinks it a bad idea that they should be included in employment bargains. Examples of this kind could be multiplied at length.

    To the extent that micro reform enhances the choices available to people, this is a good thing, but as with productivity growth such claims needed to be tested, not merely asserted.

  24. SJ
    November 9th, 2005 at 19:37 | #24

    Andrew Reynolds Says:

    cs,
    If 670 pages replaces or simplifies over 4,000 award documents that may well be considered to be a reduction in regulation.

    If you’re think that the 4,000 award documents have to be counted toward the total, then this number should really be set off against the potentially millions of AWAs.

  25. James Farrell
    November 9th, 2005 at 21:01 | #25

    Andrew

    I know you didn’t explicity claim that individual contracts will boost productivity, and that your main point was that freedom is the real issue. But as a matter of interest, is there any reason in principle why contracts should improve productivity? Howard is always vague on the mechanisms, but I guess the idea is that a shift to AWAs is an extension of the logic underlying enterprise bargaining: that sundry irrational restrictions (such as demarcations) will be lifted, and work practices will improve in general.

    But if the main impact of the new rules is on the hours people work, I can’t see much effect on productivity in the aggregate. If people give up penalty rates they’ll presumably do less overtime. By the principle of diminishing returns, that might raise their marginal productity. On the other hand, for people who trade away recreation leave and work longer, the effect should be the opposite.

  26. November 9th, 2005 at 21:18 | #26

    Exactly SJ. In principle, the idea is to replace some 4000 regulatory instruments with 8 million or so.

  27. November 9th, 2005 at 21:23 | #27

    In this case economists should at least give a thought to social utility rather than firm profitability or factor productivity. And here the answer is obvious: more people will be hurt rather than helped by the concentration of personnel decisions in the hands of HR and away from TU’s and awards.

  28. Steve Munn
    November 9th, 2005 at 22:13 | #28

    Andrew Reynold’s says:- “The reason for deregulation should be to increase in the ability of people to choose their own way in life, free of as many impediments as possible”

    Andrew, this is a “libertarian” ideological statement that doesn’t withstand scrutiny. I’ll give an example. Our heavily regulated and enforced road rules better meet the “life, liberty and the pursuit of happiness” objective than the lais·sez faire alternative. The scar on my left knee from an incident on Thailand’s anarchic roads provide me with a permanent reminder of that lesson!

  29. Andrew Reynolds
    November 10th, 2005 at 08:08 | #29

    Hmm, lots of points to respond to. In order, then,
    PrQ, to the extent that anything is criminalised, I might agree with you. I have not had time yet to read a detailed assessment, so I will reserve judgement until I do. If the items that are criminalised are the types of points that are usually inserted into agreements as a result of standover tactics, common in the building industry for example, then there may be some justification.
    .
    James – you have two “if” statements in there before you get to the meat. If increased freedom affects working hours and through them productivity – fine. Provided it is what the parties to the agreement want, then go ahead.
    .
    cs – the replacement of 4,000 (or so) regulatory instruments with 8,000,000 individual contracts would be a good thing, provided those 8,000,000 were agreements between the contracting parties. I do not see that the billions of individual transactions on a typical day in Australia are worse that the one 5 year plan that typically came out of Gosplan in the old Soviet Union. It is not the quantity that matters, it is how they are arrived at. If this 670 page bill results in theose 8,000,000 contracts being (relatively) freely agreed between the parties to them, then that is excellent.
    Steve – I have driven on the roads in Indonesia and I would tend to agree with you on that point. Libertarianism is not anarchism, however. The road rules (while I believe they are over-regulatory) are in many ways similar to a reasonable set of IR laws. It is what they do not say that counts. Our road laws, for example, do not say that I may only drive between certain hours, along set paths and require permission from the courts if I want to change them. If I want to drive I need to have a license for the class of vehicle I drive, but I do not need to have a paid up membership of the RAC (or any union) etc.
    Yes, the road laws are restrictive, and in some areas overly so, but please, do not confuse me with an anarchist. There does need to be a government, it needs to establish laws, but to me at least, each of those laws should pass a strict needs test, and I firmly believe our current IR systems fails that test.
    .
    As I have said before, though – these laws should be opposed on two fronts. Being still too restrictive and in interfering with things that should be in the control of the States.

  30. derrida derider
    November 10th, 2005 at 13:55 | #30

    I find the dialogue between Blame and Uncle hilarious. Uncle is making a simple arithmetic point – that all else equal, lowering wages and conditions to make greedy employers willing to settle for the less productive workers will lower average labour productivity. As he says, it’s simple arithmetic that says nothing about whether such a course is desirable or undesirable in itself. Blame is completely incapable of any analytic thinking, and interprets this as a slur upon the workers.

    As I’ve said before, the French have the highest productivity per hour worked of any country in the world because they don’t work their least productive hours and don’t employ their least productive workers at all. That fact in itself says nothing about whether that less productive work should or should not be done.

    The irony is that Uncle’s point is the exact reason why Howard’s “reforms” will tend to *lower* average productivity. Which yet again says nothing about whether such reforms are or are not desirable, but it does contradict the government’s rhetoric.

  31. rdb
    November 10th, 2005 at 14:12 | #31

    Brad Setser: More flexible labor markets, less business investment? Nov 08 2005

    Apologies for being one day late discussing a Peaple/ Teitelbaum article in Monday’s Wall Street Journal called “UK business investment lags.” My title is intentionally a bit overstated, but I was struck by the fact that UK business investment is (and consistently has been) lower than in Germany and France. That was not would I would have expected based on the standard “dynamic” Anglo-Saxons, stagnant Continent” storyline.

  32. Ian Gould
    November 10th, 2005 at 20:12 | #32

    Blame,

    As unemployment has fallen it’s become easier for older workers and people with limited work skills or disabilities to get work.

    This is a desirable thing but it does mean that average labour productivity will trend down.

    There’s also the standard cyclic effect. during the recovery from a recession, there’s spare productive capacity (machinery etc) and each new worker can more or less immediately start work withotu the need for new capital investment.

    That slack has now largely disappeared – new workers are likely to be less productive because of emerging bottlenecks in other inputs such as machinery and raw materials.

  33. Andrew Reynolds
    November 10th, 2005 at 23:06 | #33

    rdb,
    The reason for the higher investment in Germany and France is that employing people is expensive and leads to inflexibility. The best course there is then to hire fewer people and use more machines. The reverse is true in more flexible labour markets. The choice, then, is higher capital employment or higher labour employment. Your choice, but I personally prefer to see people working.

  34. SJ
    November 10th, 2005 at 23:17 | #34

    Andrew Reynolds Says: cs – the replacement of 4,000 (or so) regulatory instruments with 8,000,000 individual contracts would be a good thing, provided those 8,000,000 were agreements between the contracting parties.

    Those 4,000 or so “regulatory instruments” are no different in kind to the 8,000,000 or so “individual contracts”. Both sets are legal arrangements governing conditions of employment under various bits of legislation. Yours is a distinction without a difference.

    I do not see that the billions of individual transactions on a typical day in Australia are worse that the one 5 year plan that typically came out of Gosplan in the old Soviet Union.

    The old “communist” fallback. Wake up, Reynolds, the world has moved on, even if you and your pals haven’t.

    It is not the quantity that matters, it is how they are arrived at. If this 670 page bill results in theose 8,000,000 contracts being (relatively) freely agreed between the parties to them, then that is excellent.

    Nice dodge. I note that it was actually your “quantity matters” argument, i.e. “If 670 pages replaces or simplifies over 4,000 award documents that may well be considered to be a reduction in regulation” that cs was responding to. You’re also begging the “freely agreed” argument, despite your use of the word “if”.

  35. SJ
    November 10th, 2005 at 23:20 | #35

    Formatting didn’t work. Try again:

    Andrew Reynolds Says: cs – the replacement of 4,000 (or so) regulatory instruments with 8,000,000 individual contracts would be a good thing, provided those 8,000,000 were agreements between the contracting parties.

    Those 4,000 or so “regulatory instruments� are no different in kind to the 8,000,000 or so “individual contracts�. Both sets are legal arrangements governing conditions of employment under various bits of legislation. Yours is a distinction without a difference.

    I do not see that the billions of individual transactions on a typical day in Australia are worse that the one 5 year plan that typically came out of Gosplan in the old Soviet Union.

    The old “communist� fallback. Wake up, Reynolds, the world has moved on, even if you and your pals haven’t.

    It is not the quantity that matters, it is how they are arrived at. If this 670 page bill results in theose 8,000,000 contracts being (relatively) freely agreed between the parties to them, then that is excellent.

    Nice dodge. I note that it was actually your “quantity matters� argument, i.e. “If 670 pages replaces or simplifies over 4,000 award documents that may well be considered to be a reduction in regulation� that cs was responding to. You’re also begging the “freely agreed� argument, despite your use of the word “if�.

  36. SJ
    November 10th, 2005 at 23:22 | #36

    Still didn’t work for some reason. Hope it’s clear enough which bits were supposed to be block quotes of Andrew Reynolds.

  37. Andrew Reynolds
    November 11th, 2005 at 00:49 | #37

    SJ – it is clear enough.
    Where to start…
    Perhaps with the 8,000,000 figure compared to the 4,000. The distinction has a great degree of difference. If we accept both numbers for arguments sake, then each of the 4,000 affects, on average, 2,000 employees. Each of those people has very little to no say as to what is in there, nor do their employers have any real say. If each of the 8,000,000 represents an agreement between two people by simple agreement betweeen the people then the difference is enormous. If it suits both parties to change working hours (for example) all they have to do is agree to change, not get the courts involved – much better, much cheaper and much more free.
    .
    On the ‘Gosplan’ front – I was using an (admitted) extreme to make a point. A simple reduction in the number of regulatory instruments does not mean that there is less regulation.
    If we are going to use gratuitous insults: I have moved on from an early, juvenile, sympathy with socialism. Have you? Please answer the point rather than avoiding it in this way.
    .
    I added ‘if’ in in deference to our host, who had indicated that some elements of the bill may reduce the freedom of contract. That was the source of the ‘if’. I do not think it was a dodge. I would like an answer to my point, rather than your dodging of it.

  38. Steve Munn
    November 11th, 2005 at 16:47 | #38

    Andrew Reynolds says “The choice, then, is higher capital employment or higher labour employment. Your choice, but I personally prefer to see people working.”

    Sounds like you have a nasty case of the work ethic. Generally speaking, work should be a means to end, and not an end in itself. It is ironical that many hunter-gatherer societies met their material needs with just 2 or 3 hours labour a day (if anthropologists are to be believed), whereas we, with all our labour saving technology, have a much higher work burden.

  39. SJ
    November 11th, 2005 at 18:29 | #39

    Andrew Reynolds Says: “I would like an answer to my point, rather than your dodging of it.”

    Huh? What exactly is your point?

    We have an existing system. Howard is proposing to change it.

    Your point seems to be that something completely different to either the existing system or Howard’s proposal would make you happy. So what? And would you like a pony as well?

  40. stoptherubbish
    November 13th, 2005 at 12:04 | #40

    To the extent that Workchoices (not) combined with the Welfare to work legislation increase the number of job seekers(not jobs note) and reduces the price of labour, we can expect that productivity will fall, all else being equal. That is the problem with much of the chatter about Howards legislation-we are asked to accept that it will do a number of things simultaneously-increase the number of jobs, increase the number of job seekers, increase productivity (of capital and labour presumably) and increase employees income (increase in wages). It is all a little too good to be true-it is also economic nonesense, but never mind, economic arguments are not the point of the legislation. The real point is the satisfaction of Howards visceral distaste for unions, as a form of organised dissent against his supporters that he believes, deep down, is simply treasonous. Many agree with him. Most do not judging by the polls.

    I am not looking forward to Costello as he regulalry reports that productivity would have been even lower if the legislation had not been passed. And productivity will fall, as will real wages at the bottom. The number of poeple reported as seeking work will however increase. Could somebody explain to me why this will be a triumph of policy making? Oh well-this is the second time around for this kind of political economy, and this time it is both farce and tragedy.

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