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A debate resolved

September 28th, 2013

As regular readers will know, I’ve had a long debate[1] with the Productivity Commission on the sources of the supposed ‘productivity surge’ of the 1990s, which, I’ve suggested was primarily the result of increased work intensity and unmeasured increases in working hours at a time of high job insecurity. I was looking back at some of these discussions when Google turned up a Hansard transcript of hearings of the Senate Standing Committee on Economics in 2012. It turns out that the Commission now agrees with me, and has done so for some time. To quote the Commission’s expert witness, Dr Jenny Gordon[2]

There was a very big debate with the former branch head, Dean Parham, who did a lot of work on productivity. He looked at the effect of the reforms and ICT, which is one of the points that Professor Quiggin made, in trying to explain the productivity boom of the 1990s in terms of what actually happened. Professor Quiggin’s main point is that work intensity is important, which is quite hard to measure but, in fact, is a major source of productivity growth. If people work smarter and work harder while they are at work, that will improve productivity. So it is cutting the fat of organisations, I suppose you could call it. The other point is that people are working longer hours. But the way the productivity measurement is done takes account of the hours of work. That is actually data collected through ABS surveys of individuals reporting the hours that they work. So we could measures hours properly. It is hard to measure work intensity. It does appear and it is a source of productivity growth … So we were in full agreement with that. So the debate was settled back in the mid-2000s.

It’s good that we are in agreement this far. I would add though that productivity growth achieved by working harder does not, in general, improve economic welfare. As for “working smarter”, if this is a reference to technological progress, it’s fine. In my experience, however, it’s usually management-speak for “do the same job with less resources, and work out for yourself how to do it”.

More importantly, the key implication of my analysis is that, to achieve sustainable improvements in living standards, we ought to be focusing on getting the macro issues right rather than lining up for another round of microeconomic reform. Increases in work intensity don’t last, as experience since the 1990s has shown. Genuine long-term improvements in the productivity of the economy can be gained only through educating the workforce to take account of improvements in technology (only a small proportion of which are generated domestically) and through macroeconomic and labour market policies that avoid wasting human potential through unemployment and other forms of social exclusion.

fn1. In the same hearing I cite here, PC Chairman Gary Banks described it as a ‘rich’ and ‘ongoing’ dialogue. I’ve certainly learned a lot from it, and I hope the same for the Commission and any onlookers patient enough to follow it.
fn2. Not particularly germane, but interesting to this post is that Dr Gordon is married to Brian Schmidt, winner of the 2011 Nobel Prize for Physics

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  1. Kien
    September 29th, 2013 at 07:16 | #1

    Whether increased work intensity is welfare improving depends on whether a person freely chooses to do so or is forced to do so. Amartya Sen’s point that there is distinction between starving and fasting is relevant here. More broadly, well being is not only based on outcomes (having more for less) but also on freedom. Hope the Productivity Commission thinksore broadly about well being in future.

  2. Kien
    September 29th, 2013 at 07:20 | #2

    PS – congratulations on winning the debate 🙂

  3. Ikonoclast
    September 29th, 2013 at 07:31 | #3

    “and through macroeconomic and labour market policies that avoid wasting human potential through unemployment and other forms of social exclusion.”

    QED. Therefore reduce unemployment to frictional (ie. about 2%) and stop accepting 5% official and another 5% to 10% underemployment and hidden unemployment as the norm.

    Implement a Job Guarantee with government as the reserve employer guaranteeing a miminum wage. It’s simple if you have vision and courage and jettison all the neocon myths.

  4. duke the lost engine
    September 29th, 2013 at 07:35 | #4

    re: “working smarter”, in my experience, the requirement to “do the same job with less resources, and work out for yourself how to do it” is often precisely what leads to take-up of new technology (i’m thinking of IT and analytical tools)

    of course it can also lead to over-work and low quality, and the workforce needs to be sufficiently educated to take this up (and somewhere the research needs to have been done to create this technology)

  5. Ken_L
    September 29th, 2013 at 10:40 | #5

    ‘Genuine long-term improvements in the productivity of the economy can be gained only through educating the workforce to take account of improvements in technology …’

    I’m frequently amazed at my workplace about the extent to which adoption of advances in ICT is mainly driven piecemeal fashion by enthusiastic frontline workers. The ICT department specialises in rolling out hugely expensive new software that nobody has been properly trained to use. Top management makes the expected noises about staying abreast of ICT developments but in fact continues to pursue outmoded business plans and models which demonstrate zero comprehension of either the potential of ICT to change our industry fundamentally, or the ways in which customer expectations are altering, or the opportunities that have been created for non-traditional competitors to enter the market.

    Not sure of course that the government can or should try to do anything about this failure of management, other than correctly identify it for what it is and avoid bluster about the evils of unions and the need for more labour market reform.

  6. Greg Tangey
    September 29th, 2013 at 16:06 | #6

    To what extent was productivity growth in the 1990’s driven by the appearance at work of more sober workers after lunch, particularly on Fridays? Wasn’t an FBT change in the late 80’s regarded as being the “death” of the long boozy lunch, which then meant that if bosses were soberly at their desks, workers were obliged to be as well. Relative sobriety might explain some of the work intensity gains.

  7. Chris Johnson
    September 29th, 2013 at 17:20 | #7

    John, thanks for the link to that article on Brian Schmidt (and Jenny Gordon). It’s beautifully written, and a particularly skillful bit of science journalism.

  8. Jim Rose
    September 29th, 2013 at 18:39 | #8

    I thought the firm came into existence to reduce shirking and agency costs?

    One cause of the GFC was an inability to monitor the work effort of CEOs and banks etc. Some say.

    But under john’s theory, making CEOs and banks do there jobs properly is not a productivity gain?

  9. Jim Rose
    September 30th, 2013 at 19:54 | #9

    one of the gains of microeconomic reform was the greater use of incentive pay.

    at Safelite Glass, Ed lazear found that it increased output per hour by 41%. one-half due to extra work effort, the other half to self-selection in recruitment and retention.

    when wages replaced piece rates in a blue jeans factory, lazear found that jeans output fell because the most productive put in less or left.

    is this the increased work intensity that is the subject of debate?

  10. JamesH
    October 1st, 2013 at 10:09 | #10

    I note that at the time, there was an argument that longer unpaid work hadn’t been measured and hence people couldn’t say if it was a contributer. Since then The Australia Institute has done regular surveys of unpaid hours at work (this year’s Go Home On Time day is coming up) which might provide some useful data settling this question, though of course they are only doing now and not in the 1980s-1990s.
    The Conversation recently reported some relevant research: Employees work harder during recessions, which ties in to a point I have been making for a while that periods of high measured productivity are usually periods of high unemployment.

  11. Newtownian
    October 3rd, 2013 at 16:23 | #11

    Tks for Guardian link.

    One comment on the above

    “As for “working smarter”, if this is a reference to technological progress, it’s fine. In my experience, however, it’s usually management-speak for “do the same job with less resources, and work out for yourself how to do it”.

    That is perhaps a Queensland way for expressing it – smart state and all that.

    Here in NSW for sometime ‘efficiency dividend’ has been the identical equivalent. It was fun to hear Labor pick it up during the twilight hours of the Federal government too.

    How journalists can let the politicians get away with these weasel words is beyond me. At least some of the comedy skits do a good deconstruction – but by rights it should be routine to call out the Newspeakers when they utter such rubbish – if only.

  12. Jim Rose
    October 3rd, 2013 at 17:29 | #12

    The notion that it is never beneficial to deregulate because the benefits to the public or private monopolist always exceed the social losses to the public is not new.

    The public choice literature on the transitional gains trap suggested that reform does not necessarily make society better off. The rent-seeking costs of the original privileges are capitalised and are lost forever. They are not regained by reform.

    McCormick, Shughart and Tollison (1984) generalised to argue that the initial effort to establish regulation dissipates the monopoly profit, limiting the gain from deregulation to the efficiency cost of monopoly. The resources lost to rent-seeking can never be recovered, which was why there was a voter disinterest in deregulation prior to the 1980s. The gains of deregulation were small prior to the 1980s.

    The prevailing model of deregulation is essentially a nirvana model, in that the gains from deregulation can essentially be had without cost. Further rent-seeking costs come from lobbying for and against reforms and these are lost to society forever. Reform is not a free lunch.

    Too often it is assumed that deregulation can replicate the status quo ante. Fred McChesney observed that “The airline industry of 1999 is not the airline industry of 1978 minus the Civil Aeronautics Board”! The wealth lost in aviation rent seeking is not recovered, or even recoverable by airline deregulation. Production possibilities have been irretrievably diminished.

    To the extent that specialized resources were involved in the rent seeking–resources that could have been devoted to amassing specific capital in producing the regulated good–the deregulated relative price must be higher than the pre-regulation or competitive price. These specialised resources cannot to used for new purposes.

    The relevant article by Tollison and Wagner (1990)

    “This paper applies the theory of rent seeking to argue that economic reform, in the sense of correcting past deformities in the economy, does not pay from a social point of view.

    Economic reform, at best, should focus on the prevention of future deformities. The analysis is developed in terms of the example of monopoly, but its applicability extends to any example of economic reform.

    The general principle underlying the analysis is that reform is not a free lunch, all the more so when the costs of the reformer and the resistance of the object of reform are taken into account.”

    Tollison and Wagner concluded that the gains from deregulation are greatest in industries that fight reform the hardest. Their rent-seeking is ongoing rather than sunk costs and this can be recouped by deregulation

    To the extent that there is on-going Australian rent-seeking such as the shirking on work effort such as that identified in John’s post, rather than investment in specialised resources that must be scrapped upon deregulation, the increase in work intensity after deregulation is a further welfare gain. Wasted resources are brought into use.

    It is commonplace to observe that the rents from regulation are rationed to a select group on an annual basis such as with jobs with easy duties and pointless tasks. Rather than make a cash payment, access to the rents are conditioned on growing wheat that is soon destroyed, farming in drought zones, manufacturing cars consumers do not buy but for tariffs, and flying large planes around half-empty or to small airports in Tassie.

    Tullock’s paper ‘which rectangle explains’ these points nicely as does Becker’s 1984 classic on pressure groups. Requiring people to waste real resources to access the regulatory rents allows them to be limited the distribution of the monopoly rents to the pressure groups that lobbied for them.

    • Becker in 1984 pointed out that state owned enterprises with their cross-subsidised prices and soft jobs can be a efficient way to subsidies employees, consumers or suppliers that make up the winning pressure group. Part of the output of the state owned enterprise, often unmeasured, was subsidising political winners in ways that was more efficient than all the other ways of subsidising them.
    • Privatisation is inefficient because less efficient methods of subsidisation will now have to be used to subsidise these political clients.

    The social gains from deregulation are overstated, the losses from monopoly and regulation are under-stated, but the social gains since the 1980s of avoiding further economic distortions were large.

  13. derrida derider
    October 3rd, 2013 at 18:04 | #13

    … productivity growth achieved by working harder does not, in general, improve economic welfare

    No, but in the presence of fixed costs of employment it represents a transfer of the match rent from employee to employee. And where alternate jobs are hard to find (ie the employee cannot credibly threaten to terminate the job match) these rents can be large.

    So yes, the net welfare gain might be small or even negative but the employer’s welfare gain can be large. No wonder business lobbies are keen on such “reform”.

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