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Pushing back on productivity

September 3rd, 2014

For the last twenty years, I’ve been engaged in a lengthy debate with advocates of microeconomic reform who claim that reforms produced a surge of productivity growth in the 1990s and that more such reforms are urgently needed. I argued that the apparent surge was the result of increased capital utilization and higher work intensity in the aftermath of the 1989-92 recession. Hardly anyone in the economics profession was convinced.

Their views were unchanged after 2000 when (as I had predicted) productivity growth tailed off and then turned negative as the fear of unemployment decelined and the work intensification of the 1990s was reversed. First, this decline was attributed to a range of special factors (drought, Y2K and so on). Then it was said to be a measurement problem associated particularly with mining (true, but why accept measurement error in the 2000s while denying it then 1990s). Finally, after 2008, it was blamed on the end of Workchoices.

As everyone on both sides of the debate understands (though some choose to deny it at times) “productivity” is code for “working harder”. Microeconomic reform is supposed to increase competitive pressure and thereby keep workers on their toes at all times. In addition, they are suppose to “work smarter” which essentially means “find ways of getting more work done with no additional resources”.

Now, at last, it seems that I’m not alone in casting doubt on all this. Ross Gittins, always more sophisticated than the majority of economic commentators, has picked up some remarks by Ric Simes and Mike Keating telling business leaders to stop complaining about their workers’ laziness and start doing what they are supposed to be paid for: promoting innovations that yield genuine improvements in productivity. I’ve quoted at length over the fold, but do go and read the full piece.

Here’s the core of the piece

Simes, now a director of Deloitte Access Economics, formerly of Treasury and economic adviser to Paul Keating as prime minister, wants to see a more sensible discussion about productivity.
Productivity is obviously important and policy should indeed be focused on lifting it.

“But we do need to be careful about what this may mean in a particular circumstance,” he said. One problem is that productivity is being used as a catchcry for myriad causes, often unjustifiably.

Simes agreed with Mike Keating’s trenchant observation that “business associations, some leading employers and their camp followers in the media are insisting that future reforms must focus on alleged labour market rigidities and reductions in taxation, as if these were the most important influences on productivity”.

And while “there is scope for improved labour relations to make a modest contribution to improved productivity … the main responsibility for improvements in that regard lie with employers themselves,” Keating has written.

“The best thing that employers and their trade associations could do is to stop passing the buck to everyone else for their own failings, and get on with making their workplaces more productive using the existing freedoms that they undoubtedly have,” Keating concludes.

Simes adds that this is exactly what most businesses try to do. For his evidence, keep reading.

Simes’ second problem with how “productivity” is being used in the debate concerns its measurement. “Productivity is simply a less than perfect measure of economic wellbeing, and having the public debate focus so much on what the Bureau of Statistics reports as productivity can be unhelpful.”

Indeed, Professor John Quiggin, of the University of Queensland, had called productivity an “unhelpful concept”, mainly because of problems with the way the contributions of labour and capital were measured in its calculation.

Simes agreed with Quiggin that we’d be better off using a term that was closely related to productivity, “technological progress” – that is, the introduction of technological innovations such as new products and improved production technologies.

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  1. Peter Chapman
    September 3rd, 2014 at 11:05 | #1

    I agree with the thrust of these comments but I discover I have been labouring (yes, pun) under the misapprehension that productivity was not just about working harder, but also about working better (more efficiently). That is, among other factors, productivity gains could come through an increase in the ratio of capital to labour, in crude terms. Technological innovation has the potential to deliver the same or better output for a given input of labour. The policy problem for countries like our own, facing an ageing demographic profile and an increase in the population ‘dependency ratio’ (ratio of non-workers to workers, again in crude terms), is essentially how to harness the benefits of improved productivity resulting from technological innovation for the common, or collective, good. In other words, how to prevent the privatisation of all the gains from productivity, when those gains derive from more diffusely social processes of innovation; the purpose being to maintain standards of living across the board, rather than see increasing socioeconomic inequality and a looming crisis in the capacity of the state to fund the social wage. Tax the rich.

  2. Ikonoclast
    September 3rd, 2014 at 12:15 | #2

    The productivity of our economy should be measured by also factoring in all unemployed workers as having zero productivity and factoring in all underemployed workers in the same manner but on a prorata basis. Is that how it is done? If not, the measure is fallacious. Failure to employ all the employable is an inefficiency of the first order. We then ought to also subtract loss of natural capital from GDP. This is just for starters.

    What I am saying is that our macroeconomic and microeconomic accounting is all wrong if it does not account largely avoidable costs like unemployment, crime, poor public health etc. in the negative column. It is also wrong if it does not account for loss of natural capital and negative externalities in general.

    The accounting of capitalist economics does not match the “biophysical accounting” of the real world. This mismatch makes for frightfully bad decisions which result in the incremental and now exponential destruction of the biosphere’s ability to support humans and their economy.

    Matters will not change until capitalism collapses which it soon will. The collapse of capitalism is as inevitable as any “perpetual” motion machine grinding to a halt. After capitalism’s collapse there might be a better sustainable system, a worse system or no system at all. That is all unclear yet. What is clear is that capitalism as it stands today (oligarchic / corporate / environment-destroying / exclusivist / unequal) is unsustainable at all levels. It has insuperable internal and external contradictions.

  3. BilB
    September 3rd, 2014 at 12:23 | #3

    There was an item on PBS last night about this very subject looking at the US recovery. To get it US employers are using ever more casual labour which/who are organised by rostering optimising software that seeks to have the minimum on floor staff for the customer traffic which is monitored with a high degree of accuracy. These are companies such as Star Bucks. The staff live this crazy life for $8 per hour. So one person being interview had managed to maintain 2 jobs achieving 57.5 hours in that week for a big pre tax income of $480. These people must guarantee to be available on call to be employed regardless of whether they get any work or not. with the on call guarantee aspect organising time around studies is impossible.

    This is the Libertarian ideal of productivity as applied.

    The problem with this maximised profit regime is that it over time becomes the norm to which property values and rents adjust, and that level sets in as permanent. The US is now locked into the “productivity” performance demand of Asia and the advantage of cheap Asian goods has vanished for all but the wealthy. Wages have reduced to the level where the cheapest of Asian goods are “normal” price to regular workers, so their costs have increased their incomes have stagnated, their working hours have increased and their rents have increased to where extended family accommodation to one property is universally necessary.

    By comparison we pay our floor staff $25 per hour. So the target of the “productivity” pundits is clear. The problem is that lower wages require lower costs for regular workers, particularly accommodation. So any moves to push wages down must also push property values down, or provide means to reduce rents by half, minimum. This is not a dilemma for the maximum profit people, they just ignore the living reality of the poor while they maximise the returns on their property investments, but it is a dilemma for the government.

    You cannot call for static or lower returns on personal time while failing to provide the ability for people to live at lower cost. We have a legislated property development regime that does not allow for sufficient flexibility for lower cost housing. Study the problem of high cost land, excessive development restrictions, long commutes, inflexibility with regards electric propulsion (ie maximum power for an eBike at 240 watts [ridiculous]), excessive profit taking for communications phone and internet, and of course there is electricity post carbon tax (no change) which is expensive for those on low incomes.

    The solutions to these things are relatively easy, but without change in the living costs there can be no change to wages and hence increased “productivity”. The fact is that moving into an increasingly resource challenged future, while still requiring “growth”, we really do need to reduce our consumption of everything including space (land), so facing up to this challenge, and doing it now, is the right approach. I am certain, though, that we do not have the right people to meet that challenge. Labour past weren’t either.

  4. Troy Prideaux
    September 3rd, 2014 at 12:28 | #4

    Focusing on manufacturing: Productivity growth should theoretically be strong in our modern high tech economy – high increase in technology input, natural increases in process efficiency, cheaper material input costs (imports), greater geographic market potential (exports) should translate to higher product turnover etc etc. well according to the economic rationalist playbook anyway.
    Back in reality: free trade with little protections translated to our manufacturers competing against foreign subsidies, slave labor, little environment protections, market dumping, high foreign tariffs protection and of course greater economies of scale.
    So we were told by the brain surgeons in Canberra that we need to transition to a niche based manufacturing economy – they got the clear msg we couldn’t complete in the high volume/low cost manufacturing with the likes of China. We tried for a while (as John mentioned), but once China really geared up, we stood little chance.
    So here we are today – a niche based manufacturing economy specializing in small run/high cost specialty products that aren’t economically or practical to purchase or organize overseas.
    Problem is – (almost by definition) niche based manufacturing economy = low productivity based manufacturing economy. The runs are small, the prices are high, the jobs are specialized. This is an unavoidable FACT! There were no alternative outcomes to this.
    With manufacturing going, going, go… So must R&D and innovation and so must many many creative jobs that relied on manufacturing.
    And those brain surgeons in Canberra still ask why we have young Muslim men heading overseas to fight in these terrible wars, why male youth suicide rates are at alarming levels, why we’re the drug capital of the world… [deep resigned sigh]

  5. Gerard
    September 3rd, 2014 at 12:50 | #5

    Spot on. The definition of productivity has been a challenge for a long time. Some argue it is about getting more out of a single person, while others frame it as getting more out of a single hour of a workers time. If you take the first definition all you want is longer hours and lower pay. If you take the second, then you focus on innovation, incentives and growing sustainable jobs.

    Troy, you seem to be suggesting that niche manufacturing is not viable. I think if you look globally there are many examples where it is highly successful. The challenge is that it requires a type of planning and support that is very different to the way industry policy has been organised in this country in the past. You suggest the runs are small, the jobs specialised and the prices high and this is exactly why it has to be the area that we focus on. Unfortunately our government in recent years, started under labor and increased significantly under Abbott has given up on any form of manufacturing, R&D and product innovation. We should have been reorganising for this inevitable change for years, but instead industry policy from both sides continued to focus on propping up nonviable industries with huge amounts of taxpayer funding.

    Yes there needs to be productivity gains, but they need to be innovation based if we want them to deliver any sort of globally competitive economy moving forward. Otherwise our best hope is to focus on being really good at delivering our role as the White Trash of Asia.

  6. Troy Prideaux
    September 3rd, 2014 at 13:19 | #6

    @Gerard
    Problem is Gerard that if you transition to a complete (or substantial) niche based manufacturing economy, the increase in the costs of locally supplied product increase exponentially (as has happened!) because the added costs are part of a snowballing effect. The increased costs of the locally supplied materials is passed on to your product costs and so it goes on snowballing. I work in manufacturing and can see this very unambiguously. Our company has transitioned from a small production run manufacturer to an importer that also produces niche specialty items. Good for us, because we’re no longer forced to run a lean operation – lots more fat in the margins. Not so good from a *macro* perspective in terms of national productivity though. One of the tipping points that forced the transition was our foundry and machine shop (both geared for low cost / high volume runs) closed their doors as their automotive business was drying up so we no longer had local low cost/high volume alternatives available to maintain that business model.

  7. September 3rd, 2014 at 21:57 | #7

    Isn’t part of the problem that productivity in services is very hard to capture? If you are growing wheat or making steel, you have physical quantities of output that give you a pretty unambiguous measure of productivity, whatever happens to prices. Services can only be measured by money; in many cases, only by inputs. If JQ improves his teaching or research, his “productivity” doesn’t change. Conversely, if an investment banker destabilizes fianncial markets by inventing toxic new derivatives, his “productivity”, measured by the short-term profits, looks sky-high. There is also a growing communist sector, including the blogosphere, where nothing is priced. Obsessing over “productivity” is backward-looking.

  8. bjb
    September 4th, 2014 at 06:45 | #8

    When anyone on the Right talks about productivity and labour market reform, they mean only one thing: forcing down workers wages and conditions. They won’t be happy until the conditions of Blake’s Dark Satanic Mills are the norm.

  9. Ivor
    September 4th, 2014 at 07:17 | #9

    So if workers produce more, but the selling price falls so their enterprises earn the same, has productivity gone up?

    If workers work less and produce less but selling prices rise, then enterprises may increase their earnings. Has productivity gone up or down here?

    Why don’t productivity mongers state the units they are trying to work with?

  10. ZM
    September 4th, 2014 at 07:40 | #10

    Did anyone else read the article a while back about the Productivity Commission taking on the enemy of sourdough bread bakers? They’re really doing the difficult work of investigating the fundamental reforms needed to the economy…

    “The Productivity Commission has fingered bakers of “artisan products” and “international style breads . . . with healthy additives such as whole grains” as a small but noteworthy drag on our economic efficiency.
    It takes twice as many bakers to bake these loaves as it does to bake a fluffy white sliced. But the statistician doesn’t feel the consumers’ pleasure, “given the challenges of measuring changes in quality”. “Bakery product manufacturing is likely to have contributed to lower measures (or productivity)” the commission says.

    Small winemakers are in the commission’s sights too, for ignoring falling demand and sticking with the vines. “Lifestyle considerations, tax arrangements, and alternative sources of income may have reduced the incentive for small wine-makers to leave the industry.”

    http://www.smh.com.au/business/national-business/artisan-products-a-drag-on-productivity-20140429-zr157.html#ixzz3CI74eiHj

  11. September 4th, 2014 at 13:33 | #11

    @ZM
    Wow thanks for posting that ZM – it is an amazingly telling article.

    So ‘productivity’ according to the PC = producing as much cheap junk as you can dream of (because we can’t possibly measure quality).

    It’s just one of those things that makes you think that we, as a society, are somehow being controlled by robots or something – or at the least, people who can’t think straight. Worrying.

  12. September 4th, 2014 at 13:36 | #12

    Robots or people who can’t think straight – sounds like Cabinet actually.

  13. Ratee
    September 4th, 2014 at 16:33 | #13

    I am probably wrong, because it is 40 years since I studied this stuff and 30 years since I had to use the theories in actual economic policy work in a state Treasury department, but from memory labour productivity had nothing to do with the prices of the factors of production it was a physical relationship, the quantity of labour needed to produce a unit of output. Thus technology used, whether physical or intelectual (ie work processes), and embodied worker quality (skills etc) improved the ratio by enabling higher output per labour input. Dollar costs were never in the calculation.
    What was also always ignored was all the associated societal infrastructure that delivered the worker ready for work.
    It was thus always too specific a measure to suit the purpose of being a basis all the popular productivity arguements. (Associated with the ideological strugle between capital and labour for the rents from the business activity. ie the relevance of the $2 per day African labour that apparently competes with Australian mine workers)

  14. Ken_L
    September 5th, 2014 at 11:34 | #14

    Productivity in conservative usage is no longer limited to “working harder”. It now means anything that reduces an employer’s costs and is synonymous with “competitiveness”. Thus Liberal backbenchers are now calling for the abolition of weekend penalty rates on the grounds it will “improve productivity”, although even on their terms it’s hard to see how an across-the-board reduction in the cost of Sunday work is going to improve any firm’s relative competitiveness.

  15. hix
    September 11th, 2014 at 15:51 | #15

    @Gerard

    Not quite. To some extend can also just squeeze more or less work in an hour work, with the result that people are just more exhausted and have to do shorter hours. As a high industry share of gdp outliner, we often have jobs with exactly this problem in Germany. You probably know Aldi. Thats a good example for work intensity.

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