Game over ?

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.

40 thoughts on “Game over ?

  1. 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.

  2. 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!

  3. 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.

  4. 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.

  5. 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.

  6. 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.

  7. 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.

  8. 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”.

  9. 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�.

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

  11. 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.

  12. 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.

  13. 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?

  14. 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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