Why do national productivity gaps persist?

  • Philip Hammond, UK Chancellor of the Exchequer, says: “It takes a German worker four days to produce what a UK worker makes in five”
  • Others say much the same about French workers
  • But such claims are not new, they’ve been made over the last 30 years at least
  • The ONS data on which such claims are based seriously flawed however:
    • Whole sections of the economy are ignored, such as household activities or the consumer surplus obtained from freebies offered via the likes of iphones
    • Other sections are difficult to measure such as public sector outputs so assumptions are made that their costs can be thought equivalent
    • Other sections take time to collect and verify all the data given the number of organisations involved so errors are numerous and considerable
  • That said, most economists still seem to think the ONS data is worthy of at least indicating the order of productivity gaps and basic trends
  • Not so anyone else in the UK or G7 however
  • Hence, big national changes are never made so big productivity gaps are never closed – G7 economies just continue to chug along whilst experts mutter about ‘more capital intensity and greater investment in R&D’ to explain France’s apparent superiority over the UK
  • We say it’s not G7 workers who are to blame – they’re all  about as productive as each other, whatever the sector
  • It’s the mix of sectors in the different economies and the overall unemployment rate that makes the big difference between the UK and France and Germany, say:
    • If one country has more and bigger high-productivity sectors than another then, despite workers in each sector being about the same productively, the overall productivity of the former will seem much better than the latter
    • And if one country has a low unemployment rate (UK = 4.3%) compared to another (France = over 10%) then, as this percentage falls, the previously unemployed (usually less skilled, less productive) are mopped up by the market but this will lower its overall productivity level
  • It’s why Japan apparently has a much worse national productivity level than the UK, a claim which, given their work ethic, has to raise suspicions about the data on offer

 

Conclusions:

  • There’s apparent big productivity gaps between nations, especially G7 nations, mostly explained by their mix of sectors
  • There’s also big productivity gaps between sectors within each of those nations
  • Finally, there’s more big productivity gaps between organisations within each of those sectors within each nation
  • Huge opportunities to improve thus lie everywhere

Low Australia productivity affects all, not just a few

New Reserve Bank governor, Philip Lowe, says boosting productivity is essential if Australia is to maintain the living standards it has enjoyed in recent years

He warns: “Australia’s remarkable boom times are over and the best way to maintain our standard of living is to have a laser-like focus on productivity”.

In his first appearance before the House of Representatives Standing Committee on Economics, he said:

  • The confluence of factors that boosted living standards in recent decades will not happen again
  • Australians enjoyed real income growth per person of three per cent on average for 15 years until the global financial crisis in 2007
  • Incomes and living standards grew solidly because of strong productivity growth, large numbers of young people entering the workforce and the global commodity price boom

 

But he warned that the situation has changed today, with tepid productivity growth, an ageing population and falling terms of trade cutting into standards:

  • “It was a remarkable kind of a period and I think many of us started to think that was the normal state of affairs – it would have been nice if it was”
  • “That period now looks like it’s behind us.”

 

Dr Lowe said as it was hard to control demographics and impossible to control the terms of trade:

  • “The only way we can go back to anything like the previous rate of growth in our living standards is focusing on productivity growth”
  • “That’s not just a concern for the Reserve Bank, it should be a concern for the parliament and the whole 24 million people in our country – what do we do to get the productivity growth up again to get the living standards rising.”

 

He also warned of the limits of monetary policy with the key interest rate at 1.5 per cent, the lowest since Federation.

So he urged “some entity” or government to use low interest rates to invest, using their balance sheets to facilitate infrastructure spending.

It’s the rest, not the best, that’s the problem

The Brooking Institute’s Martin Neil Baily and Nicholas Montalbano considered the causes of the current global productivity puzzle recently

“The most promising sign for future growth is that the most productive firms are growing faster than the rest – the frontier is still moving out – but the diffusion of best practices is not pulling the rest of industry along”

Of the many reasons on offer, this could well be the most likely explanation of the so-called ‘productivity puzzle’ afflicting most developed nations at present

Lack of cash and/ or confidence and knowhow to improve productivity is preventing some 80% of organisations in any sector and 80% of sectors in any economy from doing the needful to keep up with the best

There’s no doubt that huge (> 20%) productivity improvements could be made if laggards per sector upped their game, for the benefit of all their employees and home nations

They just need help to show them the way and the rewards on offer

However, naysayers believe there’s some hidden law of large populations, as per the normal distribution, which says there will always be a 20% vanguard in any sector and the laggard 80% rest will always perform at significant levels below them

It’s a fact of life that some are more talented, motivated and fitter than others

Fortunately, it’s human instinct to want to climb ladders and do better – and global competition keeps most G7/ G20 private sector managers on their toes

So most in the laggard 80% will not be standing still most of the time

It’s just some people are more ambitious than others

Broad action needed post Brexit

In the Guardian, Katie Allen recommended ways Prime Minister Theresa May could ‘lift the UK economy’s post-Brexit’ blues – via:

  • Tax cuts – especially VAT
  • More infrastructure spending – traffic jams and delivery delays waste a huge amount of time, adding to unit costs and reducing national productivity
  • Encouraging huge increases in housebuilding across the nation, prioritising brownfield sites and speeding up planning permission processes – thus increasing labour mobility to skilled workers more inclined to move to where needed
  • Delaying the planned apprenticeship levy
  • Boosting productivity via investment in innovation, education and infrastructure
  • Reducing planned rises to the national living wage
  • Dropping ‘helicopter money’ on all – echoing Ben Bernanke’s thoughts for the USA some years back
  • Firming up many more trade deals

 

But this is mere tinkering at the edges when the whole economy is considered

On the demand side, Brexit may well cause short-term problems with our exports to our current biggest and closest customer, the EU, but the great majority of their member nations’ economies are going nowhere and have been doing so for many a year

Meanwhile, there are over 165 other nations out there, most with huge potential to grow or develop further – most are also keen for many of the more upmarket goods and services we produce

Currently, EU rules restrict what and how we can sell with the latter – worse, they protect EU companies by restricting many third-world nations from exporting what they’re good at to the EU which curtails both their development and productivity improvement within the EU – Brexit should remove such shackles on competition and trade for the UK

On the supply side, Allen ignores the huge one-off opportunity staring the UK in the face i.e. the scope to boost productivity and earnings simply by ensuring all organisations, large or small from public and private sectors, make a concerted effort to cut their waste and optimise their use of existing costly resources

At present, at least 80% of them waste at least 20% – for many, it’s over 50% – yet few realise they suffer this way!

This means the UK alone is wasting some £300 billion each and every year

Conclusion – It’s not sophisticated macro-economics needed to boost the UK economy – it’s good performance measures and then business common sense on both the demand and supply sides of the national productivity ratio

Inequality of Wages and Productivity

President John F. Kennedy believed that “a rising tide lifts all boats” but many question if that remains true today

They point to data showing that productivity has risen sharply since the 1970s whilst wages have stagnated and conclude that productivity-driven economic growth does not necessarily benefit many USA workers

The most productive firms are thriving but the least productive ones are failing to keep up – as firms grow apart in productivity, they also become more unequal in how much they pay workers – increasing income inequality is said to be the result, one that is now becoming a major issue in many G7 nations

Economics professor Giuseppe Berlingieri et alia say: “Such productivity gaps are growing both within countries, between sectors, but also within sectors in the same country – it’s not just what sector you work in but which company you work for”

Countries that attempt to shield workers and firms during tough economic times should experience less inequality, both in terms of wages and firm productivity, but this will make it harder for resources to flow from less to more productive firms – what’s beneficial in the short term may be detrimental over time and slow overall productivity growth, also trapping workers in low-paying firms rather than giving them the opportunity to earn higher wages elsewhere

MIT economist David Autor, when asked about the causes of inequality, said: “There are many moving parts here – one of them has clearly been IT – another has been international trade – but I also think the decline of unionisation has mattered a great deal”

However, James Sherk of the Heritage Organisation has a different slant on this issue: “Inequality claims rest on misinterpreted economic statistics – they juxtapose productivity and pay data that cannot be directly compared, leading to inaccurate conclusions”

In particular, the claim that pay has lagged far behind productivity growth:

  • Examines wage growth instead of total compensation, which includes other rapidly growing benefits
  • Uses different price indices to adjust pay and productivity for inflation
  • Omits the effect of faster depreciation, which reduces net income but not gross productivity
  • Ignores known measurement errors in BLS (Bureau of Labor Statistics) productivity calculations.

 

More careful comparisons show that measured productivity has increased 100 % and average compensation 77 % over the past 40 years – issues inflating productivity measurements account for most of the 23% difference.

An apples-to-apples comparison shows that employee compensation continues to follow productivity closely, with workers earning more as they become more productive.

If so, this has important policy implications:

  • Many policy-makers mistakenly believe that employees are destined to no longer enjoy the fruits of their labour, even if the economy returns to full employment
  • They’ve turned their attention to redistributive economic policies to compensate
  • Better policies would focus on measures that enable Americans to become more productive and command higher pay, such as reducing the cost of higher education or regulatory costs that slow the economic recovery and labour compensation

 

Yet again, official statistics generate opposing views from experts