MIRACLE solves productivity puzzle

The US is worried about the puzzle of their flat output/ GDP and productivity growth following the 2008 financial crisis, yet employment has risen

Likewise the UK and other G7 nations

They had all expected growth to ‘revert to trend’ by now and be at least 2% per annum, not approach zero as seems to be happening

Interestingly, all G7 nations are suffering in much the same way which must offer a clue as to what’s going on

Explanations offered by a variety of experts include:

  • M = Mismeasurement of GDP, a seriously flawed statistic:
    • GDP doesn’t count many of the things we value in life – things that make life worthwhile e.g. free internet services, digital assets (the cloud, IoT), growth in intangibles
    • And it counts incomes realised by financial and oil companies before allowing for associated costs later
  • I = Innovation – Major technological innovations may have peaked:
    • Artificial Intelligence, driverless cars and Twitter are seen as no match for the gains made from electricity, the internal combustion engine and telephones – at least, not yet
    • But productivity can even dip upfront as new innovations are introduced but returns are slow to build – there can be a time lag between invention, trial and error, prototypes and launch through to widespread adoption as people learn how best to use them and acquire new skills e.g. electric motors and light bulbs had little impact over the period 1890 to 1920
  • R = The Rest – Vanguard firms continue to improve, the rest do not
    • Either there’s a lack of diffusion of transformational (digital) technologies from the best to the rest in all/ most sectors – it always takes time, often many years
    • If it’s truly general purpose like electricity or computers, most other organisations need time to be convinced and seek demonstrable proof before they ‘jump on the bandwagon’ – then they take the plunge which can mean re-structuring and re-training of staff
    • The long-tail of poorly performing companies, including zombies, comprise some 80% in all sectors – most do little to try and catch up, not least because current very low interest rates put little pressure on them to become more profitable, even enabling some to stay alive rather than letting creative destruction do its work
  • A = Administration – Government/ EU red-tape regulations have been mushrooming:
    • Some say they’re stifling corporate efforts to improve
    • Others say well-intentioned social welfare programmes are keeping people from moving to better jobs
  • C = Capex – A slowdown in productivity-enhancing investments, much due to the corporate hangover still being suffered following the financial crisis of 2008 as banks restricted lending whilst they shored up their balance sheets and companies were concerned about uncertain economic outlooks, Brexit included
  • L = Labour – An influx of cheap labour has deterred many companies from investing in productivity-enhancing equipment and systems – people are easier to shed – others have indulged in ‘labour hoarding’ to avoid high outplacement costs and in expectation of imminent demand rises – overall, when unemployment is low, even relatively unproductive workers are employed so productivity again declines
  • E = Exports – Outside the EU and G7 there is a huge ‘Rest of World’ market waiting to be developed and itching to catch up rather than fall further behind – but exports still only account for a small percentage of total output

Each of the above probably has some impact on apparent national productivity levels, especially GDP mis-measurement, but none explain why there has been a dramatic slowdown ‘across the board’

As ever, as soon as there’s more than one (credible) explanatory variable for an issue, and no clear understanding about their interactions and effects, then it’s open season for all sorts of forecasts and explanations

Hence we get so many conflicting views from so many learned commentators

Basic steps to big improvements

There are various acronyms on offer for how to go about improvement projects viz:

  • PDCA from TQM – Plan, Do, Check, Amend
  • DMAIC from Six Sigma – Define, Measure, Analyse, Improve, Control
  • SREDIM from Work Study – Setup, Record, Examine, Develop, Implement, Maintain

 

All boil down to much the same process

Managers, whatever their level and team size, need to take just five basic steps to make big productivity improvements viz

1. Produce punchy corporate plans i.e. one page summaries for all employees – if they exist, they’re not seen or understood by most managers, never mind employees – most lie unused, gathering dust on shelves once written

2. Instal a set of performance measures – most managers have lots of measures but lack 80% of the measures they need

3. Analyse the potential to improve – most managers don’t know how to do this, not least because they don’t have good measures to start with

4. Run special improvement projects – again, most managers don’t know how to do this – and, if any projects are started by in-house teams, most run out of stamina to finish the course well before big improvements are achieved

5. Employ CI – Continuous improvement – most in the West ignore the huge benefits possible from seeking to improve any and everywhere, on a daily basis

It’s little wonder productivity improvement is slow at best, whatever the organisation – or nation

 

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Why do national productivity gaps persist?

Philip Hammond, UK Chancellor of the Exchequer, is forever saying: “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

We already know the ONS data on which such claims are based are seriously flawe:

  • 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
  • And other sections take time to collect and verify all quarterly data so estimates are made which can involve significant errors

 

That said, many economists still think the ONS data is worthy of use, at least to indicate the order of productivity gaps and basic trends

Not so anyone else in the UK or G7 however, particularly managers who together are most responsible for a nation’s collective productivity performance

Hence, big national changes are never made, and apparent 20% productivity gaps are never closed – instead, G7 economies just continue to chug along at the same speed as before whilst their experts mutter about the need for ‘more capital intensity and greater investment in R&D’ to close any gaps

Shame on those managers, unaware and unconcerned about their individual productivity performance, never mind their nation’s

One things is for sure – it’s not their workers who are to blame – given the same working methods and gear, each nation’s workers are 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 both France and Germany, say:

  • If one nation has more and bigger high-productivity sectors than another then the overall productivity of the former will seem much better than the latter
  • And if one nation has a lower unemployment rate (UK = 4.3%) than another (France = over 10%), if this percentage falls, previously unemployed workers (usually less skilled, less productive) will be mopped up by the market but this will lower the nation’s overall productivity level

 

It’s why Japan apparently has a much worse national productivity level than the UK, despite the many world-class manufacturers in their midst

Conclusions:

  • The apparent big productivity gaps between the UK and some G7 nations can be mostly explained by their different mix of sectors
  • Such mixes cannot be radically changed overnight – that will take decades if such changes are desirable, which might explain the persistence of the apparent UK 20% productivity gap
  • As long as the mix in each nation plays to its strengths, then productivity improvements may well be needed within each of their sectors, particularly in the long tail of companies usually found in each one
  • Huge opportunities to improve productivity would seem to 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