Wage levels versus Productivity

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

They point to data showing that productivity has risen sharply since the end of WW2 whilst wages have stagnated and conclude that productivity-driven economic growth does not necessarily benefit USA workers on average viz:

  • Productivity in the USA up by 243%
  • Wages up 109%

 

The most productive firms are thriving but the least productive ones are failing to keep up – and as firms grow apart in productivity, they also become more unequal in how much they pay their workers:

  • Economics professor Giuseppe Berlingieri (et alia) says: “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”
  • And increasing income inequality is the result – one that is now becoming a major issue in many G7 nations

 

Nations 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, he questions whether pay has actually lagged far behind productivity growth because:

  • Average wage growth is calculated, not total compensation which includes other rapidly growing benefits such as health insurance, tuition fees, pension contributions, holiday entitlements
  • Different price indices are used to adjust pay and productivity for inflation
  • Faster depreciation is omitted yet it reduces net income but not gross productivity
  • Known measurement errors in BLS (Bureau of Labor Statistics) data are ignored

 

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

Sherk thus believes an apples-to-apples comparison would show employee compensation continues to follow productivity closely, with workers earning more as they become more productive

If so, this has important implications:

  • Many policy-makers mistakenly believe that employees are no longer destined to enjoy the fruits of their labour, even if the economy attains full employment – such fruits are for capitalist shareholders and their lieutenant CEOs mostly
  • Hence, 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

 

It’s another example of official statistics generating not only opposing views from ‘experts’ but also flawed policies from those in power

Pin factory productivity

Adam Smith illustrated how the division of labour could improve productivity in the famous small pin factory example he used in his tome ‘Wealth of Nations’, 1776, viz:

  • 10 workers, each specialising in a different aspect of the work , could produce over 48,000 pins a day
  • However, if each of these ten workers had made the entire pin on his own, they might not have made even one pin a day, and certainly not more than 20
  • Hence, one must never focus on the task alone when seeking to improve – always look at the process as a whole

 

Bertrand Russell, the famous mathematician, wrote the following many years later in response:

In praise of idleness

  • Suppose that, at a given moment, a certain number of people are engaged in the manufacture of pins – they make as many pins as the world needs, working eight hours a day
  • Someone then makes an invention by which the same number of men can make twice as many pins as before
  • But the world does not need twice as many pins – pins are already so cheap that hardly any more will be bought at a lower price
  • In a sensible world, everybody concerned in the manufacture of the pins would take to working four hours instead of eight each day, and everything else would go on as before
  • But in the actual world this would be thought demoralising
  • The men still work eight hours, there are thus too many pins, some employers go bankrupt, and half the men previously concerned in making pins are thrown out of work
  • There is, in the end, just as much leisure as on the other plan, but half the men are totally idle while half are still overworked
  • In this way it is ensured that the unavoidable leisure shall cause misery all round instead of being a universal source of happiness
  • Can anything more insane be imagined?

 

Conclusions:

  • When qualified workers are in short supply, or increasingly expensive to employ, it makes sense to seek to automate their work
  • At present, and despite low unemployment, UK firms can exploit cheap foreign workers, either immigrants or via outsourcing to the Far East for cheap labour and land or India for English speaking call-centres
  • Come Brexit, however, the former cheap labour source may well dry up whilst, already, the weaknesses of the latter outsourcing route have curtailed much demand
  • So the inevitable pressures on UK management will be to invest in new and better processes and technology
  • Thus a significant uptick in UK productivity growth can be expected in the next year or so

Full AI impact may take time

Erik Brynjolfson, an MIT economics professor, says:

  • “We are optimistic about the ultimate productivity growth fuelled by AI and complementary technologies
  • The real issue is that it takes time to implement changes in processes, skills and organisational structures to fully harness AI’s potential as a GPT (General Purpose Technology)”

 

Benefits from specific applications are already being realised but broader economic effects from widespread adoption have yet to gain momentum so we await many more applications, steady improvements and the spawning of complementary innovations

And this could take years, even decades

Professor Rodney Brooks, MIT emeritus professor of robotics, says:

  • “Having the ideas about AI is easy
  • Turning them into reality is hard
  • Deploying them at scale is even harder
  • Realising the benefits of AI is not automatic, nor is it fast
  • It will require great effort and entrepreneurship to develop the needed complements and adaptability at individual organisational and social levels
  • Major adjustments to business processes, capital infrastructure and job design will be needed to realise their full economic value”

 

Conclusion: The coming economic resurgence due to AI could be as big or bigger than any of the others seen in the past

GE announces ‘Big Data’ productivity gains

A new report from GE – General Electric, USA – found that the Industrial Internet  could add €2.2 trn to European GDP by 2030, boost productivity and spur economic expansion.

The report, called The Industrial Internet – Pushing the Boundaries of Minds and Machines: A European Perspective, says that a mere 1 % increase in efficiency in healthcare, aviation, transportation and energy could yield savings close to €40 billion.

By adopting the technologies of Big Data and intelligent machines, the report’s authors claim Europe could “recover the productivity gains missed in the first round of the internet revolution and compound them with new ones, catching and moving ahead of the curve”

Good examples include:

  • AI to aid doctors and lawyers
  • Big Data analytics for retail and drug discoveries
  • Wearable sensors to monitor blood pressure and health conditions
  • Robots for surgery and eldercare
  • 3D printing for complex manufacturing such as bespoke hip joints or gas turbine blades

 

But such claims are NOT new

‘Expert systems’ to help diagnose faults and maintain human bodies or machines were being built back in the 60s – but they were too simplistic and didn’t catch on

However, with AI, IoT technology and enormous modern computer power, GE’s expectations may well be realised

Myths about productivity?

An interesting set of views and counter claims about productivity were found on Google:

  • It leads to higher wages:
    • It doesn’t
    • It needs collective bargaining, but unions have mostly lost their influence
  • It doesn’t result in fewer jobs:
    • In an ideal world, it would lead to increased output, increased market share and even increased number of jobs
    • It rarely works out that way
    • Most improvements are justified by labour-saving which is much easier and faster than penetrating new markets
  • It leads to better quality jobs:
    • The opposite is true
    • The staff that remain have to do the work of those laid off, and for the same pay
  • It stifles competition:
    • The UK, for instance, needs large capital expenditure to set up new productivity-competitive businesses
    • China does not, able to use cheap labour instead
  • It stifles innovation:
    • Retooling production lines can be very expensive
  • It freezes capital:
    • Capital which could be used for vital infrastructure say

 

You might ask which side of the fence you’re on with each claim

UK public sector wastes £120bn – every year!

A new report from the Taxpayers’ Alliance claims that the UK public sector wastes £120 billion each and every year

And this is despite claims of tightening belts and being forced to close libraries or fire lollipop ladies.

It’s equivalent to a cost of some £4,500 for every British family.

They say: “A relentless war on public sector waste is needed”

But what do those in charge, our political leaders, do?

They can’t be seen to be cutting public services – it loses them many votes

On the other hand, it’s a vote-winner if they’re seen clamouring for more resources to be poured into such cherished national assets as the NHS – National Health Service – or schools or police forces

Few question what percentage of existing resources allocated to the public sector services are being wasted or whether operating methods they use are as good as they could be – staff are all seen to be working hard, resources fully utilised, so the obvious conclusion is ‘more is needed’

And none dare admit that, on a like-for-like basis, public sector staff are better paid, have longer holidays and receive better pensions than their private sector counterparts

But, if they would only dig a little deeper, they might well find the waste of time and resources is at least 30% across the board – with much more waste on top due to the inefficiency of methods being used

Sadly, no such numbers exist

If they did, one might well find that no extra funding is needed to remove most queues in the NHS, say, or and make a huge improvement to the current poor police record in clearing-up crimes of all types, especially serious crime

Some public sector review body is needed to conduct a regular, two-pronged study of all public services:

  • Prong 1 should review the specific services each public sector should offer ‘free at the point of delivery’ having regard to what the public is willing to fund – the nation must cut its cloth to what it can afford
  • Prong 2 should review the efficiency levels of each public service unit, compare them with best practice, make changes needed and continuously improve

 

At present, neither seems to be happening other than on an occasional, piecemeal basis

Hence Amber Rudd, UK Home Secretary, said:

  • “Police chief constables need to concentrate on cutting crime – the public do not want to hear about disappointments over funding”
  • To bleats that police forces cannot sustain further substantial cuts: “Greater efficiencies have been shown to be available”

 

But who was then charged with doing what?

Chief constables were unlikely to change their tune

Meanwhile, Sara Thornton, Chair of the National Police Chiefs’ Council, pointed out that: “Offences involving knives, guns and serious violence have increased significantly”