Productivity matters
- Broadly defined, productivity is measured by comparing outputs with inputs used to produce it.
- One important input is of course labour, and labour productivity is the focus of recent studies.
- Productivity gains are registered when workers produce more during the same number of working hours, for example, or when more is produced by the same number of workers.
- Logically, higher productivity affects companies by creating more value that can be distributed to employees in the form of higher wages, to owners or shareholders through higher profits, or to consumers via lower prices, which also improve market competitiveness (and increase their demand for more/ different goods and services as they become more affordable to more people, thus causing extra economic growth).
- Trends in productivity, together with trends in production factors (labour, capital), determine “potential growth”
- But key factors are more complex nowadays:
- Key inputs include labour quality and motivation levels, not just labour numbers or hours – and labour productivity can be hugely affected by currently unmeasured capital inputs which include not just buildings and machines/ automation/ robots but ICT/ AI – and, more importantly, the processes which use them all
- And what of public sector productivity which is not subject to market pricing – output value usually cannot be measured so is assumed equal to input costs i.e the latter are the costs people pay in taxes to receive the services they voted for and so apparently were willing to pay for – overall public sector productivity is thus always static at value 1, no matter how inefficient sub-sector units are, and no matter the waste and cost of inputs employed?
- And what of the considerable ‘economic activity’ that goes unmeasured – aka the ‘white’ and ‘black’ economies e.g. house or charity work, moonlighting or working for cash?
- All up, one thus has to question the usefulness of any national productivity measure
- That said, back to Dr Martin
- Increasing ‘potential growth’ is, in turn, essential for an economy to achieve higher income per capita and improve living standards.
- For all its central importance, productivity has proved surprisingly difficult for economists to calculate.
- Traditional caveats on “mismeasurement” potential refer to difficulties in assessing productivity in services (some 80% of G7 economies), especially new digital services, adjusting for quality improvements, and – more recently – imputing inflation rates.
- A striking example is the free availability of many digital services (such as Google Maps), which generate productivity that, by definition, evades accounting through market prices.
- This highlights productivity gains that could be missing from the official figures.
Technological progress
- Technological progress is one way to increase labour productivity, by equipping workers with better tools to produce more and/or better.
- Economist Robert Gordon made the case a decade ago that the effects of disruptive, productivity-enhancing innovations such as computers and the internet have plateaued, with new products bringing marginal improvements rather than any radical technological change.
- Others such as Gilbert Cette say that innovation takes time to infuse throughout an economy i.e. it follows the ‘J’ curve – major innovations take time to spread, not least because of the need to change people and processes to accommodate them – consider AI’s current early days for example.
- And technological progress itself is highly dependent on research and development (R&D) activity:
- While R&D expenditure has increased, both in the U.S. and the EU, it has been much slower in the latter.
- The result has been a widening gap
- European technology patents have remained flat over the past 15 years (although surely it’s their quality, not quantity, that matters most)
- Some technological progress can yield ambiguous outcomes e.g. social media can greatly contribute to communication, information sharing and coordination in the workplace, thus generating productivity gains but, without effective controls on their use, they can also destroy value by distracting employees and wasting their time, making them less productive through disrupted workflows and focus.
Declining investment
- Several studies stress a decline in investment (aka ‘capital deepening’), mostly in industries unrelated to ICT (Information and Communication Technologies) and in the more generalised “intangibles” (skills or management practices) that directly affect them.
- One explanation could be the after-effects of the global financial crisis of 2008-2009.
- Measurably lower numbers for business formation and failure have weakened competitive pressures on markets – scarce resources are not being smoothly directed toward the most productive companies, while “zombie” firms can maintain themselves, dragging productivity figures down.
- Globalisation has also played a variable role – increased offshoring of physical investment (factories, production lines etc.) and subsequent deindustrialisation have straightforwardly translated into productivity declines in Western countries doing the “outsourcing”.
- At the same time, the EU has proved much less successful than the U.S. in attracting FDI (Foreign Direct Investment), which could account for part of its productivity lag.
Labour market shifts
- Slowing productivity gains could also be the outcome of a growing mismatch between the supply and demand of skilled labour – workers with an average education cannot keep up with the demands of high value-added industries and find themselves relegated to less productive tasks.
- Demography also plays a role through the effects of aging populations on developed economies, acting through three channels concerning older workers:
- They may have more difficulty adapting to technological change
- They tend to consume more personal services and less goods, reallocating labour markets toward lower-productivity jobs
- They are said to consume less and save more, depressing aggregate demand and reducing investment – although a shrinking working-age population has encouraged countries like Japan to invest in highly productive automated systems.
- To these factors must be added the Covid-19 crisis, which prompted many companies to practise “labour hoarding” even as demand and output fell, to retain experienced staff and avoid the training and administrative costs of re-hiring.
Less effort
- Mysteriously, new generations’ ability to use apps and other productivity-enhancing digital devices has not yet translated into higher labour productivity.
- Recent PISA surveys of 15-year-olds have shown falling levels of knowledge and skills in mathematics, reading and writing.
- Just as disturbing, however, is a visible deterioration in social or interactive skills, including simple manners, essential in the workplace for cooperating with others and coordinating teams.
- More broadly, observed declines in attention spans and the ability to focus have been attributed to excessive use of personal digital devices and changing pedagogical approaches (i.e.teaching methods) in both public and private education, which downplays the hard work required to earn good grades.
The impact of minimum wages
- Typically, a minimum wage is seen as increasing productivity, for at least four reasons:
- It motivates workers to be more productive.
- It reduces employee turnover, which often leads to higher levels of training and productivity.
- It destroys jobs for the most unproductive workers as companies invest in technology to replace costly human labour, thus increasing productivity.
- It can force low-productivity companies out of business, acting as a market selection mechanism to help healthier companies thrive.
- However, in countries with a high minimum wage and high payroll taxes, the outcome might be negative for productivity.
- To avoid a disincentive for employers to hire, governments can compensate for a high minimum wage by reducing payroll tax for minimum wage employees, thus keeping their perceived net wages intact.
- But this system gives employers incentives to keep workers at or just above the minimum wage – a good recipe for demotivated employees and stagnant productivity.
Meaningless employment
- Another phenomenon rarely mentioned in productivity studies is the multiplication of what anthropologist David Graeber described as “bullshit jobs”
- For example:
- In bureaucracies of the private sector, especially in large companies that demand monitoring of line employees but less of the middle managers doing the monitoring
- In public administration due to traditional bureaucratic inertia and lack of accountability, which encourages bloat – an inbuilt government preference for over-regulation, turning complexity into a business, which encourages the creation of useless roles.
Food for thought indeed – especially when ‘weighting’ each suggested factor