Australia’s falling productivity figures are starting to unleash a strange kind of panic, helped along by the shift of Michael Stutchbury from The Australian to the Australian Financial Review. The implication of much of this frenzy is that we are paying people too much, and if Australian industry is to survive then we either need to make them work harder, pay them less or employ them for shorter periods. Then productivity will rise and we will all be saved. Having made the “tough choices”.
Like most ideologically inspired cliches, it is not entirely false or misleading. Lower wage bills with same output will, QED, lead to higher labour productivity. Nothing like a circular argument to make everyone feel comfortable. But to say that it is simplistic is only to scratch the surface. If this is the best the business community can come up with, then we really are in a spot of bother. And how exactly we get to have a higher standard of living by paying the work force less is far from clear.
A few points immediately occur. One is that the lament by the business community is really about margins: that is, about reducing labour costs so profitability can be maintained. Second, productivity figures are an aggregate statistic, which tells us little about strategy, a bit like a football score only records the result, not how to improve the score next time. Third, it is a crude statistic based on an industrial era notion of output relative to costs that poorly matches the characteristics of post-industrial capitalism (which I shall return to a little later). Fourth, I think it tells us little about national economic policy. Fifth, it is largely a management issue, not an IR issue (except to the extent that IR affects management). Crucially, management in successful high wage economies tend to pursue a complex relationship with organised labour that is far from determinedly adversarial. Fifth, anyone who thinks that non-resources Australian industry can thrive as long as we get a few percentage point gains on labour costs is living in fairy land. Globalisation is a lot more complex than that.
Still, that is where we are, for the most part. Tony Shepherd, president of the Business Council had this to say in the AFR:
The big concern of the BCA is there is a complacency in Australia about what we need to secure our future prosperity. There’s sort of a magic pudding approach that – you know, we can eat the pudding and it will be replenished and we don’t have to worry too much about the future because the resources sector will carry us through. But I think the economic problems that we are seeing in Europe now have highlighted the need for nations to have a plan – a plan that locks in the capacity of the country to be resilient and to prosper. And it’s our belief that the current settings are in fact not doing that.
We have some businesses in Australia which are struggling because of the high Australian dollar, and it’s fair to say that, on the whole, business confidence in Australia is low. So the challenge for Australian governments including the states is how do we lift our productivity and become more competitive. And to do that, we need to focus on the fundamentals. It’s not that complicated. Workplace laws are an obvious starting point. We’re becoming a high-cost, low-productivity nation. We believe in high wages and people being well paid and well looked after and well cared for and well trained and happy in their job. But we must get productivity. A stable and predictable regulation format is required.
Yep, when he says he believes in high wages and people being well paid, the meaning is clear enough. He doesn’t. And when he says it is “not that complicated” he has got it gloriously wrong. It is very complicated. A more informative and thoughtful contribution came from Keith Hancock, formerly senior Deputy President of the Australian Industrial Relations Commission:
It is conceivable that changing IR arrangements could affect productivity. Employers’ antipathy to arbitration in the early 1990s was based in part on a belief that if they had more control over workplaces they could get more out of their employees. And strong unions may inhibit management in its efforts to maximise output from given resources. Whether such possibilities are significant is a matter to be determined by evidence.
It is usual to measure productivity for the “market sector”. This is because it is difficult to measure the output of the public service, defence and education, whose products typically do not have market prices.
Between 1964-65 and 2009-10, trend growth for labour productivity in Australia corresponded to an annual rate of 2.2 per cent. For multi-factor productivity, the growth rate was 1.1 per cent. The faster growth of labour productivity reflects the continuous growth in the amount of capital deployed by the average worker.
It is obvious that the trends “explain” much of the historical record of productivity. This lends some perspective to the debate about productivity performance.
It is difficult to avoid the inference that long-term productivity growth is the fruit of long-term forces such as technological innovation, rising standards of education, better health and accumulation of capital.
Nevertheless there are variations around the trends. The claim that enterprise bargaining led to a “productivity surge” has to invoke the rise in the productivity curves, relative to trend, in the latter half of the 1990s. The claim that IR has destroyed productivity turns on the experience of the late 2000s.
Neither claim can be conclusively proved or rejected. But there are questions. Why did the earlier “surge” peter out? And how can the effects of enterprise bargaining be separated from those of other 1990s economic reforms and from those of the increased deployment of information technology?
Productivity performance since 2004-05 has been poor. If it were due to the extra union clout under the Rudd-Gillard regime, why did the deterioration set in several years earlier? There is a better fit with the inception of Work Choices, but talk of a causal link seems far-fetched.
The Australian Bureau of Statistics has published industry-level analyses of productivity covering the period since 1994-95. It is clear that the productivity record differs radically between industries.
In the long term, the crucial factors in productivity growth are innovation, rising quality of the labour force and growth of the capital stock. In the short term, we need to look at the special factors.
Attempts to find the causes of good and bad productivity performance in IR are misconceived.”
Much of the empty noise is due to the fact that it is economists, score keepers, doing the complaining. “The score is not going very well, therefore we must fix the score. Then the score will look much better”. True, but not especially helpful.
Government can help improve productivity with investment in infrastructure, of course, and, over the longer term, by investment in education. But as Hancock points out the claim that IR policy neatly correlates with productivity growth is “far fetched”. A typical case of ideology trumping thought.
Here are a few realities, I would suggest, about “productivity”:
1. About two thirds to three quarters of productivity enhancement comes from capital investment, technological upgrades. Not cutting wages, or reducing hours worked. The gains derived from this are slowing in most of the developed world, not just Australia.
2. If you want to radically cut wages you globalise: go looking in China or Vietnam. That has little to do with Australia’s IR laws and it requires real management skill because it is about much more than just finding cheap labour (witness the travails of Pacific Brands, the latest Australian corporate casualty of globalisation). You have to manage cross border value chains, complex logistics and currencies. Successful globalisation takes good management and Australia’s domestic cartels are about two decades behind the curve. There are many exceptions in the ASX 200, but it is something rarely discussed.
3. Productivity, as the word implies, is about producing stuff from the same or lower levels of inputs. But what happens when everyone is doing it and the low wage producers, especially China, are not creating enough demand? You get oversupply, which is the problem in many global industries, especially manufacturing (one of the worst is the car industry). So looking at productivity in isolation is to miss the point. The point is how to develop businesses for which there is demand that is not entirely dependent on cost efficient production and therefore price. We live in a post industrial era in which intangibles like brands or customer “relationships” tend to determine demand. That is not achieved by cutting workers wages and it is rarely achieved by finding cheap labour in Vietnam. If Australian industry is to go up the “value chain” — and that is what most countries are trying to do — then it requires something much more sophisticated than a bit more labour flexibility. Even being “innovative” developing clever new widgets, will not necessarily help much because the speed of copying is now so fast; diminishing returns on product innovation can hit very quickly.
4. Management, not the work force, is to blame for poor productivity. After all they take the credit and higher wages, so they must also take responsibility. To the extent that the IR laws entrench certain work place behaviours, then IR practices can be damaging. But it is management skill that is the crucial determinant, and the fact that they are blaming everyone but themselves is revealing. The crucial difference in Scandinavian countries (and Germany, as Houses and Holes pointed out), is that there is a good understanding of globalisation and how governments can work with management and the work force to develop a sustainable strategy (which has nothing to do with tariffs and subsidies).
5. The reason the business community is beating up on the IR system, and implying workers are paid too much, is that they are used to running domestic cartels, and in domestic cartels incremental gains in wage costs or market share have a telling effect on profitability. It has very little to do with developing a sound response to a high currency and a potential national problem.
So here are a few suggestions:
1. Look at the capital investment patterns and determine the effects on productivity. The massive investment in mining, for instance, may have a lagged beneficial effect.
2. Introduce Australian management and political leadership to a new concept called globalisation; better late than never.
3. Look at the domestic cartels. Maybe even break up a few if we really want want to improve productivity and get more innovation. Although I suspect many in the business community will suddenly lose enthusiasm for the whole thing.