Productivity now!

You will no doubt have noticed the pounding chorus of  “productivity now” emanating from the government’s economic pow wow today.

Productivity is vital, absolutely so. Wikipedia describes it thus:

Productivity is a measure of the efficiency of production. Productivity is a ratio of production output to what is required to produce it (inputs). The measure of productivity is defined as a total output per one unit of a total input.

So, the more you produce from less the more money you have at the end of it. Hence you get richer.

There are many ways to measure productivity and the above is one grotesquely simple method, even though it fails to capture other dimensions of the production process.

Working with our overly simplistic definition, I’ve reproduced  above a table of GDP per hours worked from the national accounts which we might take as a proxy for productivity if not productivity itself.

You can see the problem. The first ring shows a consistent growth rate in 1%+ range per quarter over the 1990s, following the competitive reforms of the late eighties. The second circle is the more recent decade in which growth is essentially zero.

That is, until the recent March quarter, where we see a breakout not seen for over ten years. Of course it’s wildly speculative to say so but there is every chance that is the front edge of the surge in productivity that the RBA and myself have been waiting for owing to the new and enduring competitive pressure from the high dollar and a rise in the household savings rate. That has to be good news and does rather throw cold water on the limited approach to productivity reform espoused by some of major business papers: that wages should be slashed.

Cheaper labour is one input only into productivity growth and not the most important. What is more important is competition, something that Australian business was subjected to in the 1990s for the first time in a century but went soundly back to sleep in the 2000s as consolidation across every industry turned corporate managements into a back-slapping bunch of Macquarie Bank alumni.

Competition is now a matter of survival and the drunk and flatulent have returned to discover that they have now to actually improve their businesses to grow.

Just think of what we could do if we broke up a few of those cartels.

Comments

        • There’s a touch of data there. It’s useful though I’ll admit I can’t calculate multi-factor productivity in one hour. And yes, some posts are designed to promote discussion, which hardly seems irrelevant. You might notice below that the Financial Times thought it of value.

      • Not if there are increasing returns to scale as all the evidence points to. increasing returns to scale is why capital intensive industries are generally oligopolistic, and why capitalist economies tend away from perfect competition.

        Also why the largest productivity enhancing changes are driven by government initiatives.

        By far, productivity improvements are a function of technology and human capital. John Quiggin has some interesting thoughts on the recent discussion re productivity.

        http://johnquiggin.com/2012/06/04/is-working-harder-and-longer-really-worth-it/

  1. I watched the speech this morning, and like Glen hinted at the government go through the Productivity Commission list and implement at least some of it? Easy for me to say, but it would be a great policy if they listed some, and stuck to it. If fact if all parties could agree on a subset, and then government changes would have little impact.

    I think I must live in a perfect world, but thanks for raising this issue.

  2. In the Australian political vernacular, ‘Productivity’ is code for ‘work harder, longer, more subserviently’. I wish it meant efficiently, farsightedly, capital-intensively.

    • Yep. Do more with less. Interesting how Australians work some of the longest hours yet have some of the worlds lowest productivity levels. Long hours does not equate to increased productivity.

      Heard on the radio today about the need invest in more PPP toll roads and infrastructure. Hang on; WTF do I pay taxes for from the pay packet to the petrol pump? Among other things, in.fra.struc.ture. That it has now come to this shows what a total failure Australia’s political system through all levels is in being able to manage such critical elements in support of the economy.

      • All the Macquarie guys are drooling at the hope of more toll roads… They need your money, and it’s in their best interest.

      • that’s a bingo. I can attest to the “long hours does not equal productivity”. Was up to 1am last night working, don’t know if I got anything done…

        The answer lies in Germany, I’m sure. A working holiday to observe local conditions (around October perhaps?) would be worthwhile. I should set up an exploratory committee with the team at MA to explore this option, for the good of the nation of course.

        • Write a report on your “OKTOBER” trip.

          Should be a business expense as a MB employee yeah?

      • I am not of fan of productivity per se but man, have you seen how slow the guys are when they build roads here, coffee/smoke time every 10 min.1 work 10 watch

        Just ridiculous

        • Take Sydney toll roads for example of Australian productivity.

          Both the M2 & M5 tunnel had too few lanes the day they opened.

          Both roads have only been completed 10-15 years ago and they’re already undergoing major upgrades that will take longer to complete than the original construction… and disrupt traffic for years while in the process…there’s productivity for you.

          Bradfield had the right idea, build it right the first time (8 lanes like an LA freeway) and the road will last 80yrs +

    • That is v true. No one in business knows what productivity is and implicitly use it to mean working all hours, anywhere, at airports answering email etc and ‘being productive’.

      I ridicule it and say that it ignores the 1st industrial revolution because you can have people working 6 day weeks on those terms. And then tell them that ABS stats show Australia’s productivty has fallen in the last decade and it alarms them they have nothing to say. It’s not true – must be wrong – Stop! It can’t be right.

      Business won’t raise productivity if executives are ignorant of what it is.

    • Aristophrenia

      Very well said, it also means – slashing wages, slashing conditions, destroying entitlements while increasing bonuses and dividends.

      There is very, very long way for the global economy to go in order to realise that real growth comes through giving workers better remuneration and more time to spend it or more things.

      Sadly, everything is geared towards homogonesing the global workforce in order to distillate the global financial elite.

      • Real growth occurs through innovation and the use of saved wealth to invest in productive ventures.

        It is not achieved through consumption.

        I’d still love to know how wages can be increased above production as you advocate while achieving a sustainable outcome. All it does in reality is spread the wealth from current unsustainable practices down to the masses, but you still have the same issues around unsustainable debt.

        In effect, you create communism rather than the current crony capitalism. And we know how that ends.

        • Iron HorseMEMBER

          ‘Real growth occurs through innovation..’

          Yes, and innovation usually occurs at the periphery which is now continually shrinking

    • dumb_non_economist

      DC, just a slight amendment for you; In the Australian management vernacular, …… or In the Liberal Party vernacular, ……

      As to your last sentence, you’re dreaming! High level Australian management is bombastic at best, middle-management is intimidatory and hypocritical; do as I say, not as I do!

    • ‘Productivity’ is code for ‘work harder, longer, more subserviently’

      Or outsourcing. I am a freelance product engineer in Melbourne. I found the basic websourcing approach to be a bit threatening with Indian PHD’s in my field on offer at 15$/Hr. My strength is 3D design, system configuration and company standards. Now my latest customer (who manufactures in China) has suggested I head up a team of three websourced engineers to kick off the rest of his product range. This team of 4 would be cheaper than a local team of 2.

      It’s hard to argue with his logic as he has own cash on the line and needs to survive in todays circumstances.

    • JunkyardMEMBER

      Yep. And we quickly find out who is using the most efficient business models. The massive floor space, massive overheads, massive markup department store, or stripped down highturnover web retailer.

      • Well that’s actually counter intuitive.

        The massive floor spaces, overheads, markups are not labour, they are rents.

        So all the talk of ‘increase productivity’, as a guise to have labour become a even more efficient input can’t really accomplish anything.

        All it is doing is extracting wealth out of labour into rents.

        By rewarding this, you encourage the behaviour to repeat.

        No wonder the west is falling.

  3. Stormy Waters

    What about the report (see link below) that showed non-mining sector productivity growth but was being hidden behind productivity reductions due to mining?

    There were a couple of posts about this but it seems to have been forgotten of late.

    If the report is right then seeing the productivity indicator you’ve calculated bounce up again may be partly driven a cooling of mining investment such that it’s not embracing such inefficient practices in the haste to exact dirt?

    (as posted here: http://www.macrobusiness.com.au/2011/08/mining-is-making-us-lazy/)

      • Get with the times. Most governments do listen to corporations. Most pollies want a seat at the Board or ‘advisory role’ post politics…

    • Alex Heyworth

      Stormy, IIRC the paper referenced in that post was suggesting that (1) overall productivity was being held back by the mining sector and (2) mining sector productivity was being held back primarily by very high levels of capital investment.

      Doesn’t seem like a daft thesis to me. If it is correct, we would expect to be seeing very rapid improvements in productivity quite soon. Assuming China holds up!

    • Alex Heyworth

      PS, it certainly made better reading than the usual straw men being trotted out so far on this thread.

    • Based on my experience mining is definitely a drag on productivity, particularly over the last 5 years.

      For a while the increasing size of equipment improved the situation but we are at or close to the practical limit in terms of size so no more gains there.

      The bulk of the industry has also consolidated into a few big players. These have cultivated the most amazing bureaucracies that have just started to strangle these organizations. In commodities where there are no longer extreme margins they just seem unable to adapt… Think aluminium and nickel.

      The perfect example is raventhorpe nickel in WA. BHP built it for a few billion but after the nickel price tanked, couldn’t operate it and make money. It was sold to a small canadian mob who now operate it with a quarter of the staff bhp had. I expect this type of thing will keep happening as mineral prices fall back to their historical averages.

  4. There is an entire cottage industry of research firms and even media firms (Dad’s Army) that capitalize on the demand to legitimise this corporate dog whistle called “productivity”.

    Predictably, they don’t seem to acknowledge or even bother listening to the independent body called the Productivity commission.

  5. It’s taking me back many years but wasn’t there always an intellectual divide (Chicago vs west coast?) that said you either have fewer national companies so they compete better internationally or you have more national companies so they are leaner and compete better internationally? The ultimate intellectual decision on this underpinned the goals of the anti-competition laws.

    Australia has clearly gone down the path of the former and our corporate oligopolies now spend all their energy blocking competitition politically and locking out competitors – as opposed to innovating and improving productivity.

  6. JunkyardMEMBER

    Productivity is complicated. I know there has been a bit of research done on how all the instant communication mediums – like email, communicator, group chat, used at most large businesses now – serve mainly to interrupt us four hundred million thousand times a day.

    What little time remains in the day is usually wasted on mostly pointless meetings, and zero time is spent on actual management and improving processes.

    • JunkyardMEMBER

      I should add reading/posting to blogs on company time, to that list , too 😉

      • Add going for smoking breaks to the list, and too many overpaid execs to the payroll/productivity calculation. Paying useless recruitment consultants is another cost easy enough to slash.

  7. GunnamattaMEMBER

    I always tend to think of productivity as being akin to goodwill and peace on earth to all etc.

    Certainly at a particular level it is definitely good, and something to aspire to.

    But at any given level you can also be sure that whoever is tossing it into public discourse is talking book one way or another.

    And when governments talk about it it is probably akin to a ‘ritualistic form of psychic masturbation'(as EP Thomson once described methodist prayer practice)

  8. Jumping jack flash

    Yes, productivity, yes, competitiveness.

    However, more competition in a system that is incorrectly set up to begin with is not going to help anything, it will only produce more of the same problem.

    We just don’t know what productivity is. Productivity is not sending useless emails at 1am that do nothing. It is welding together and bashing pieces of metal to make a car to sell to the world at 1am. You know, that stuff they used to call work. The stuff that everyone is simply too precious to do anymore.

    We have been drinking our own kool-aid for too long. We think technological red tape – emails, telephone calls and meeting after meeting to only plan the next meeting is now productivity. It is the opposite of productivity.

  9. Pretty tough to have real productivity growth in a largely service based economy. It is, as so many have pointed out, little more than a code word for “work longer for less”.

    Manufacturing is where real productivity increases occur, and a sound manufacturing base is what this country sorely lacks.

    Sell them dirt!