The productivity puzzle

Glenn Dyer at Crikey (unfortunately, behind the paywall) notes an interesting analysis by Rob Brooker of the National Australia Bank of the slowing of Australia’s productivity growth.

In a nutshell, both labour productivity, and multifactor productivity have been growing very slowly over the past few years, with recent data suggesting that labour productivity has been almost stagnant. This has set off a predictable torrent of writings from the likes of Peter Reith calling for the reintroduction of WorkChoices, or something very much like it.

Brooker suggests that the apparent poor productivity performance may be due to a number of short-term, cyclical factors – for instance, the massive investment of labour and capital in new and expanded mining operations may reduce productivity temporarily, as they do not contribute any production until they are actually in operation!

Furthermore, he suggests that “producer real wages” have fallen, particularly in the mining sector but to some extent across the entire economy. In a nutshell, sure, wages for mining jobs have gone up, but commodity prices have gone up even faster. In such circumstances, the incentives are for mining companies to hire more labour, rather than improving the productivity of the labour that they have.

One minor quibble with Brooker’s piece is his (seemingly somewhat off-the-cuff) statements on the effectiveness of education reform:

The more recent economic reform agenda is concerned with improving and expanding the reach of education and training as well as improving the efficiency of the delivery of government services, especially health. These reforms can be expected to lift the level of structural productivity (although not necessarily its growth rate) but over a lengthy time horizon. Realistically, educational improvements would need to have been implemented for an entire generation before their effects become measurable. Commendable as such policies may be, they should not be justified on the basis of relatively short-term, cyclical fluctuations in measured productivity.

Brooker’s broader point – if the current productivity growth slowdown is the result of short-term factors, goverments don’t really need to do anything about it – appears reasonable, but not all educational improvements will take a generation to have an impact, particularly in the tertiary and vocational sectors.

In any case, a useful counterpoint to the increasingly loud bleating about IR from sections of the business community, who are as usual more interested in increasing their piece of the pie rather than increasing the pie’s size.


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13 responses to “The productivity puzzle”

  1. Peter Whiteford
  2. wilful

    I’ve been quite informed and engaged by Crikey’s picking apart of the productivity debate.

    It’s quite remarkable how much spin can be used in relation to workplace relations. All that these business are yelling loudly is “we want to pay people less!” and “we want to give them no security!”. Thi sis some race to the bottom beggar thy neighbour debate where all of the consumers (who are presumably buying as well the making products sold by these people) get poorer and less secure. A nasty vicious circle, which is all I would expect from Australia’s business “leaders”. Their bubble rarely gets popped.

  3. Russell

    Related was this from the National Interest on how the quest for increased productivity in the public sector can deliver the opposite.

    And if you download the September issue of Resources & Energy Quarterly (our bedtime reading in W.A.) there is a review of productivity in the mining sector.

  4. Alister

    A key issue for me when talking about labour productivity is that some folks – guess who – see the inputs as labour cost, rather than actual labour. Therefore, reducing labour cost by paying workers less by (their) definition improves productivity. This is a shallow, indeed silly measure. But it helps to understand where the IR-productivity nexus exists in a cetain mindset.

    Quiggin argues that the productivity surge of the 90s was a myth, which would also help when discussing falling increases in productivity.

  5. derrida derider

    If, as orthodox wisdom says, big investments in education result eventually in rises in productivity on a one or two decade time scale, what do you think would happen to productivity growth a decade or so after a period where there was relatively little of such investment, and that investment ill-directed?

    As I have noted before, we’ll be paying for the Howard government’s failures in education policy – their most serious deficiency IMO – for a long time.

  6. derrida derider

    Alister, no doubt some businessmen see it like that. No economist does.

    As for JQ’s schtick about “increasing work intensity”, it’s one of the few areas I disagree with him on. For one thing, labour market conditions were bad for most of the 80s, so why didn’t work intensity and hence measured productivity surge then?

  7. Labor Outsider

    The change in IR laws is a red herring in the productivity debate. The trend slowing of Australian productivity growth predates Labor’s IR changes by many, many years. The empirical analysis that I have seen shows that although some of the slowdown was associated with the mining boom (although commodity prices jumped quickly, significant investments in labour and capital inputs were necessary before export volumes could increase significantly), the slowing has been too broad based to be attributed only to that. One factor people should consider is that the microeconomic reform agenda of the late 80s and early 90s resulted in a productivity dividend that lasted until the early 2000s. Once that level shift had washed through the system, productivity growth fell back. There are also some other interesting sectoral stories. Utitlies was once sector with very high measured productivity growth during the 1990s. But that was driven by a wave of job shedding as the sector went through privatization and restructuring. The productivity growth in that sector was not due to greater investment or innovation.

  8. Peter Whiteford

    According to the ABS at http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1370.0~2010~Chapter~Productivity%20%285.5.2%29

    “In the most recent productivity growth cycle (2003-04 to 2007-08) there was an overall decline in Australia’s productivity. Output growth during this cycle averaged 3.6% per year, while total inputs grew at an average 3.8% per year (labour at 2.4%, capital at 5.4%). The -0.2% difference between input growth and output growth was the average annual decline in productivity. ”

    As LO points out the flatlining of productivity growth precedes the changes under Labor.

  9. calyptorhynchus

    As we already produce everything we need to live well, why not produce it more slowly, and enjoy life more?

  10. wilful

    As we already produce everything we need to live well, why not produce it more slowly, and enjoy life more?

    Hippie.

  11. BilB

    I suspect that the problem here is the sum of:

    on the negative side

    Australia’s declining focus on manufacturing
    Australia’s decline in agricultural performance
    Australia’s progressive shift to a service economy funded momentarily by the huge profits obtained by selling massively underpriced imported goods, and minerals (Commercial sector).
    Australia’s increasing dependence on the construction industry.

    on the positive side

    Australia’s improved intellectual industries
    Mining and minerals
    Renewable fuels.

    Of these from a productivity point of view
    Manufacturing has the greatest capacity to improve industry and per person output.
    Agriculture also has huge potential to increase per person output, but is a problematic industry due to weather and climate.
    Service industries are largely a one on one type of output and only lend themselves to increase per person output where computers can be used on a large scale.
    It is the Commercial sector that has been keeping Australia’s arse out of the fire, but this is because it is able to buy third world production at 5% and sell it at 100%. This is an artificial “productivity” strength.
    The construction industry can improve its productivity but this tends not to happen as market tastes must be manipulated in order to allow this to occur. Generally construction involves guys moving stuff around and it is not easy to speed this up hugely beyond where it is now.

    On the positive side

    Mining and minerals is a short lived industry which should not be considered in the considerations of a steady state economy.
    Intellectual industries have a huge capacity for variation of profitability and productivity. At the high end a few hundred JK Rowlings could make a very significant economic impact. Universities which become exporters via international student services .
    Renewable fuels industries have a huge capacity to increase productivity over time.

    Any way my point is that from a national point of view Australia’ productivity problem is to do with our mix of industries and their changing relative contributions to the national outcome.

  12. John D

    Measuring both the inputs and outputs of productivity can be difficult, particularly when we are looking at national productivity. For example, the link provided by Russell @3 comments that there has been a decline in mining industry productivity for the last 10 yrs that can be explained in part by:

    To understand these productivity trends we need to know how much growth there was in labour and capital in the mining sector. Over the 2000s the use of labour and capital increased at the rate of 6 and 5 per cent a year respectively. However, output only grew at about half the growth rate of the inputs, or by less than 3 per cent a year. As a result, MFP, labour productivity and capital productivity all declined over the decade.
    An important reason why mining output did not increase as fast as mining inputs is the lags in output associated with capital investments. This can be seen in Figure 3, which traces the trends in the labour, capital and output indexes, with a two-year lag to both inputs. This figure
    shows that output, as measured by gross value added (GVA), and lagged capital grew steadily and in an apparently stable relationship over the period 1990–91 to 2009–10.

    What was not said was the drop in productivity could also be partly explained by increases in haul distances and overburden removal as mines age as well as more marginal deposits being mined as a result of higher commodity prices and the using up of the more attrractive deposits.
    It gets even harder to measure the productivity of workers who produce something less tangible than tonnes of ore. For example, consider teachers:
    If we simply measured teacher productivity in terms of teaching hours per student hour we could improve productivity by simply increasing class sizes. If we included student “hours to reach a certain standard” in the measure it may actually make more sense to reduce class sizes. (And give a better result in terms of the national interest.)
    Even there the result may be distorted. A lot of the real education comes when teachers go off topic.

  13. John D

    We could improve our “productivity” by shutting down industries with low productivity as well as replacing workers whose education and aptitudes limit their capacity to be more productive. There would be a few downsides of course. The economy would contract, unemployment would rise and we may find that services like health and education disappear because it is hard to fudge the “productivity” figures high enough to raise these industries above the productivity cut-off. But hey, productivity is the obsession dejour so what the hell?
    One of the things that creates problems for organizations is the use of inappropriate key performance indicators. (KPI) It is very easy to find situations where improving a KPI actually makes things worse rather than better. In addition, it is easy to get a situations where the effort required to measure the KPI simply isn’t justified by the outcome.
    Then there is the conflict that can occur between what is good for the country and what is good for the shareholders.
    What I proposed at the start of this comment is clearly absurd from the countries point of view. At the very least any overall measure of productivity should be measured in terms of potentially available manhours, not hours worked by the lucky people who have a job.