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Fun with labour productivity

Written By: - Date published: 12:23 pm, March 28th, 2009 - 14 comments
Categories: economy, employment - Tags:

We often hear that labour productivity is not growing fast enough and some argue it should be a focus of government economic policy. Yesterday, for example, Bill English was trying to blame the recession on the average growth in productivity under Labour.

However, economists like Brian Easton point out that labour productivity growth is heavily affected by the different quality of workers. Less productive workers can get jobs when employment is booming and are likely to lose them when the economy hits trouble. It is argued that these people entering and leaving employment overwhelm real changes in worker productivity in the labour productivity statistics. I wanted to find out whether labour productivity growth really gives a useful picture of the state of the economy, or whether changes in employment growth are dominant, masking any real changes in workers’ productivity.

So, I went and crunched the numbers (actually, I got this online calculator to do the hard part). I got the employment figures going back to 1986 and worked out the percentage of working age people employed each year, and then the rate of change between years. I got the labour productivity index figure for the same timeframes and calculated the rate of change each year for that too. Then I compared the rates of change in employment and labour productivity to see if there was any mathematically significant relationship. And there was. In technical terms, there is a negative correlation of -0.2. (0 means no relationship, 0.5/-0.5 is a very strong link, 1/-1 is a perfect link, more info here). That means when employment goes up labour productivity growth tends to be slower and when employment goes down labour productivity growth tends to be higher.

You can see the trend when you look at the graph of change in employment and change in labour productivity.

employementrategrowthvslabourprodgrowth

In the late 80s and early 90s, employment is falling and labour productivity growth is strong. In the last decade, employment growth was strong and labour productivity growth was weak. When employment plateaued and then fell in 2007-08, when labour productivity growth accelerated to its fastest in 9 years.

In many ways the labour productivity number is just a mirror of what is happening with employment. Greater productivity per hour worked is undoubtedly a good thing, but faster labour productivity growth across the economy is usually the result of fewer people being employed leaving only the ‘cream of the crop’. Indeed, several times in the last two decades total economic output and employment has been falling while labour productivity rose rapidly. Simply looking at labour productivity growth might lead to the conclusion that everything is going well, but a look at the wider picture shows it is not. In fact, in the 11 years from 1987 to 2008 in which the employment rate grew, labour productivity grew an average of 2.1%, while in the 11 years  in which the employment rate fell labour productivity grew an average of 2.4%  – 15% faster. Labour productivity only fell one year, 2007, which was the year of the second fastest rate of employment growth at the peak of a long employment boom.

This doesn’t mean we shouldn’t try to boost labour productivity, of course we should as long as it’s not done by cutting jobs. But it does mean that labour productivity is not a useful statistic to look at if you are trying to assess the health of the economy. Productivity is only one factor in production; focusing on it gives a misleading, often backwards, picture. Which is, of course, why National has concentrated on it. They could hardly attack Labour on better indicators of economic health like GDP growth, wage growth, or unemployment.

Just wait, I bet the labour productivity stats for 2009 will show fantastic growth, even though the economy is in deep trouble.

the mathemagician

14 comments on “Fun with labour productivity ”

  1. gomango 1

    Very one dimensional analysis and you may have missed quite a few obvious points. Have you looked at the correlation between business investment, business incomes, actual rate of corporate tax paid etc for other explanations? As much as low quality employees find it easier to get work in good times, business owners also invest more in productivity improvements. Productivity investment takes a while to flow through. I think that will explain a lot more of the accidental correlation you found. The employment rate is more likely to be a response to business productivity issue rather than a coincident indicator. You raise the point of coincident versus leading or lagging indicators maybe having an impact but then don’t address it.

    Try looking for serial correlation – you might find some other relationship between employment growth, productivity, business investment, taxation, dividends etc that aren’t the answer you are looking for in order to fit the required answer to a political question. A factor analysis study of a few different obvious inputs to productivity growth would provide more light.

  2. justthefacts 2

    [Tane: Your post has been deleted because speculation on the identity of posters – guest or otherwise – is banned on this site.]

  3. rave 3

    Labour productivity means workers are producing more commodities in a given time. Historically it means that the share of wealth produced going to the employers increases in relation to that paid in the form of wages. It also means an historic rise in the long term unemployed. While relatively fewer workers produce more but get back less of what is produced, relatively more workers don’t even get a wage. That’s why capitalism is ultimately doomed. It cannot even organise the production of its own profits without destroying the basis of its wealth, the working class. That’s why Karl Marx said that capitalism creates its own gravediggers. Roll on the revolution.

  4. RedLogix 4

    Productivity is only one factor in production; focusing on it gives a misleading, often backwards, picture.

    Very, very true. It rather annoys me that we use the term ‘labour productivity’ at all, when it would be far more descriptive to use the term ‘business productivity‘.

    Just last week we had some Nat-voting talking head rabbiting on about ‘New Zealand’s appalling low labour productivity rates’ as if somehow we were all lazy, unskilled slack-arses and all our problems would be fixed if only we pulled finger and did a decent day’s work for a change. When in fact NZ’ers already work longer hours than most OECD nations.

    The real barriers to improved business productivity lie around issues like:

    1. Access to affordable indigenous development capital that doesn’t just finish up sucking off the intellectual property and profit offshore.

    2. Investment in higher value products; access to more affordable R&D and the right people to drive it.

    3. Much less bullying and mean-spirited pettiness from middle managment; more leadership, passion and creativity.

    4. Quit cutting each other’s throats here in our tiny local markets and engage the wider world collectively.

    Most of our real productivity problems sit on overpaid, overstuffed asses around board tables … not smoko rooms.

  5. vinsin 5

    Thanks for the post. A very interesting read.

  6. Kevin Welsh 6

    Good points RL. How about adding in there, investment in plant and machinery?

    I think can of two or three profitable busines that have shut down after more than 100 years of existance and paid out shareholders, rather than make the investment in plant and machinery to remain competitive.

    A worker can only do their best with the tools they are given.

  7. George Darroch 7

    Kevin Welsh – exactly. And NZ’s low wages increase the relative cost of technology, plant and machinery. Because when wages are low, it’s relatively more expensive to pile on another warm body than putting down hard cash and investing.

    This isn’t to say that business owners don’t invest despite cheap labour, just that less of them do. And as a result, labour productivity remains low. Australia and have high wages, and high productivity as a result, because putting on more workers is just not an option most of the time.

  8. Tom M 8

    My understanding is that increased productivity is meant to lead to increased wages (and there is quite a bit of empirical support for this) and only indirectly increased employment (through increased consumer spending of the higher wages). So the analysis given doesn’t really speak to the underlying reason why we support higher productivity.

    Also as pointed out by the first commenter, the situation is hardly ceterus paribus – other things have changed in the New Zealand economy other than productivity and unemployment growth. You don’t seem to have made much effort to correct for these, so I’m unsure of meaningfulness of your provided r value.

  9. pat 9

    I may be crazy, but if someone is made unemployed doesn’t their productivity drop to zero?

    And aren’t employers making as many workers as they possibly can, unemployed?

    Don’t the huge surplusses of raw materials piling up in factories and on wharves, and all the unsellable houses, and manufactured goods languishing in warehouses and shop fronts, unsold, suggest that productivity is not the problem?

    Wouldn’t even more productivity make this problem worse?

    Do employers know this?

    Is this why they are slashing overall productivity as fast as possible, but in a way that hurts their profits the least, but hurts their ex-employees the most?

    Wouldn’t a drop in productivity matched with a huge rise in wages enable working people to buy all the unsold surpluss goods and services?

  10. rave 10

    Pat
    Sounds good but not under capitalism.
    Under socialism workers would plan production.
    By increasing productivity we could produce what we need and reduce working hours by at least half.
    We could rescue the planet and live to tell the tale.
    We would pay our own wages according to “from each according to their ability, and to each according to their need”.
    The bosses would be made redundant, and expected to earn their keep.
    Since they are so incredibly talented, entrepreneurial and daring, they would produce much more than the rest of us dullard wages slaves.
    Its called the negation of the negation of the master slave dialectic.
    But its in the future, we have to work out how to get there.

    Captcha: they haffen. For now that is true but not for long.

  11. Barryb 11

    pat, Tom M. The post is about the labour productivity statistic that gets quoted, not individuals’ productivity and you’re right that it sucks. saying ‘but that statistic sucks so you’re not proving anything’ is the point of the post. The Nats shouldn’t be using labour productivity to try to score political points.

    try to keep up

  12. It is true that the use of labour productivity can be misleading. However, total factor productivity growth has been terrible. As a result, when National talks about “productivity” they aren’t off track when they say that it appears to be a fundamental issue for the economy.

  13. jerry 13

    but they don’t talk about total factor productivity, they talk about labour productivity. Anyway, just as growth sucks in lower quality workers which drags on average labour productivity growth also sucks in lower quality capital which is the first to be idled when there is a recession.

    So growth is going to see the average quality of employed labour and capital fall relative to recession but that’s better than having all those people and all that plant sitting doing nothing.

  14. “but they don’t talk about total factor productivity, they talk about labour productivity.”

    Actually, they just constantly complain about “productivity”. I’m not sure they every bother to make the effort actually defining what they are talking about 🙂

    “Anyway, just as growth sucks in lower quality workers which drags on average labour productivity growth also sucks in lower quality capital which is the first to be idled when there is a recession”

    Within say a year yes – but if we looked at TFP statistics over a longer horizon, there will be a discernible trend that is independent of the economic cycle. It currently appears that we have experienced a period of lower trend TFP growth.

    As a result, given the information we have it appears something has happened to growth in productivity in NZ – however, even if we knew what was wrong I’m not sure National will be able to introduce any policies to improve things.

    However, my main point is that they are right when they say productivity growth has slowed – using the issues with labour productivity to attack their point of view seems to be a little of a straw man argument. The more important question is “how does the government think they can lift productivity”. I doubt they will be able to do anything about it – and attacking Labour based on weak TFP growth is a bit silly in of itself.

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