Productive debate

Written By: - Date published: 1:34 pm, June 9th, 2009 - 23 comments
Categories: bill english, economy, employment, national/act government - Tags:

There was nothing in the Budget for productivity. Education, the foundation of producitivty, was actually cut when you take into account inflation and population growth. There was a bit more for a few more roads but shaving a few minutes of the commute has no effect on productivity.

Yet Bill English is very keen for us to be focusing on productivity as a measure of his success as an encomic manager. Why would that be?

Because when there’s a recession on and employment is falling, productivity goes up.

An example: Joe, Mary, and Sue work in a factory producing widgets. Joe makes 8 an hour, Mary 9, Sue 7. What is the hourly productivity of the factory? Output/labour inputs – 24/3= 8 widgets per hour.

Ok, the economy’s humming and demand for widgets increases. The factory hires Sean. Sean has less experience than the others, maybe he’s just not as good a worker, and besides there’s less room and they have to use their backup equipment for him to work on. Sean produces only 4 widgets an hour. total production is up from 24 to 28. They have increased employment from 3 to 4. Both good things but look at productivity: 28/4=7. Oh noes.

A recession comes and widget demand falls. A job has to go. It’s Sean (last in first out makes sense because it’s likely to be the reason he’s less productive). Now the factory produces less and employees fewer people. But productivity is up from 7 to 8! Yay?

That’s what is happening in our economy right now. Output is falling as is the number of jobs. When people are made redundant it’s, quite logically, the least productive who go. even though everyone is poorer on average and there are more unemployed people to be supported by fewer workers there’s one economic metric that looks rosy – average productivity goes up and up. In fact, as one commentator wrote in the Dom (I think) recently ‘if I really wanted to boost productivity, I would go around shooting least productivity workers’. Higher average productivity does not mean we are collectively better off.

No wonder English wants us to concentrate on productivity. If we automatically and falsely accept a rise in average productivity must be a sign of broader economic well-being he looks good. That’s why we need to realise that productivity is just a ratio of GDP and hours worked. It doesn’t tell us squat about the health of the economy. For that we need to look to GDP and employment levels directly.
-Marty G

23 comments on “Productive debate ”

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  1. the sprout 1
    9 June 2009 at 1:48 pm

    umm wasn’t the grand plan to fix productivity, the economy, crime, diabetes etc: Tax Cuts?

  2. toad 2
    9 June 2009 at 2:32 pm

    And true to form, as if to prove your point, in chimes the Employers and Manufacturers Association (Northern), in a media release made just a few minutes after this post Marty:

    Employers report the uncertainties around personal grievance law are a real barrier to productivity improvement

    Meaning they want the government to change the law so it is easier for them to improve productivity by sacking people.

    • Mr Magoo 2.1
      9 June 2009 at 3:39 pm

      Much like the “jobs summit”, the only “new” ideas the “captains of industry” tend to come up with are rehashing old positions and putting their hand out.

      They ARE hoping this will boost productivity of course. For their company! Not the country. They are hoping they can cut overall output (i.e. reduce production) and shift work onto existing staff for free. (make staff work longer and thus be less productive)

      Yup. And we wonder why our productivity is low?

  3. Daveski 3
    9 June 2009 at 2:33 pm

    Umm, I mightn’t be an economist, but isn’t GDP a result of productivity times hours worked??

    Sure any statistic on its own is meaningless just as your blanket criticism of productivity.

    You are on stronger grounds when you point out we need to improve our academic achievement and our commitment to R&D although Labour managed to largely ignore this debate during the good years by focusing on redistribution rather than generation of resources.

    • Draco T Bastard 3.1
      9 June 2009 at 2:54 pm

      No, it’s not. GDP is, essentially, the value of everything sold. You could get a general productivity value with GDP/hours worked but it wouldn’t give individual productivity. Cut a least productive employee and the average productivity value would go up even though GDP would go down. Which is what Marty G is saying.

      • Daveski 3.1.1
        9 June 2009 at 4:19 pm

        Yep you can distort GDP in the way you claim. However, everything else being equal, GDP must come from productivity improvements – improved technology or added value etc. It’s hard to argue against that but I’m sure you will 🙂

        It is however refreshing that we are debating productivity as a core component to improving NZ’s economic performance.

        • merlin 3.1.1.1
          9 June 2009 at 4:38 pm

          “GDP must come from productivity improvements – improved technology or added value etc. It’s hard to argue against that but I’m sure you will”

          I’ll take that… GDP = labour inputs x productivity -so you can also increase GDP by increasing labour inputs.

          The point of the post though isn’t that increasing productivity isn’t good. Of course it is. It’s about using the annual productivity growth figure as some knd of proxy for how well the economy is doing. As is pointed out, productivity actually goes up fastest when employment and production are falling.

          What we want is for GDP, productivity, and employment all to go up (while not screwing the enviornment too). We should work to do that but don’t assume that’s what you’re seeing when the next productivity figures look good.

        • GC Martin 3.1.1.2
          9 June 2009 at 7:06 pm

          explain your take on “added value”.. to what sectors of the enzed economy does it presently apply..

          • Phil (not Goff) 3.1.1.2.1
            10 June 2009 at 1:04 am

            Simple definition of ‘Added value’ production: producing a product of higher quality than that generally viewed as standard.

            I’ll give you an off-the-wall example; the guys producing the Hulme F1 car… NZ will never compete with Japan when it comes to mass production of automobilea. But, we can and are producing a small number of exceedingly high quality examples.

            Same principle applies to our world class yacht building industry, and also (somewhat suprisingly) our dairy products – milk is milk, but our cheeses and yoghut has a very good international reputation.

        • GC Martin 3.1.1.3
          10 June 2009 at 1:29 pm

          Daveski..

          So.. when I ask you to explain yourself someone else – ie “Phil(not Goff)” answers..?

          Or do I take you are the same..?

          Phil(not Goff)’s answer BTW was entirely predictable, whereas “Daveski” was by no means… ipso facto why I asked in the first place. Now kindly respond..

  4. SPC 4
    9 June 2009 at 3:17 pm

    It’s time to reveal this governments real productivity strategy.

    As high producitivity is centred in areas of international export trade (comparative advantage) – whenever jobs are lost in the rest of the economy our productivity “increases”.

    The Jobs Summit and the claim that they want to close the wage gap with Oz was a diversion from the real programme – higher unemployment and lower wage growth boosts productivity and profits.

    Why – they measure productivity by the number of workers employed, they make no allowance for the economic waste of government provision for the unemployed on welfare support. This rising cost (and loss of wage income tax revenue) to government means the nominal producitivty of the working economy rises whenever the government is in fiscal crisis (and the government share of the declining “productive” econony is rising while this occurs). Thus of course this “productivity” goes hand in hand with attempts to cut back government spending (including restricting wage growth) and calls for welfare reform etc.

    • merlin 5.1
      9 June 2009 at 4:46 pm

      All the so-called debate from the right is on labour productivity, which goes down when employment is high and the economy has been growing strongly for an extended period.

  6. burt 6
    9 June 2009 at 5:30 pm

    An example: Joe, Mary, and Sue work in a factory producing widgets. Joe makes 8 an hour, Mary 9, Sue 7.

    I would give Mary a bigger salary than Joe & Sue. I know that flies in the face of the thinking that we are all equal but as you stated – Mary makes more widgets.

    Pay Mary the same under the premise that “we are all equal” and “we must have a collective” and what is the incentive for Mary to work harder than Sue & Joe?

    I guess if what we would rather see is all the people paid the same and the company unable to fire bad employees then we need to expect poor productivity.

  7. Zaphod Beeblebrox 7
    9 June 2009 at 7:18 pm

    Of course productivity improves when unemployment goes up, simply because you have better workers to choose from.
    Once you reach full employment you can only improve your productivity by improving skills and training or by getting technological improvements (you still need to trian someone to use the technology though).
    Take home message- unless you can train and educate your workforce (or import a trained workforce) and keep them healthy you are stuffed. The U.S. has found this out recently.

  8. tsmithfield 8
    9 June 2009 at 8:21 pm

    Personally, I think the role of the government in increasing productivity is to ensure that employment law is congruent with modern research into job and organisational design that has been shown to increase productivity.

    A psychological approach to job design is the direct opposite of some of the highly unionised environments where individuals are brought down to the same level and treated essentially as a homogeneous group (e.g. group contracts etc).

    In contrast, the psychological approach treats workers as individuals with their individual skills, motivators, and working styles. In the psychological approach to job design, productivity is largely the result of fitting individual skills and working styles accurately to the required tasks. Reward structures tend to be focussed at the factors that are motivating for each individual.

    Workers who feel they fit their job, enjoy their work and work environment, feel they are being rewarded for their efforts in ways that are important to them, and feel that they have opportunities to grow and personally develop themselves through their jobs, are likely to be more productive.

    • Zaphod Beeblebrox 8.1
      10 June 2009 at 2:50 pm

      Your last para is all true, but how do you go about achieving all this? The quality and people skills of the management of the organisation would have to be a major factor in making happy productive workers.

  9. OhPlease 9
    10 June 2009 at 10:16 am

    Excellent post – and excellent discussion. Thanks.

    Improving labour productivity is actually about increasing the stock of non-labour capital, it’s not much to do with workers. The higher the capital to labour ratio, the higher the labour productivity. The question for NZ is why NZ businesses don’t provide decent capital for workers to use!

    (i) the high cost of capital in NZ caused by high OCR.
    (ii) we have too many SME who are credit constrained.
    (iii) our principal industry, farming, has not had many non-patented technological advances (patented ones like crop improvements do not improve productivity as the surplus is extracted by the patent owners).

  10. Stephen 10
    10 June 2009 at 10:23 am

    Productivity is not something you can meaningfully measure in the short term. It is only meaningful in the medium to long term. Why do we not measure inflation on a daily basis? technically we easily could but it would be meaningless. Of course I am commenting on a nationwide basis here. A company may be able to have short term meaningful numbers but careful interpretation is required.

    We will be able to measure any productivity increases in New Zealand for the current government in a few years time. We can comment on our poor productivity suffered with the previous government and on how far behind Australia and USA we are.

    We can not compare our productivity with Australia or USA over the last six months. It is just not meaningful.