No. 119

Productivity – Any Solutions?

STONE the crows! Productivity is the economic equivalent of exercise – everybody approves of it but we all want somebody else to do it for us.

Except of course those who argue that things are okay and that worrying about productivity is all too boring to bother with. Like Jessica Irvine in Friday’s Sydney Morning Herald, who produced a flabby take on the debate, which she began by suggesting we needed to be hypnotised to read. [i]

It was all amiable abstraction, the sort of take on the debate favoured by people who do not worry how they will make their payroll week in and out.

For businesses, struggling with unsustainable award arrangements and intrusive unions under Fair Work Australia, the productivity debate isn’t about polemics or pussy footing. They need to use their plant and people more efficiently.

How to do it is harder than it looks, with economists arguing whether we are more or less productive than we were in the 1990s, when the stats show Australia’s productivity improved dramatically.

For a start, some economists, notably the University of Queensland’s John Quiggin, suggest the fabled productivity spurt of the 1990s was fiction. All that occurred was deregulation of the economy forced workers to up output. Growth stopped when people ran out of puff. [ii]

Others explain we should not worry. In an April paper for the Productivity Commission, Dean Parham accepted that productivity improvements paused rather than stopped last decade, but suggested perhaps it wasn’t a disaster because capital was soaked up in mining investments, which delivered increased profits and returns yet to come. At least that’s what the Crows think he wrote – even for PC prose his is dense and difficult.[iii]

But whatever happens at a national level individual companies still need to know how to increase output without flogging workers harder or paying them less, both of which are all but banned since working families became a protected political species.

So the Crows, optimists that they are, flapped over to the library thinking academics might have the answer. And it turns out they do – it just took a while to find it.

It appears one way to improve productivity, particularly in countries with strong labour laws is to sack staff and hire casuals. Lopez-Villavicencio and Silva looked at OECD economies over 20 years and concluded that when permanent workers are highly protected their wages increase by a higher magnitude than labour productivity. The reverse applies to temporary workers, in part because they are much cheaper to fire. [iv] Of course, the stronger the labour laws the harder it is to hire casuals, but since when are economists required to work in the real world.

And isn’t it worse if the permanent workers are all union members? Not according to a US survey by Kleinhenz and Smith who found productivity can improve when firms involve factory-floor union leaders in decision-making. However, you pay a premium for this. Confirming everything you saw in Norma Rae, unionised companies pay wages that are 17 per cent higher than those without organised labour.[v]

Or if you don’t want to talk to the comrades you can, if you dare, take the de-regulation route and reward workers according to their output. But this can lead to a race to the bottom, with firms deciding that keeping wages down is a safer bet than paying more for higher output, what New Zealand researchers Rasmussen and Foster call a “low cost, low skill ‘equilibrium.’ ”[vi]

But perhaps this unhappy option only applies in the shaky isles, because the US provides examples of low skilled workers without the protection of unions who are immensely productive. According to Hyung Je Jo and Jong-Sung You, Hyundai’s workers in Alabama are more productive than those in some of the company’s Korean plants.[vii]

This is confirmed by overall US evidence showing lower wage growth does not lead to workers losing interest.

The decline in the income of the average American family is a political staple. What is less known is that for 40 years workers there have produced more for less.  According to Fleck, Glasser and Sprague, increased productivity and real hourly compensation grew at the same rate until the middle 1970s. Since then an ever-growing gap has occurred each year. Between 2000 and 2009 manufacturing productivity grew by 3 per cent plus a year – twice the rate of wages.[viii]

Nor is this a uniquely American example of can-do more for less. What the Koreans accomplished in Alabama, US firms achieve in Europe. Bloom, Sadun and Rennen studied the performance of US IT firms and EU companies they took over and concluded, “The US IT related productivity advantage is primarily due to its tougher ‘people management’ practices.”[ix]

Other than an obedient workforce, unlikely in Australia, is there any one thing companies can do to really make a productivity improvement against the international competition?

Probably not, but governments can make a huge difference, firstly by investing in education.

Erosa, Koreshkova and Restuccia examined the importance of education in national income. “Human capital accumulation strongly amplifies total factor productivity differences across countries,” they write.[x]

And, second, by getting government out of the way. Porter and Rivkin argue that rather than reducing workforces or their wages, long-term productivity improvement in the US depends on national and state governments simplifying the tax code, reducing economic regulation and investing in schools.[xi]

It’s not advice that is much use to a business owner whose labour costs are rising under FWA imposed rules but it’s a message Canberra should heed – to grow the economy invest in education. To their joint credit (and when did you last read that?) the government and opposition have accepted rationing of university places and are committed to funding places for every prospective student a university will accept. And the Productivity Commission estimates that voc ed reform can add 2 per cent to GDP. [xii]

But only after improving its productivity. TAFE fails to provide sufficient skilled workers where we have shortages.[xiii] And the PC points to the need to deregulate industrial relations in the public vocational and education training sector. [xiv]

That’s the thing about productivity – its less dull than difficult to discuss and hard to accomplish.


[i] Jessica Irvine, “More fiction than fact in talk of poor productivity,” Sydney Morning Herald, May 25

[ii] John Quiggin, “No hard and fast rule for workers” @ August  20 2011, recovered on May 27

[iii] Dean Parham, “Australia’s productivity growth slump; signs of crisis, adjustment or both,” Productivity Commission, April 19 2012 @ recovered on May 27

[iv] Antonia Lopez-Villavicencio and Jose Ignacio Silva, “Employment protection and the non-linear relationship between wage-productivity gap and unemployment,” Scottish Journal of Political Philosophy, 58, 2 (May) 2011

[v] Jack Kleinhenz and Russ Smith, “Regional competitiveness: Labor-Management Relations, Workplace Practices and Workforce Quality,” Business Economics 46, 2 (2011),

[vi] Erling Rasmussen and Barry Foster, “New Zealand Employer Attitudes and Behaviours: What are the implications for lifting productivity growth?” New Zealand Journal of Employment Relations, 36 (2) 2011

[vii] Hyung Je Jo and Jong-Sung You, “Transferring production systems: an institutionalist account of Hyundai motor company in the United States”, Journal of East Asian Studies, 11 (1) Jan-April 2011

[viii] Susan Fleck, John Glaser and Shawn Sprague, “The compensation-productivity gap: a visual essay,” Monthly Labour Review, January 2011

[ix] Nicholas Bloom, Raffaella Sadun and John Van Reenen, “Americans do it better: US multinationals and the productivity miracle,” The American Economic Review 102, 1(February 2012)

[x] Andres Erosa, Tatyana Koreshkova and Diego Restuccia, “How important is human capital? A quantitative theory assessment of world income inequality,” The Review of Economic Studies 77 (2010)

[xi] Michael E Porter and Jan W Rivkin, “The looming challenge to US competitiveness,” Harvard Business Review, 90, 3 (March 2012)

[xii] Productivity Commission, “Impacts of COAG reforms,” 2 April 2012, @ recovered on May 26

[xiii] Saul Eslake, “Productivity: paper presented to the annual policy conference of the Reserve Bank of Australia, 15-16 August 2011, 23 recovered on May 26

[xiv] Productivity Commission, “Vocational education and training workforce,” April 2011, XXXIX recovered on May 26