Yves here. While this post contains a useful, high-level discussion of the productivity debate, I’m sure it will frustrate readers in yet again relying on the “let them eat training” as the solution.
My belief is that at least some of the productivity slowdown is due to shorter job tenures. Companies now generally refuse to train workers, which means they spend a lot more time on searches that are typically overly narrowly specified, as in you have to have done the same job for a very similar employer to be considered. This keeps higher paid managers busy-looking. The fact that employees know full well that their company is not committed to them means the better workers will be on the lookout to move to greener pastures. And managements that treat workers as disposable will find them less loyal in other ways, like not putting in extra effort which would make a difference in the long term (like make a customer happy) if the boss won’t notice a missed opportunity.
More employee churn also impairs performance in terms of people working together cohesively, since a lot of what happens in organizations involves navigating around the quirks of co-workers, bosses, and customers. Would a sports team be any good if it had 20% turnover in a year? Yet average job tenures are 4.4 years, which implies an even higher rate of personnel churn.
By Roy Green and Renu Agarwal from the University of Technology, Sydney. Originally published at The Conversation; cross posted from MacroBusiness
There is a wide recognition by economists and policy-makers that “the large differences in income per capita observed across countries mostly reflect differences in labour productivity”.
Further, “productivity is expected to be the main driver of economic growth and well-being over the next 50 years, via investment in innovation and knowledge-based capital”.
This is what makes Australia’s productivity slowdown since the 1990s so concerning, as it coincides with a period of massive technological change and innovation. Nor is Australia the only country to experience this phenomenon, or to be puzzled by it.
A Productivity Puzzle
Productivity is not an easy concept to define. Essentially, it is a measure of the efficiency with which we can turn inputs into outputs, based on new technologies and business models, a capable and educated workforce and effective management of firms and organisations.
During the mining boom, the deterioration of Australia’s productivity performance was masked by the boost to our terms of trade from higher commodity prices. With the end of the boom, it has become apparent that new sources of growth must be identified, re-positioning Australia as a more complex and diverse economy, embedded in global value chains.
Given the significance of this challenge, the Federal Government called in the Productivity Commission. Its discussion paper highlights the “justified global anxiety” that “growth in productivity — and the growth in national income that is inextricably linked to it over the longer term — has slowed or stopped. Across the OECD, growth in GDP per hour worked was lower in the decade to 2016 than in any decade from 1950”.
The most problematic feature of this challenge is that we lack a clear understanding of why productivity growth has slowed or stopped in Australia and around the world, despite a considerable amount of analysis and debate.
Broadly, three reasons for the productivity slowdown have been advanced.
First, there is the claim by Robert Gordon that today’s innovations do not compare in scale or impact with the breakthroughs of the 1990s let alone the wave of earlier transformations bringing urban sanitation, electricity, the telephone, television and commercial flight: “so it’s the lack of really profound economy-wide impacting innovation in the past few years that’s been the problem.”
Against this view, Erik Brynjolfsson maintains that technological disruption is at least on the scale of earlier periods but has yet to demonstrate its full impact, which will require “a host of complementary innovations, just as it did in the industrial revolution: investments in education, reorganization of work, new policies…”
In particular, he anticipates “the core technology of artificial intelligence, machine learning, and combining it with knowledge in lots of different areas [will] create new products and services”. Others agree that “the new digital economy is still in its ‘installation phase’ and productivity effects may occur only once the technology enters the ‘deployment phase’”.
Second, evidence suggests that productivity growth is still very strong, possibly stronger than ever, but confined to “frontier firms”. These tend to be younger, more innovative and profitable. They also vastly outperform the laggards, whose poor performance brings down the average. Here the productivity slowdown is thought to be due not to lack of innovation, but rather to a lack of diffusion from the frontier to the rest of the economy.
This stems partly from the growth of monopolies and oligopolies in many industries. They encourage the “financialisation” of corporate activity at the expense of productive investment, particularly in R&D. Another factor is the uneven quality of management, which can inhibit enterprise “absorptive capacity”, or the take-up of new ideas and business practices, even in a competitive environment.
Finally, there is the view that whether or not there has been a transformation of productivity performance as a result of technological change, it may not be reflected in the statistics due to measurement shortcomings. For example, the role of the internet in changing the way we communicate, assemble data and deliver services is simply not captured by traditional measures.
Most economists accept that “what we measure affects what we do; and if our measurements are flawed, decisions may be distorted”. But some go further, arguing that “the time is ripe for our measurement system to shift emphasis from measuring economic production to measuring people’s well-being. And measures of well-being should be put in a context of sustainability”.
We need reform
Whatever measurement tools are adopted, productivity-enhancing reform will be a key driver of long-term growth and jobs. It will enable us to compete globally not just on cost, which promotes a self-defeating “race to the bottom”, but on quality, design and innovation as the framework conditions of a high wage, high productivity economy.
US Federal Reserve Chair Janet Yellen understood this well in a speech last year on the role of productivity in restoring global growth:
Though outside the narrow field of monetary policy, many possibilities in this arena are worth considering, including improving our educational system and investing more in worker training; promoting capital investment and research spending, both private and public; and looking for ways to reduce regulatory burdens while protecting important economic, financial, and social goals.
In Australia, the Chief Economist reports that “innovation-active” businesses are 40% more likely to increase profitability, twice as likely to export and two-to-three times more likely to demonstrate higher productivity and employment.
Yet innovation has been getting bad press, just like productivity in the past. It was not so long ago that productivity was viewed suspiciously as a ruse to make people work harder, when the real benefit was in working smarter. Now innovation is resisted on the grounds that it destroys jobs altogether. While this may be true in specific cases, it also creates jobs, and has done so historically.
The problem is that most newly created jobs will not be the same or in the same places as the jobs that are gone. It has been estimated that up to half the existing jobs in advanced economies will disappear or be changed beyond recognition in the next 10 years. This implies a much bigger emphasis on education and training to prepare for the future.
To be credible, a new productivity agenda will have to ensure that the gains from innovation are shared systematicallyacross the workforce and society, rather than accumulating in a few hands. This is the lesson of populist revolts over centuries, including the current examples occupying the world’s attention. A new agenda will require a new social contract.
I found it astounding that one of the most obvious reasons was ignored. Namely, growth in productivity depends fundamentally on cheap energy, whereas our dominant energy source – fossil fuels – has been running into big trouble, despite a lot of propaganda from official sources like the EIA. Just read David Hughes (Post Carbon Institute) about the real prospects of oil and natural gas fracking.
In this context Gordon does have a good point: Current technological advances are more optimization than fundamental change, such as a new source of cheap energy such as nuclear fusion promised to be (it’s still living on promises, not accomplishments). Renewable energy is improving, but it looks more like a road to survival (if we create a more egalitarian, sustainable, and much less extravagant society) than a game changer toward renewed growth.
If energy costs were the driver, we would have gotten a productivity pop from the fall in oil prices in 2016. I don’t believe there was any.
And there are a lot of reasons to think we won’t see oil above $90 for many many years save on a short-term basis (geopolitical scares) OR something very stupid, like attacking Iran and having them torch the Saudis. Among other things, we may have reached peak demand.
Gail Tverberg has a peak oil model that shows how the interplay of debt and peak oil actually results in a low oil price. According to her model, if I understand it correctly, the reason for low growth was running out of cheap oil, which then made debt service difficult and low growth and oil prices.
So according to her moder, both the low oil price and low productivity growth can be accounted by peak oil.
You can take that a step further. With a debt-based money system, and “GDP” being measured in dollars, the amount of work being represented by an amount of money slips over time. If you’re working the same number of hours (the “hour” being a fixed unit), and wages are flat (also fixed, as a nominal number, let’s say), but the money unit you’re measuring in (GDP represented in USD) is debasing. So the amount of GDP produced per hour of work (measured in hours) would appear to be slipping when in fact it is the effect of the money itself debasing. No?
It’s not the price of energy that matters, it’s the cost (the amount of work and energy required to generate it). This keeps going up as fields deplete, offset somewhat, but not entirely, by technological improvement. Shale helps, and moves the price, but it’s not a game changer with respect to cost of extraction. The discovery of oil created a huge boom which lasted quite a while but that faded out in the 70’s and we’ve been struggling ever since (notice how we’ve only made progress on small things (computers, biotech, etc.) not big things since then).
Basically, Dick is 100% right here, in my opinion.
Adding my two pence to the discussion.
Steve Keen has recently started investigating the role of energy in production — besides the other two classical determinants labour and capital. From well-established Cobb-Douglas production functions, he is trying to ferret out what exactly is hidden behind the “Solow residual”.
Keen’s analysis is in its early stages, but the first results seem to indicate that energy input is possibly the major constituent of that famous “Solow residual”. In other words, productivity could be essentially tied to the accessibility, availability and quality of energy inputs — well before the qualification of the workforce or the amount and modernity of capital.
The problem of decreasing energy returns on oil, which will soon require more energy input to extract than it contains was detailed in a video posted here on NC:
SRSroccoReport Interview with Louis Arnoux: Thermodynamic Oil Collapse
Energy costs are essentially uniform and passed along inthe value chain. Energy efficiency tends to zero differentiation amongst viable competitors.
So its not energy cost per se.
I think your preamble fairly concisely nails a big condideration.
Companies that cultivate employees enjoy a deeper company memory of how to get things done effectively/profitably ( and as importantly how not to “to things”, incredibly important but not always recognized).
Businesses that recognize “corporate memory” csnenjoy a competitive advantage -if they are wise enough to recognize it.
All the process documentation in the world cant always catch the finesse of how to get something done, free collaboration in desirable and that doesn’t gappen when emoloyees are pitted against eachother.
“Energy costs are essentially uniform and passed along inthe value chain. Energy efficiency tends to zero differentiation amongst viable competitors.
So its not energy cost per se.”
I’m not sure what you are saying here. The point is that we are not making energy breakthroughs like we used to (hydro, coal, gas, nuclear, oil). Countries that weren’t making use of existing energy technology (e.g. China and coal) can have great growth as they catch up, but at the frontier, there is not much happening, so we grind on.
point is “energy” is a commodity with a uniform cost spread across all surviving competitors.
If , for example you smelt aluminum from Bauxite, your likely paying an energy cost pretty similar to your global competitors.
If youre converting natural gas into fertilizer, again, the entities in this business are buying a similarly priced bulk commodity..
..”the petroleum market is like a big bathtub with many little spigots filling it, and many drains pipes coming out..” A global commodity.
Not necessarily, there are all kinds of externalities that can affect the cost structure… access to roads, pipelines, health care, etc.
For example, here in Canada, we have distribution problem where many want to build pipelines… billions would need to be spent for this… if we go ahead and build these it means billions not going into other sectors.
Are oil companies going to pay the true cost of distribution to these pipelines? My intuition says no. Many other sectors will end up paying. Externalities will abound… it will help oil industry and keep oil flowing but by no means guarantees future prosperity. It just seems to guarantee an even more energy dependent future.
Energy is power… No country has ever cut its oil consumption on its own. It has always been forced.
Is see a future where more and more of the workforce is working to produce power… instead of having 90% in agriculture like in the last century, the next one might see 90% in energy production.
Not the latest numbers but close enough to show there is little uniformity across energy sources:
Cost of natural gas = $1.10 for 100,000 BTU
Cost of heating oil = $2.50 for 100,000 BTU
Cost of electricity = $2.93 for 100,000 BTU
My recollection is that the US may have reached peak energy demand but worldwide it is expected to continue to rise for many more years.
I’ve long suspected a strong correlation between the slowdown in productivity and the popularity of MBA qualifications for managers.
PlutoniumKun. There was a study in the Chronicle of Higher Education that showed that U.S. undergraduate business majors were least-prepared students, had the biggest gaps in knowledge to try to close, and failed to do so. Contrary to your observation, I’d advocate eliminating business as an undergraduate major.
On the other hand, I do agree with you in that “management” has become professionalized. Yet it isn’t a profession. MBAs consider themselves generalists, when they truly ought to be forced to learn a specific business in detail. And the numbers of MBAs who major in manufacturing are minuscule, another sign of detachment from reality.
Tell me about it, DJG.
I’ve spent more than a little time around undergrad business majors, and there are times when I’m amazed that they’re even in college. And, by that, I mean a four-year institution.
IMHO, a lot of them would be better served if they could get a two-year certificate from a community college, and then they could get out there and start making the big bucks that they so ardently desire.
This. The self-serving idea of an MBA who can manage in any industry by reading spreadsheets has been tremendously damaging. If your specific knowledge is so facile you don’t deserve to be highly paid.
As a productivity-suck I would also include ridiculously over-specific credentialism (a curious contrast to the I-can-manage-anything MBA ideal). Cover-your-butt corporate HR policies that are ridiculously specific in their requirements for other positions. Oh, you’ve managed Brand A backup software for 10 years, we can’t possibly hire you to manage backups with the very similar Brand B even if you could learn it in a day.
Here’s an alternative view.
Since the 1990’s and more so from the 2000’s, debt capital has increasingly moved from financing small & medium businesses to financing ‘investment activities’ – i.e. increasing the leverage on property & equities. In particular housing/property in Australia. There is no point in creating innovations if mainstream small & medium businesses can’t get the funds to invest in these innovations. This change has become more marked with movement to Basel II & III. The capital cost of funding small & medium businesses has increased purely as a function of changes in regulatory requirements before any other factors. Perversely these regulatory reforms were supposed to address problems of leverage not move capital away from mainstream businesses. And this is largely due to CEO bonuses being paid on stock prices which are driven by return on equity (impacted by Basel) for banks.
You can have all the bright ideas in the world but if these’s no money for businesses to take up the ideas then productivity doesn’t improve.
The solution is to split banks into separate purely retail, business, & investment banks with their own regulatory and ROI benchmarks.
At the moment business banking is squeezed by retail banking focus on investment mortgages and leveraged positions in loss-making unicorns trying to capture monopoly returns by investment banks.
As long as FIRE sector ‘earnings’ are added to rather than subtracted from GDP figures, the impact of rent extraction on all other productive economic activity will be hidden. The increasing financialization of corporate activity was listed as a problem related to increased formation of market oligopolies, but that misses the generalized nature of rent extraction from every aspect of the economy, with property and rental price increases due to financial speculation being some of the most obvious. It would be interesting to look for correlation between increased dominance of the FIRE sector in GDP vs. the evaporation of expected productivity gains.
As Gordon Gecko said, “Bud, it’s a zero-sum game.”
It’s actually worse than that – parasites weaken the host………………
Just to add to Yves comments about churn, I think a crucial problem with the increase in turnover of staff in many organisations is the loss of institutional memory.
Years back I worked on a major engineering project in London. The particular project had been in gestation for about 20 years before getting the go-ahead. When I started, the office was in chaos as there was a major gearing up in hiring and most of the staff were relatively young. In one corder though were two old guys who seemed to spend much of the day reading the newspapers and nipping out for cigarette breaks, while all around them was a buzz of activity. There was a lot of curiosity about how they justified their wages. It soon became apparent. They’d been with the project since the first day and had an enormous amount of knowledge of small but annoying day to day issues. So when a query came up such as ‘is it true that 10 years ago we promised stock proof fencing to this landowner?’, or ‘how much water capacity from that well did the local council say the contractors could use?’, you could spend several hours pouring over old correspondence or engineering drawings. Or you could wander over to one of the old guys and just ask. Invariably, they would have an immediate (and invariably correct) answer.
It was pretty farsighted of the managers of that project to maintain those guys in their job – they realised that people like that were just as important as a hugely expensive document control system (incidentally, the same organisation blew 30 million on a digitised system that was a disaster). But I suspect that many companies simply don’t recognise the value of this knowledge and would see them as dead wood and let them go. No amount of investment in information technology can match the knowledge value of someone who’s been through the whole cycle of a project.
Incidentally, this is I think the key reason why major public transport infrastructure projects in the US and Britain are notoriously more expensive to build than in Europe and Asia. The latter recognise the value of rolling projects and a long term investment in design and management teams. In the US and UK each project tends instead to be seen as a discrete ‘unit’ to be set out as a one-off contract leading to a very steep learning curve.
De-industrialisation by financialization realy is a phenomenon coming to a place near you.
Over the past several years I was able to observe a case, executed by the book, through the eyes of a member of my extended family, who worked on mid management level for a company that once was one of the big five in its market worldwide and now is a sole shadow of its past.
The company, which has a 100+ years history, had come into trouble years ago after a big deal had gone foul. They had to file for bancruptcy-protection and finally partly got bailed out by tax-money and partly were split up, re-pachaged and sold to several bidders, mainly financial “investors”.
That started a long queue of ever greedier “inverstors” scraping up the remnants left by their predecessors and, naturally, each of them sold and took out another important part of the core competencies (to the competitors, who else) of that company, to compensate for their credit-line and revenue-expectations.
Today, there’s nothing valuable left anymore than the brand-name, a rest of some 100 people, who still habe a bit of knowledge about the business and a highly dillusional upper management, who still think they could score big with that once famous name, but each time get slapped in the face, because everyone with a little knowledge of the branch knows about the history and the loss of central competencies. The management mostly consist of hired guns with no memory in connection to the company. The only motif of their actions ist the bonus-package.
Instead of trying to secure a steady business at a lower level, which were possible, they follow the path of quarterly reports to the bitter end.
All in all it is a very sad process to watch indeed, because there are so many people on the lower levels, who know, what is going wrong and knew, what could be done. But every initiative is overruled top down. Motivation in the lower ranks steadily melted away as did productivity.
The final chapter of the story was written by an investor, who finally clipped everything that had anything to do with production and concentrated on earnings on patents and other intellectual property.
I think, as long as quarter to quarter thinking is the enforced norm, there is no incentive for upper management to even think of anything productive. There’s always a part of the company which you can sell oder employees you can fire, in order to produce the numbers for your bonus. If something goes wrong that way, why care? Just leave and kill another company.
On the side of the employees, the dominant factor that kills innovation, risk-taking and productivity is omnipresent fear.
As I could witness firsthand, fear of the workers for their knowledge-monopoly, that kept them in the company, killed projects to further knowledge-transfer and killed related investment proposals into new fields of expertise too.
Your comment contains almost all the nuggets of wisdom necessary to understand where we’ve gotten to, which only highlights the difficulty that lies ahead.
The ‘Greed is Good/MBA culture’ that was so carefully nurtured in the building of the neoliberal consensus has stoked the fires of class-warfare, and as one of the primary, but unacknowledged undercurrents of recent history, that class-warfare has resulted in a near total demoralization of that portion of the working class who are old enough to remember the good jobs and prosperity of what seems the recent past.
In the end, the high priests of the neoliberal church have but one tool left in their toolbox, austerity, and that they have been applying ruthlessly, but obviously to no avail.
The austerity has destroyed demand along with morale, and has laid bare the uselessness of our ‘leaders’, and the managerial class that enables them, so thoroughly that no amount of propaganda will be able to rehabilitate them.
The dogs won’t eat the dogfood
Our two political parties, having finished killing and eating the Goose that Laid the Golden Egg, are now enthusiastically beating the dead horses named Divide and Conquer.
The beatings will continue until morale improves!
I wish I was sure that Sunday’s marches were a true evidence of a dawning solidarity as opposed to just the latest gimmick intended to shore up the house of cards that is the Democratic Party and Third-Way politics.
The fact that so many Democrats not only shoved their way to the front of the parade, but were accepted by many as its leaders is not encouraging.
What would be encouraging, is if, when Trump supporters realize they’ve been had, which of course they will realize sooner than latter, we are ready and able to embrace, console and invite them to join in Solidarity, as opposed to point, laugh and ridicule.
This is the exact moment for us to wake up to the fact that it was not all White Men who drove us into this ditch, it was 1% of them, and that along with the Black Mis-leadership class, and the Labor Mis-leadership class, there exists a Women’s Mis-leadership class who are busy, not working for a new and better tomorrow for all of us, but to join, and share power with those same 1% of white men who seem intent on destroying our dreams.
I hope all those marchers, which included my wife and daughter, will come away inspired and committed to building a true Solidarity, as opposed to re-animating the rotting corpse that is the current democratic ‘leadership’.
If I had to guess, I’d say the odds are about 50/50.
“In one corner though were two old guys who seemed to spend much of the day reading the newspapers and nipping out for cigarette breaks, while all around them was a buzz of activity.”
On Planet Japan, such guys (they’re always guys) are called madogiwa — window gazers. No one consults them about anything, though. They are just waiting to reach retirement age.
In Japan, on the factory floor of the auto companies, robots are getting fired. It turns out that too much automation has drastically reduced the number of people that know how to build a car. Robots need teachers too.
Nothing like false equivalence, eh?
Don’t let wisdom get in the way of a chance to make a pitch for the neoliberal over-arch.
I’m curious — how many madogiwa (in Japan) do you know, have you observed, have you desk-audited or anything? Where did you come across the word, anyway? “Entrepreneur” or “Barrons”? And an economically wise political economy would of course rationally kill anyone who was not hurrying, scurrying, BlueTooth in one ear, smart phone stuck to the other, Doing Stuff however idiotic and deadly, to the larger population, all that activity might be.
If I was a would-be contestant on “Price is Right” I’d cast my vote here on “Change in the growth rate of hedonic artifacts”, mostly because nobody else has picked that yet. I don’t have any strong belief in that, but I also don’t discount it as a possibility. For example – computer CPUs are no longer getting much faster – how does that affect the growth rate of hedonic adjustment and the economy-wide measurement of productivity? Or perhaps the local broadband monopoly/duopoly is offering faster Internet for the same price, so I’m getting higher resolution advertisements in my web browsing. Does that factor into societal productivity measurement??
Said the economist, when asked “How much is 2 + 2?” — “How much do you want it to be?”
The Rich Sh!ts who own us certainly place a high value on “hedonic” EVERYthing — artifacts, titillations, perversions, satisfactions of all sorts… They somehow find a line item in their calculus of “values” for such stuff.
The authors misunderstand Yellen misunderstanding:
No, this is indeed within the ‘narrow’ field of monetary policy which has been made all the less narrow by QE/ZIRP. By ballooning the Fed’s balance sheet, the Fed has pumped free money into the unproductive top of the economy. With inflated asset prices and free money (combined with stagnant demand caused by austerity) there is zero motivation for firms to invest in R&D (aka improved productivity) and every motivation for them to play the ponies with the FIRE sector– the exact opposite of Yellen’s call to “promote investment and research spending”, thus showing she is utterly clueless.
So the solution is to increase aggregate demand (fiscal spending + better working conditions) and eliminate the perverse incentives pushing companies not to invest in improvements like R&D, right? Not according to Yellen or the authors. According to them, it is the workers who must change, not capital. No changes to monetary or fiscal policies here; instead yellen wants to focus on the educational system and worker training whilst “looking for ways to reduce regulatory burdens”. The authors pick up on this riff, adding that
Jobs being changed “beyond recognition” sure rhymes with the jobs created under the Obama economy, 94% of which were part time or temporary. But there’s a method behind this madness; in my experience whenever I run into anyone bringing up productivity, it is not because they want to improve actual productivity, but rather because they are looking for excuses to blame workers and thus make our existence even more precarious.
I may be simplifying things, but I look at these facts and productivity loss does not seem so bewildering: start investing in the real economy instead of diverting everything to FIRE and productivity will return to where it was before the breakneck financialisation of the economy.
‘..there is zero motivation for firms to invest in R&D (aka improved productivity) and every motivation for them to play the ponies with the FIRE sector– the exact opposite of Yellen’s call to “promote investment and research spending”, thus showing she is utterly clueless.
When wages goes down it becomes economically possible to hire people to do low-productivity jobs. Why bother with efficiency when it is cheaper to throw more resources at getting the job done?
That’s my take too. Globalization and financialization have decimated workers and bargaining power. As mentioned in the piece, productivity gains continue in frontier firms and industries, but, as you suggest, why should Walmart or McDonald’s innovate when they pay crap wages? However, with the recent increases in minimum wages, there is an incentive now.
Maybe. Maybe not.
Completely agree. Is it smarter to invest $1 million in high-tech machinery, and educate expensive workers to operate and maintain it, or build your factory in China where you can pay $5/day?
I would bet a lot that the global productivity slowdown is acutely caused by a narrowing of the beneficiaries of established rents and the erosion of those rents.
Which links us to the increasing inequality.
“There is a wide recognition by economists and policy-makers that “the large differences in income per capita observed across countries mostly reflect differences in labour productivity”.”
WHAT?! This is a joke right?! Like Prof. Anwar Shaikh mentioned, how can a bus driver in India be less ‘productive’ than one in Sweden?! Another, Indian Manufacturing worker productivity has been rising but wages haven’t – http://www.livemint.com/Opinion/Vxmd5HHO8qeLuqYUiobbpM/Higher-productivity-equals-higher-wages-Not-for-the-Indian.html
Its not a silly economic question, its social and political. Its high time economists started embracing this!
Silly, of course their pay isn’t increasing! An increase of pay would immediately reduce “productivity”. Productivity is ALWAYS increased by reducing the work force but increasing the workload WITHOUT increasing pay/benefits…except for CEOs.
That quote immediately caught my eye too – that “the large differences in income per capita observed across countries mostly reflect differences in labour productivity”.
What an absurd assumption that has its origins in the absurd Efficient Markets Hypothesis. This ideological belief that price (or wages) reflects productivity ignores monopoly pricing, fetish consumerism, rent extraction via finance, etc. I think Michael Hudson said it best. “Lloyd Blankfein of Goldman Sachs said that the reason Goldman Sachs’ managers are paid more than anybody else is because they’re so productive. The question is, productive of what? The National Income and Product Accounts (NIPA) say that everybody is productive in proportion to the amount of money they make/take. It doesn’t matter whether it’s extractive income or productive income. It doesn’t matter whether it’s by manufacturing products or simply taking money from people, or simply by the fraud that Goldman Sachs, Citigroup, Bank of America and others paid tens of millions of dollars in fines for committing. Any way of earning income is considered to be as productive as any other way. This is a parasite-friendly mentality, because it denies that there’s any such thing as unearned income. It denies that there’s a free lunch.”
What do you expect when economists use linear algebraic models to try to describe an infinitely complex non-linear differential-calculus economic-world. It’s like expecting a child to explain the grand unified theory of the universe – which even the physicists haven’t constructed. Is it any wonder that the economic models fail so quickly. And our child-economists keeping on happily playing with their blocks.
“the large differences in income per capita observed across countries mostly reflect differences in labour productivity”
I’m glad we are picking at this absurd assumption. It’s as if logic isn’t even in the economist’s toolbox.
The labor productivity of a Chinese sweat shop worker making Apple’s phones is high, and their pay is low. Productivity wise, compare how much wealth they create, compared to an economist chowing down on a six or seven figure salary producing reports that resolve to gibberish.
What economists fail to recognize is theft of sweat. Apple’s $200 billion hoard held aloft never to touch a peasant again is imagined as the magic of markets, when it’s the result of looting labor.
For examples, countries with less banking would be less productive using our productivity measures…
Country productivity depends on sector weights.
For example, Canada needs to export loads of resources to import each BMW… and food.
So now let’s imagine a country’s household debt to income going from 60 to 160% in a decade… we know that printing money is propably the most productive sector of the economy as bank profits swell so productivity holds up for a while.
What happens when households are tapped out? The economy slows, impacting all sectors. Bank profits flatten and suddenly that country realizes it’s going to have to produce and export an even bigger amount of resources to replace those bmws… in other words just to stay even.
But due to demographics they realize that to keep the Ponzi scheme going they are going to have to increase immigration. However these new immigrants will be consuming the energy and resources the country needs to be exporting so it can import value added products.
The problem with our productivity measures is that they include sectors that are long term wealth destroyers and measure how good they are at destroying the economy!
The problem with our productivity measures is that they include sectors that are long term wealth destroyers and measure how good they are at destroying the economy!
Good one Moneta.
Larry “pretty air” Summers was paid millions by Haaarvaaaaard and lost billions to the productivity enhancers of Wall Street. Some of the long term wealth destroying sectors of the economy are the economists, and having them make pronouncements from their policy thrones permanently and persistently destroys wealth.
Bernie Sanders: The business of Wall Street is fraud and greed. For Wall Street to be more productive implies more fraud and greed.
For the peasants, increased productivity means sweating moar, so Wall Street has more to steal.
A virtuous or viscous circle, depending on where one is in the food chain.
Re “productivity is expected to be the main driver of economic growth and well-being over the next 50 years, via investment in innovation and knowledge-based capital”
So, the decoupling of wages and productivity in the US over the last forty years, resulting in a massive redistribution of wealth from the “lower” classes to the top of the economic spectrum, leads one to this conclusion? Amazing. Well-being? Really? Ask anyone in the US who just voted for Trump out of outrage over what has been done to them.
The problem with free markets is that most investors don’t want risk. They just want guaranteed returns…. so who is going to fund all this risky innovation unless there is bailout guarantee?
R&D seems to be slowing down, from my perspective. In the public arena, you have the US government pulling back significantly on basic research through NIH/NSF and others, while they continue to keep the other half of public R&D, defense, secret. Expect a major productivity explosion (pardon the pun) if the military tech was made available to all.
The problem could be solved tomorrow by the US government.
Can’t speak for corporate R&D since it’s much more opaque, but you do see Google and others pulling away from their “idea incubator” teams.
This is a good observation. I’m having trouble finding an adequate historical perspective with a quick google search, but I think you’d see a pivot away from R&D in the 1980s as “shareholder capitalism” became the driving management philosophy.
Additionally, if productivity is measured on a GDP per capita basis, what share of this is attributable to increased rent seeking-aka finance, versus tangible improvements in output?
For a further summary on the demise of Bell Labs, arguing that its pure science was doomed when the AT&T monopoly was broken up, see http://www.beatriceco.com/bti/porticus/bell/the%20end%20of%20ATT.html
And then, Bloomberg made the point back in 2009 that the decline of R&D also meant the decline of well-paying jobs, with a resulting decrease in consumer demand which would be deadly for a consumption-based economy. (https://www.bloomberg.com/news/articles/2009-08-27/where-have-you-gone-bell-labs)
One famous corporate R&D center that has shrunken tremendously is Bell Telephone Laboratories.
This has: “But since the 1990s, labs dedicated to pure research—to the pursuit of scientific discovery—have seen funding slowly decline and their mission shift from open-ended problem solving to short-term commercial targets, from pure discovery to applied research. Bell Labs had 30,000 employees as recently as 2001; today (owned by Alcatel-Lucent ALU) it has 1,000. That’s symbolic and symptomatic of the broken link in the U.S. business model. With upstream invention and discovery drying up, downstream, industry-creating innovation is being reduced to a trickle.”
30,000 employees to 1,000.
Bell Labs is now owned by Nokia.
Why would developed nations productivity continue to increase as their companies pursue inexpensive labor anywhere in the world?
First the high labor, low training manufacturing tasks are moved overseas while the more complex jobs are maintained in the USA for a while.
The US government, via trade policies and military presence, has tended to remove corporate risk for tapping overseas labor by USA and other countries multinational firms.
When manufacturing labor, in the long term view, is viewed as inexpensive, one does not have great pressure to use it as efficiently (automation, more training, more investment) in the USA while it is being shifted to a low cost region..
I simply don’t see increasing productivity as a good thing. What it means, in practice, is ALWAYS fewer workers doing all their original work PLUS the work of their just “down-sized” co-workers for the same, or lower, pay and fewer benefits. BOOM! Instant productivity increase!
Fuck that. Quit aiming for ever greater “productivity”. It is telling that all it would take to instantly decrease “productivity” is to increase pay and benefits for the workers doing all the extra work! Tells you it is a false paradigm. It is merely a bit of trickery to allow CEOs to give themselves big, unearned bonuses. “I cut 20% of the work force, shifted all the work onto the remaining 80% AND cut their benefits! That ‘saved money’ can now be freely folded into a FAT BONUS FOR ME!”
Exactly Praedor. I think that the “Eff It” factor explains a lot of the productivity slowdown.
As in, eff working harder. It’s just going to make the boss rich.
Big and complex topic with a lot of moving parts. Focus is typically placed on Labor productivity, with little ever said about Capital productivity or Total Factor Productivity.
With the decline in energy and commodity prices, and real cost of American labor essentially stagnant for decades, seems to me this focus is misplaced. Not that China is without its own set of problems in this area, but think Chinese entrepreneur Jack Ma of Alibaba Group is onto something when he points to U.S. spending of $14 trillion on wars over the past three administrations rather than on infrastructure, education, productivity enhancing research, plant and equipment, and the nation’s people. He also drew attention to the massive misallocation of trillions of dollars of capital to bank and shadow bank bailouts and subsidies.
With the cost of money at zero for the past 8 years, it seems to me that the focus for the decline in productivity should be redirected toward the usual suspects. Effects of massive volumes of debt-leveraged corporate stock buybacks, the role of monopolistic/oligopolistic pricing, markets manipulations, and toxic workplaces have been broadly ignored. I would also like to see some OECD efforts to consider and address the effects of currency manipulation, together with incorporation of environmental and health metrics in collaborative and creative initiatives.
Don’t confuse this discussion by stating facts!
I think that you’re spot-on with this comment. The breakdown of democracy has led to short tenures in government service, just like those in the private sector. Western governments have stopped investing in anything other than rah-rah wars and bailing out donors to the electeds running campaigns-without-end.
Howto: Maximizing Labor Productivity [Source: Harvard PhD in Harvard MBA course curriculum]
1) Determine the country’s Gross Domestic Product (GDP). [in dollars]
2) Calculate the number of total productive hours for a country. Basically, you’re calculating the number of so-called “man-hours” worked to produce products and services. For any country, find the number of people in the workforce for the given period and multiply it by the average number of hours worked.
3) Get rid of everyone and charge high prices for purchased or outsourced products.
Then productivity tends toward infinity as more and more workers are taken out of the labour force. With 100% automation, productivity will stay constant at an infinite level, no matter how inefficient the robots operate.
Clearly, the only index that makes sense to evaluate economic efficiency is total factor productivity, as Chauncy Gardiner alludes to above. However, this raises nasty measurement difficulties — capital, energy…
Indeed, it was not entirely clear from the article what kind of productivity the authors — and the other authors they refer to — are relying upon for their argument.
Post industrial economies are doing exactly what they were structured (designed) to to do. Namely, transfer wealth into the financial sector with disregard for the overall economy. This, as others have said, manifests itself in management’s, PE firms, the MBA-class, that know how to and are incentives to financially engineer. They are not paid to compete with better businesses, better products, innovation, process improvements, etc.
The flip side of employee turnover is that so long as “owners” or senior managers continue to enrich themselves they will encourage, not discourage it.
Several observations in the article and in the comments above ring true:
–Companies don’t train. I work in publishing, which had a craft model when I started. The senior editors spent a lot of time training the new young editors. Training went out the window about twenty or so years ago, around the time that desktop publishing arrived. Everyone is a publisher! Which means that no one is a publisher.
–Gordon is right that no major new technology has spurred productivity. Many of the “disruptive” companies and technologies are just new means of distribution. Federal Express. Much of the Internet (Etsy’s a good example). Uber (slicing up taxi rides to make them unprofitable). But we haven’t had anything as productive as the invention of the personal computer lately. Cellular phones? Enhancing productivity? No.
–Too much of corporate effort is in monopoly or monopoly-like situations. Too many companies are hoarding cash, which is a form of class warfare. It also undermines the purpose of a joint-stock company to do so. Several commenters note that R&D is down. But now that all right-thinking people hate the government, where is some of that R&D going to go on? You also have these weird, unproductive semi-monopolies like Wikipedia, which destroyed printed encyclopedias–and now begs for money to stay on-line.
–Measurement error? I’m not so sure. I am trying to wrestle a parcel out of the U.S. post office. I have received some dozen e-mail messages, each showing this parcel making its way all around Chicagoland, but not to my door. Is this productivity? Is this the great new digital frontier? And why can’t they just deliver the damn parcel instead of recording its constant erroneous movements?
Your parcel is caught in the great postal gyre. Eventually it gets ejected and lands on your doorstep.
With respect to the bulk of your post, which I agree with, I take exception to your criticism of Wikipedia. I see no reason why we need to keep a restrictive, wasteful, antiquated system of knowledge distribution in place, when the alternative is free-ish, available almost universally, can be regularly updated and is peer reviewed. There are flaws to be sure, but for something of such broad utility I believe it’s worth it to to try and improve it rather than denigrate it.
One thing also to bear in mind is that Wikipedia is only sixteen years old and is part of the massive disruption of the economy wrought by the internet. Publishing got hammered economically when the link between content and the physicality of the printed work was broken, and ever since we have been trying to figure out how to pay writers, artists and publishers for their work. To be honest though it must be said that we are trying to figure out how to pay laborers in all areas of the economy. I don’t have the answers to that but where we are now is better than where we were before in terms of peoples access to information and ability to create and distribute their works. In short, I loved the printed encyclopedia but it’s gone and I don’t want it back.
With respect, the answer is easy.
Productivity is caused by high wages. Period. Productivity is flatlining because, with the third-world population explosion (mostly deliberately engineered by pro-natalist government policies) providing massive amounts of labor, the real cost of labor is going down. Therefore it is not necessary to invest in making labor productive.
In the middle of the Gobi desert fresh water is valuable. At the base of Niagara Falls, water is relatively cheap. Supply and demand. Investing in expensive water-conserving systems at the base of Niagara Falls would not make the water there more valuable, that would be stupid and so nobody would do it.
Wages are not high because productivity is high. FIRST there is a tight labor market, that makes wages high – by simply shifting more income from rentiers to workers. THEN there is the incentive to invest in making workers more productive.
But facing this head-on would inconvenience those whose profits depend on cheap labor. Therefore this analysis is racist and taboo. Therefore we must come up with ever more epicycles to explain away what really should be obvious.
Productivity can be measured in terms of money which is quite arbitrary, and it seems the case of this analysis. But in terms of energy land or water usage? In per worker units? In terms of achievements in the case of services?
Much more to be analysed.
“Companies now generally refuse to train workers, which means they spend a lot more time on searches that are typically overly narrowly specified, as in you have to have done the same job for a very similar employer to be considered. This keeps higher paid managers busy-looking.”
As exemplified by the annoying ad for the “zip-recruiter” job board:
The insipid techno-music jingle evoking the sound of a coffee peculator and the voice of the actor supposed to be a boss looking to fill a job vacancy : “Hiring is the worst part of my job… The searching, sorting through resumes…. Most people don’t have the right experience.”
I gag every time I hear it.
Yeah. I still have fond memories of a Simpson’s episode from the 90s. The Indian ex computer programmer currently running a 7-11 stands behind the counter yawning and tiredly says, “I wish I had some help around here so I could go home and get some sleep.”
Within 1 second, there is a whooshing noise from the air conditioning pipe overhead and out pops a fresh Indian from India.
Later on, I found out they also fall from IT Dept. duct work and have resumes with just the right mix of recent specialty technical skills and experience satisfying the Wishes de Jour of IT managers.
While computers have grown in sophistication and power we are still hampered by ossified database management software. I work in higher ed and we use software to manage our student data that was originally designed for HR purposes many years ago. There are many many changes I can envision that would make the software better, however, because layer after layer of data is embedded in this outdated software we cannot make changes. Unless we ditch it and go with brand-new software we are stuck with these inefficiencies for a long time. To move over to a new system would be difficult as we would need the new system to integrate with the old or else have data chaos during a long transition. From my vantage point this is extremely frustrating. I see all kinds of ways we can improve the software but nobody ever asks how it can be improved because it is assumed that that is what we have to work with. I get a shrug or an excuse, “that portion was written in COBOL, do you know how hard it is to find someone who knows COBOL and is willing to work for University wages?”. Kind of like the QWERTY keyboard. We are stuck with some inefficiencies despite the fact that there is enormous potential for productivity increases
Here is an article on that supports your turnover thesis…
Thanks for the link.
“Most dealerships have a better process for buying office supplies than they do for hiring people,” Robinson said. “It’s already hard enough to be a dealer. Dealers can’t control cheap private-equity dollars consolidating stores. They can’t control interest rates, recalls, regulators. They can’t control ride-sharing or nondealer models. The only thing they have 100 percent control of anymore is who they put on their payroll.”
The grim news: Despite the added focus on hiring practices, the track record of retailers actually has worsened. Five-year trends from the Dealership Workforce Study generally are going in the wrong direction, Kraybill said.
Pirate Equity productivity destruction. Who knew?
Capitalism is too productive to survive. It has gone extinct. Its own worst enemy. Loved Sergei Brin’s comment yesterday that now Davos is the same as Burning Man except they still wear clothes. What other things can we name that became so efficient that they disappeared. poof. Some unlucky species that took specialization to the cliff and then stumbled off. The only thing we should heed in the above analysis is “…a new productivity agenda will require a new social contract.” And possibly we should take it not as advice but as a warning.
“This stems partly from the growth of monopolies and oligopolies in many industries. They encourage the “financialisation” of corporate activity at the expense of productive investment, particularly in R&D.”
To me this is the fibrillating heart of the article and of the analysis. I would leave out the ‘partly’. It may well be that Trump’s already revealed non-globalization moves with respect to corporates functioning overseas will do a great deal to ameliorate this problem – I really don’t know. It remains to be seen whether the counter-inducements to expansion will be sufficient to downsize companies and force them to think more in terms of R&D and customers instead of consumers.
I suffer from belly button lint. That is to say, it is so easy to assume “my world” is the same as every other person’s world in the USA. Peak oil? Peak whatever? Perhaps for those of us who have the time during the day to read NC and comment have a slightly different view than someone working two part-time jobs with two kids one of whom needs medical care and there is no “medical cash” in the wallet. Folks in that world don’t really care about peak anything . . . they just want to get through the day and try and sleep without staring at the ceiling wondering if their part time job is about to become no job. Do these folks buy stuff? As little as possible. Productivity to them is making it through the day so they can go home and ached all night only to do it again tomorrow. But back to me and my belly button lint.
How many Chinese DVD players at $49 at Costco do I need? And there are so many other examples of the same dynamic. Speaking for myself only, I’ve reached Peak Crap. My perception of why productivity has gone down, if it in fact it has, is that I don’t need anything more so I don’t buy it. If I don’t buy it, then it sits somewhere unbought. And the person who bought it hoping I would buy it isn’t all that interested in buy more since he isn’t selling it. So on back to the factory floor.
There are basically two sets of folks in this country well demonstrated by the recent election. There are the folks who just cannot buy any more productivity. There are the folks who have reached Peak Crap and don’t buy any more productivity.
There is a subset of Peak Crap folks who rent storage containers for the crap that no longer fits where they live. But even that has a built in limit. How many storage containers can they buy and keep track of?
Naive? Perhaps. No complex diagrams needed. No learned thesis.
Think of all the boomers who will be downsizing over the next decade even if they are wealthy!
I’m gen-x and I’ve had it with crap. I’m going zen. Not to mention all those households that have gone from 60% debt to income to 160% over the last decade… something tells me demand will be going down no matter what.
The answer to Yves’s sports team question seem to be clear: the roster size of an NBA team is 15 players, and every team had 4 or more changes for the 2016/17 seasons (http://en.hispanosnba.com/transactions).
The Warriors had 6 changes, and the Cavaliers 4.
Productivity is out-dated in this automation world. Then add in all the capital going to financialization, no wonder it is falling.
Michael Roberts https://thenextrecession.wordpress.com/2017/01/23/beware-the-zombies/:
“After a slump capital will only start to invest to raise the productivity of labour if profitability is rising and at a sufficient level.
Indeed, slumps in production should provide the basis for a recovery in profitability and a reduction in the debt burden (credit) built up to the point of the crisis. But right now there are thousands of heavily indebted small and medium enterprises (SMEs) which are barely keeping their heads above water despite low interest rates. They are keeping profitability too low and debt too high. They are clogging up the system.
Profitability in the major economies did recover from the trough reached at the depth of the Great Recession in 2009. According to the European Commission’s AMECO database, the net return on capital stock is up between 8-30% since 2009 in the major economies. But even that recovery has not meant that profitability has returned to its previous peak (2005-7) before the great crash, varying from flat to down near 14%. And in the UK and the US profitability is now falling, according to AMECO.
The most extreme strategists of capital recognise the ‘proper’ solution. Back at the beginning of the Great Depression of the 1930s, the then US Treasury Secretary, Andrew Mellon, warned against keeping ‘dead’ capital going ‘zombie like’ as a ‘moral hazard’. “Liquidate labour, liquidate stocks, liquidate farmers, liquidate real estate … it will purge the rottenness out of the system. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less enterprising people”.
The ‘solution’ for capital of ‘creative destruction’ in a slump or depression has not altered. “The fundamental tenet of capitalism, which holds that some bad companies need to fail to make way for new and better ones, is being rewritten,” says Alan Bloom, global head of ‘restructuring’ at Ernst & Young management consultants. “Many European companies are just declining slowly and have an urgent need for new management, a revised capital structure or at worst to be allowed to fail,” he adds.
With corporate debt levels higher than before the global crash and profitability in most economies lower than before and now peaking again, ‘zombie’ companies are going to have to be removed in a new deluge before improved profitability and productivity can be achieved.”
Maybe productivity is overrated. Just think about how much useless shit is productively produced. So much so that we are bombarded nonstop with advertising and marketing propaganda in an attempt to get us to buy more of what we already have too much of. And yet throughout the world, many starve and are not able to acquire this excess production, much of which would truly increase their wellbeing. Productivity is overrated. Distribution of what is produced to all who would benefit from it is more important.
My favorite theory is that programming for businesses and jobs are done overseas by people who have no concept of what the business does or how it is done. This lack of understanding of how businesses is done and why it is successful extends to executives that have never worked close to the actual day to day business interactions and who only know how to cut cost.
They do not trust employees and the built in physical and psychological limitations impede productivity. Employees only go through the motions as that is how their job is set up.
An example of this is in the beginning when the Post Office went to computer assistance to the clerks the printed receipts did not put the check number on the receipt. The clerk had to hand write it when asked. The way the clerk worked changed in other ways also and the line slowed down from the automation.
This slow down is also found with the computer medical records used by doctors and nurses. The system can slow them down tremendously and they react by cutting out the personal interactions and more. Management controls the workers and work is slowed down.
When management does not trust employees and then employees do not trust management and this is picked up by customers. When trust is lacking everything sloooowssss down.
This does not even go into the hiding of income by multinational companies and non-reported cash income by individuals.
Lack of trust and criminal activity hurts those directly involved in directing it, the employees under them in the companies and the customers. The bigger affects continue on to society and the loss commitment to government.
Everything has been sacrificed so that the rich can get richer. That’s what this is about. We are not an economy based on productivity, but a society that transfers wealth to the very rich.
Consider what most Western companies do with money (which they have record amounts of these days). Do they:
1. Invest in capital assets, such as better machinery, new facilities, and increase their R&D?
2. Invest in employee training?
3. Pay their employees in line with productivity and treat them well, as to improve employee retention, along with corporate institutional memory?
Most of the money is hoarded and what is not is used for stock buybacks. A good chunk of money is kept in offshore tax havens, no doubt in an unethical strategy to avoid taxes.
I blame the rich. They have a mentality about stealing the wealth of society for themselves. They have hired CEOs that in turn have a short term mentality. Quarterly profits matter. I once read a survey that said that if something boosted short-term profits but hurt long-term profits, 83% of CEOs would go ahead and pursue that action.
Likewise, the bean counter MBA/Management Consultant culture is harmful. The idea that someone can read an Excel spreadsheet and come up with magical ways to boost profits is crazy. If they do it, it will come at the expense of long-term profits. Often the qualitative matters are not considered. An example being the damage to employee moral of low pay and how that could affect productivity. Another may be institutional memory. Yet another may be the risks of someone reverse engineering your product if you outsource.
In other cases, it is very patronizing and frankly, dangerously ignorant for external management consultants with no industry experience to be telling people how to run their companies. Often following their suggestions would lead to a disaster.
There seems to be this cult of personality around business people, despite their complete failure to deliver. No doubt it is a very self-serving cult of personality from the rich. The reason for this slow productivity growth is that the rich have all the gains. They don’t care about the rest of society.