Real wages have not exceeded productivity gains

In Real wages and productivity Matt Cowgill explains why real wages have not grown faster than labour productivity.

In fact, the notes to Dr Parkinson’s chart say that the real producer wage, ie. the cost to employers of purchasing an hour’s labour, has risen in line with labour productivity.

It's all due to the rise in the terms of trade. Conversely, as the terms of trade fall we might well see a decline in real wages.

Productivity growth vs average income growth

Via Twitter Matt Cowgill has posted this graph of "Productivity growth and the real average incomes of the bottom 90% in Aus & elsewhere":

I think it shows that over the last 40 years the benefits of productivity growth have not gone to the workers.

Don Russell on Canberra, the public service, innovation, etc.

In Reflections on my time in Canberra Dr Don Russell makes some interesting observations about the public service, universities, industry, innovation, the economy and the role of ministers, the Prime Minister and departmental secretaries.

Our productivity is rising despite the rent seekers

In Productivity rising, but few notice Ross Gittins documents the increase in labour productivity over the last year. He also suggests that those who were previously complaining about a productivity crisis were more probably just business rent seekers.

You could call it the mystery of the disappearing productivity crisis. Last week's national accounts for the December quarter confirmed that, if we ever really had an underlying problem with weak productivity improvement, we don't have one now. By now, that's not such a mystery. No, the puzzle is why the people who made so much noise about the supposed productivity crisis show little sign of having noticed its evaporation.

...

Call me cynical, but it makes me suspect all the tears shed over productivity were little more than cover for an exercise in big-business rent-seeking. Shift the rules in my favour and it'll do wonders for the economy.

...

Big business is wedded to the happy notion that productivity improves when governments do things to make business's life easier. If these guys were a bit better versed in economics [as opposed to rent-seeking] they'd know the truth is roughly the opposite: productivity improves when governments either do things, or allow things to happen, that make life tougher for business.

So why had productivity improved? What did the Government do?

What the Gillard government did was do nothing to lower the high dollar - not that there was anything sensible or effective it could have done - and limit the budgetary handouts to only part of manufacturing industry.

The result was a lot of pressure on export-and import-competing industries to raise their efficiency (or, at the very least, cut costs) or go under. As well, a lot of other industries, including retailers and much of the media, have been subject to pressure on sales and profits coming from the digital revolution and structural change.

Gittins quotes Reserve Bank governor Glenn Stevens:

As we go through a period of transition from mining-led growth to stronger growth in the rest of the economy, he said, ''the pressures to adapt business models, contain costs, increase productivity and innovate will remain. But such adjustments are actually positive for longer-run economic performance.''

Gittins concludes his column with a great piece of advice:

Moral: Don't get your economics from overpaid chief executives - or crusading newspapers.

Australia's rising productivity

In Waking up to a productivity promised land Jessica Irvine looks at why Australia's productivity is now increasing and what we can do to ensure future increases (e.g. better infrastructure, breaking up cartels, removing artificial barriers).

The decoupling of wages and labour productivity

In Labour’s shrinking share Matt Cowgill shows that real hourly labour income growth has fallen behind real output per hour growth. That is, over the last decade or so hourly wages have not kept pace with productivity growth. As a result labour share of national income has also fallen

Labour productivity increasing

In Why cutting wages is a fool’s way to boost the economy Malcolm Farr notes that recent declines in productivity are entirely capital driven, employee productivity has actually been increasing.

The history of the issue is this: From 1993-94, labour productivity rose consistently in what Mr Parham called “very, very strong output per hour worked’‘. Meanwhile, capital productivity was flat, meaning machinery, buildings and mines were less efficient.

There has been a big change in the past 10 years. Capital productivity has tanked, said Mr Parham, dropping 20 per cent since 2003-04.

“And it’s capital productivity that has been the drag on Australia’s overall productivity performance. Because you can see multi-factor productivity, which is often the key indicator of efficiency, has done nothing. If anything it has gone backwards,’’ he said.

And what did labour productivity do while capital efficiency tanked? In recent years it has risen 3.3 per cent a year. Over the same period capital productivity has fallen by 3.4 per cent a year.

Manufacturing and productivity improving in Australia

Michael Pascoe, in Manufacturing not dead, just dieting, looks at the latest RBA statistics and notes that there has been a small rise in productivity and in manufacturing jobs:

Here's a surprise: amid all the headlines about the demise of Australian manufacturing at the hands of our strong currency, militant unions, interfering governments, poor productivity and the solar eclipse, employment in the manufacturing sector actually grew in the year to the end of August.

What's more, productivity also has been improving and is now running at a bit above the average of recent years – admittedly faint praise. It still adds up to the standard liturgy chanted by the high priests of business being as dangerously outdated as the Catholic Church's celibacy and men-only rules.

The IT contribution to productive growth

Ross Gittins, in Ready to receive a techs message, argues that the large productivity gains of a decade ago may have mostly been the result of technology improvements rather than microeconomic reforms:

Particularly over the longer term, the primary driver of multi-factor productivity improvement - and the rise in material living standards it brings - is technological advance. That's why it never ceases to surprise me how little interest most economists take in technology and innovation.

Article on Productivity and Industrial Relations

Ian McAuley at New Matilda has written Can We Be Any More Productive? It's an interesting look at labour productivity. He also explores the issue of industrial relations - in particular the need for a cooperative approach rather than the traditional adversarial approach.

More on productivity

There's a post on the Radical Expectations blog titled Productivity and Whether the Sky is Falling. It looks at theories of economic growth and the relationship of labour market regulation and productivity. It concludes with:

As the chart makes clear, productivity in the mining Industry fell 17% this year! And it has been declining for years! This is a disastrous trend, sure to spell doom for our miners. Why aren’t we hearing about the catastrophic collapse of mining? Why aren’t we seeing long lines of lorries carrying bedraggled miners back from Karratha to Sydney?

Because that, in Julia’s words, would be “crap”.

Ross Gittins has written an interesting column, Workers pay the penalty for one-way flexibility, on the call by some for the removal of penalty rates in the name of increased flexibility and productivity. He wonders if the economic gains are worth the social cost:

Why does being able to buy more stuff make up for husbands and wives being able to see less of each other, having less time with the kids, having a lot more trouble getting together with your friends, and having your day off when everyone else is at school or working?

Why is this an attractive future? Why should our elected representatives reorganise our economy in ways that suit business and promote consumption, but do so at the expense of employees' private lives?

This is a classic case of business people, economists and politicians urging on us a mentality that prioritises the economic - the material - over the other dimensions of our lives. Yet again, no one pauses to ask what these ''reforms'' will do to our relationships.

Why is it the politicians who bang on most about the sanctity of The Family are also those most inclined to make family life more difficult?

The Global Mail on productivity

Over at The Global Mail Mike Seccombe has written an interesting article on productivity in An Unproductive Obsession. In it he notes the decline in productivity in Australia and some of the counter-intuitive aspects of it (e.g. declining labour productivity in the mining sector, increasing productivity in the manufacturing sector). He also notes how hard it is to measure productivity.

He concludes his report with:

But the summary message of both, under all the McKinseyite management-speak, was that progress lay not in the "labour market flexibility" as usually defined (i.e., driving pay and working conditions down) but in attracting a well-educated workforce and managing them better. Which might seem a bit obvious, but it is at least an advance on the usual cries of business. Instead of "Work harder, you lot" the new cry is "Work smarter, you lot".

Still, the central problem remains: measures of productivity are imprecise, and the prescriptions for improving it are contradictory, often self-serving, and vague.

In the words of Denniss: "Productivity is an important concept, about which much bullshit is spoken."

And those headline figures, which everyone keeps citing as evidence of a crisis, we ask him, do they tell us anything meaningful at all?

"No."

Better productivity via better education

Ross Gittins has a great blog post Want better productivity? Try better education. To quote from part of it:

The American con man Bernie Cornfeld's sales pitch was, "Do you sincerely want to be rich?" That is, are you prepared to pay a price to be rich? The question for Australia's business people is, do you sincerely want to raise our productivity?

It seems just about all our senior business people have taken to preaching sermons about the need to improve our flagging rate of productivity improvement, but I'm not sure how sincere they are.

Why not? Because the specific changes they say they want sound like a child's wishlist for Santa: industrial relations "reform" to reduce their workers' bargaining power, and tax "reform" to reduce the amount of tax they pay.

If chief executives were more sincere in their thirst for higher productivity - as opposed to things the government could do to make their jobs easier - they might have asked what the empirical research tells us about which changes would do most to enhance our productivity.

Had they done that, they would have found the biggest gains come from adding to human capital - that is, to the education and training of the workforce.

Productivity Explained

Read Greg Jericho's blog explaining productivity: Productivity in a nutshell. It's very well done. Unfortunately it seems to be an issue that's not well understood, especially amongst the media.

Ian Verrender looks at the impact of the high Australian currency on productivity in Let's be prudent as we rush to find who's responsible:

Australia, meanwhile, is being flooded with capital. It is pouring in on an unprecedented scale as resources companies scramble to build ever bigger mines to supply the rapidly emerging global economic powerhouse that is China.

The earnings impact of that investment, and the effect it will have on productivity, has yet to be felt. Right at the moment, however, it is having a seriously negative impact.

That flood of cash has kept our currency at near record levels, which has put the squeeze on manufacturing and other export-oriented industries. Earnings have shrunk and the ability to invest in new technology has waned as a result.

NAB Article: The Productivity Puzzle

The National Australia Bank has written a paper on productivity growth: The Productivity Puzzle. The paper looks at labour productivity and suggests that recent productivity declines might well be due to cyclical fluctuations; activity in the mining and utilities industries (as they build new productive capacity); and declining real labour costs (which may encourage more labour intensive production).

It's worth a read if you have any interest in this area.

Edit 28/9: Alan Kohler addresses the issue, and the NAB paper in Digging into productivity, the Aussie miner's way.

Edit 12/10: Ross Gittins in Look within to pick up productivity discusses the management style in those businesses that are most productive:

Edit 18/10: Glenn Dyer at Crikey discusses a Sydney Morning Herald report on employee productivity in At last, something that makes sense on productivity. The report includes the findings on a survey of employees on drains on productivity and identifies the main culprits as management issues, organisational structure, lack of innovation and outdated technology. Dyer looks at the performance of Goldman Fielder as an example.

The management practices that do best, according to the study, are being highly responsive to changes in customers' and suppliers' circumstances, encouraging high employee participation in decision-making, achieving on-the-job learning through mentoring and job rotation, making effective use of information and technology and attracting and retaining high quality people.

Of course, different managers have different cultures or styles. Some emphasise results, some their people and some coping with change. The study finds all three approaches can make a high-performance workplace. The one style that doesn't work is the ''control'' culture.

Wow. How'd you like to work for such a boss in such an enlightened business? Pity is, such firms accounted for only 15 per cent of the sample.