6 Aug 2012

Can We Be Any More Productive?

By Ian McAuley
How are we faring, productivity-wise? Not badly at all - but debates about it are a minefield of misinterpretation and dud information, writes Ian McAuley

"Productivity isn't everything, but in the long run it is almost everything", said Paul Krugman,  an economist generally seen as being on the "progressive" side of politics.

Over last week two reports re-ignited the productivity debate. On Wednesday the Australian Human Resources Institute (AHRI) released a survey showing, with great claims to authority (and completely at odds with assessments by the OECD and the IMF) that Australia's economic performance was among the world's worst. Then on Thursday the Government released its commissioned report (pdf) evaluating the Fair Work legislation, which found, contrary to partisan claims, that Labor's legislation, had not been responsible for any loss in productivity.

Both reports have elicited partisan comment. On one side it's about the union-dominated Labor Government strangling the economy, the way an Abbott government would (or more confidently "will") cure all our economic ills and so on. On the other side is a spirited defence of the Fair Work Act and the spectre of a return to the dreaded WorkChoices legislation. Both sides, however, seem to be locked into a badly dated model of economic relationships.

The AHRI report is a work of ingenious creativity. In relation to Australia, Peter Wilson of the AHRI states, "Economic performance is ranked at 34 [out of 51 countries surveyed], and highlights Australia's stuttering productivity record over the last ten years relative to our global competitors." By some extraordinary analytical process (which is not revealed), the report finds that our economic performance ranks well below that of Venezuela, Italy, Nigeria, Ireland, Mexico and Portugal. As an illustration of its wackiness it reveals that the countries with the most unequal distribution of income are Japan and the Nordic countries, while Chile has the greatest equality. (This stems from an error in understanding the Gini Coefficient, a standard economic measure of inequality.)

Those bizarre findings and opaque methodology didn't bother The Australian, which ran a headline: "Productivity gap holding back growth as survey ranks Australia second last", quoting yet another weird figure from the report showing that only Botswana has poorer productivity than Australia. (The top performers according to the report are Italy and Argentina!) A little examination of the report shows that it is referring to growth in what is known as "total factor productivity", a measure based on somewhat arbitrary weights, which tends to be low in developed countries with capital-intensive industries, and, being based on growth, favours those countries coming off a low base. The AHRI claims that it engaged the Economist Intelligence Unit to undertake its research, but those who have access to the EIU website won't find any reference to it there. 

The evaluation of the Fair Work legislation is more rigorous and orthodox in its methodology. It finds that the Fair Work Act has not been a drag on productivity; in fact, productivity as measured by GDP per hour worked (the most common measure) fell during the WorkChoices period and has subsequently picked up sharply. The graph below, showing movements in Australia's labour productivity since 1978, confirms this finding.

 

A partisan rendition of this data, perhaps written by a journalist with a mirror-image bias to that shown by The Australian, might read: "Australia's productivity slid under the Fraser government, but was rescued by the Hawke-Keating Labor government, before going into a longer slide during the years of the Howard government. The Rudd-Gillard Government, however, has managed a dramatic turnaround, and this must, in no small measure, be due to the passage of the Fair Work Act."

This would be no less reasonable than The Australian's uncritical acceptance of Tony Abbott's response to the report when he said "There's a flexibility problem, there's a militancy problem; above all else there is a productivity problem".  In fact labour turnover (a measure of flexibility) has remained unchanged over the last 10 years, industrial disputes have continued their downward trend, and productivity is rising steeply.

It is hardly surprising that the Government's Review found that the Fair Work Act had little, if any, influence on productivity. Changes in productivity have many sources and there can be some counter-intuitive figures generated. For example, an economy slipping into recession will generally show increasing labour productivity, because the least productive workers are usually the first to lose their jobs. The recent productivity trough and upsurge are a result of a lag between investment and production, mainly in the mining sector. Industrial relations policy has at most a minor explanatory role. The quality of management is far more important.

A 2011 survey (pdf) by Ernst & Young found that 54 per cent of workplace respondents identified "people management" as the biggest factor influencing productivity. Some 40 per cent of respondents believed that their organisations did not have the right technology or training on how to use it, and 20 per cent said their organisations were too bureaucratised. Similarly, a report (pdf) released later in 2011 covering the service sector and published by the Society for Knowledge Economics found that the most important factors supporting productivity had to do with management of human capital.

Contrary to the notion that productivity stems from hard-driving management, it found that high-performance organisations were distinguished from low-performance organisations by high scores on procedural and distributive fairness, job satisfaction and well-being. In short, a set of workplace relationships characterised by mutual respect.

That should hardly surprise anyone who has paid attention to 80 years of studies in management. Yet culturally, many of our assumptions and practices are stuck in a nineteenth century model of class struggle, which involves a combative relationship between "labour" and "capital", or "workers" and "managers".

Trade unions, "employer" organisations, political parties and managers of some of our old established companies are entrenched in this way of thinking. To one side "flexibility" is about the managerial prerogative to hire and fire and to determine who works when. Some may even look nostalgically to the days when waterside workers would have to tune into the radio at 5am each morning to hear whether their gang had work that day. That thinking is a relic of an era when managers thought of labour as a fungible commodity, a source of brute force which can be turned on or off as one can do with electricity or water.

For the other side the workplace is the scene of an ongoing battle to protect hard-won rights, and where only dogged solidarity can match the malign power of the bosses. Each side acts so as to reinforce the other side's combative behaviour.

Those who uncritically accept such a Marxist view of economic relationships (and there are many people on the "right" who hold such a view) do not see any alternative. Yet if they look around, they will see different models in successful small and large business where people don't think of themselves as "workers" and "managers", but as people who come together to create and share wealth, for their investors, customers, communities and, of course for one another.

Our industrial relations model has passed its use-by date, and unless they embrace a fundamentally different view of economic relationships, both unions and "employer" organisations, and even our two big political parties, will consign themselves to a shared graveyard of irrelevance.

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calyptorhynchus
Posted Monday, August 6, 2012 - 19:26

Before we talk about productivity we have to decide whether we need the goods or services in the first place. If we are being productive making a lot of old junk, especially junk that is environmentally irresponsible, we're not being productive.

This user is a New Matilda supporter. nulliusinverba
Posted Tuesday, August 7, 2012 - 09:50

Ian - great article. Except the end.

'many of our assumptions and practices are stuck in a nineteenth century model of class struggle'; 'Trade unions, "employer" organisations, political parties and managers of some of our old established companies are entrenched in this way of thinking'.

This strikes me as a caricature in the first place, and based on some flawed assumptions. The 21st century is different to the 19th. Asymmetric power relations still exist (tell me they don't?). These asymmetries still cut along familiarly drawn lines, even if this picture is a lot more complicated than it was in the 19th century. Obviously, interests don't overlap in the simple way you seem to suggest (that we're all just "growing the pie" together in some kind of cooperative exercise - e.g. see real wage growht in the US since the 1970s). So long as that happens, there will always be people acting in their own interest, which happens to lie somewhere along the lines drawn by power asymmetries - what used to be called class warfare.

To suppose that we could just all "be reasonable" and cooperate with each other is very nice, but I think a fantasy, and one that academics seem prone to. "If only people could see reason, see the facts!" But social psychologists have shown that reason and facts often harden resistence and paradoxically make true beilievers firmer in their beliefs.

But, I certainly share your apparent commitment to reaching as many as possible in the middle band who can be swayed by reason and facts. However, so long as there will remain people like the comically irrational business owner who sits 5m from me every day (when he's not getting drunk or on the golf course), it would not seem possible to base policy on the assumption that people are rational and going to act in the reasonable way you suggest? (Though certainly to be encouraged). Or perhaps you have some empirical data to show that these nice workplaces you mention make up the lion's share of workplaces (utterly at odds with my expeirence in 5 corporations/small businesses)?

Furthermore, it would seem nihilistic for those with relatively no power to choose to see things in nice rosy colours when they could be balancing the power equation to take for themselves what they would otherwise be denied or given only by suffrance of who gives it to them and who, if they "misbehave", can take it away just as quickly?

Criticism meant in the most honest and friendly spirit. And thanks for the article, I always enjoy reading your work.

jackal01
Posted Tuesday, August 7, 2012 - 19:07

YES, Ian McAuley another good piece.

You summoned it up rather well add to this
The Fair Work Act Works
By Manoj Dias-Abey and New M is moving along nicely.

martyns
Posted Wednesday, August 8, 2012 - 10:58

As jackal01 says, another good piece; I agree with the other's who've commented. Having worked from age 16 to 65 in merchant ships, on the wharves and in shipping offices I've seen a wide range of work environments and have been 'on both sides of the managerial/employee fence' and also worked with several different nationalities. From my experience Australians work as hard and as efficiently as anyone else and better than many, but don't like being patronised or shortchanged. Australians aren't servile. Some union officials and managers that I've encountered in labour disputes seem like two sides of the same coin. In fact I know of some who are quite friendly when away from 'the battlefield'. They have a lot in common. What Ian McAuley has done is to show, accurately, the stupidity and divisiveness that we can expect from a future Abbott government. Shudder, shudder.

martyns
Posted Wednesday, August 8, 2012 - 10:58

As jackal01 says, another good piece; I agree with the other's who've commented. Having worked from age 16 to 65 in merchant ships, on the wharves and in shipping offices I've seen a wide range of work environments and have been 'on both sides of the managerial/employee fence' and also worked with several different nationalities. From my experience Australians work as hard and as efficiently as anyone else and better than many, but don't like being patronised or shortchanged. Australians aren't servile. Some union officials and managers that I've encountered in labour disputes seem like two sides of the same coin. In fact I know of some who are quite friendly when away from 'the battlefield'. They have a lot in common. What Ian McAuley has done is to show, accurately, the stupidity and divisiveness that we can expect from a future Abbott government. Shudder, shudder.

imcauley
Posted Thursday, August 9, 2012 - 08:37

Thanks for the comments.

To Nullisinverba, I'm not surprised to find a suggestion that my prognosis is naively optimistic, and I respect that viewpoint. I'm floating a view that goes against a great deal of evidence, including my own, having worked in small and large businesses, in the public and private sectors.

The basis for my optimism is fourfold. First, for the last 200 years, the very concept of "labour" has been changing from one of brute muscle force to one of embodied intellectual capital -- the old classifications of "labour" and "capital" have lost relevance. Second, as we see in any successful economy such as our own, skilled labour has far more power than ever before; only a reversion to a dumbing-down policy, as Howard advocated, could change that. Third, the companies operating in a cooperative mode are performing better than those operating in a combative mode; like all evolutionary processes, however, that takes time, and dinosaurs in their death throes can still do a lot of damage. Fourth, there is a good model of cooperative capitalism in Germany, particularly in its Mittelstand companies.

That's all long term, and in the meantime I still see a lot of life in the old combative model, particularly among our present crop of politicians. Between the two big parties there is only a handful of people who understand long term economic trends, and they are not influential in their parties.

This user is a New Matilda supporter. nulliusinverba
Posted Thursday, August 9, 2012 - 10:46

Thanks for writing back, Ian. I think I will greatly enjoy thinking about and reading further into the points you've raised, even though I suspect I will remain sceptical of the prospects. The kind of cultural transformation that would seem necessary would be a surprise to see, but something that sounds worth supporting, especially as compared to the situation that obtains presently.

Cheers,

Tim.