Keith Rankin Analysis: What’s happened to Labour Productivity?

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Keith Rankin Analysis: What’s happened to Labour Productivity?

Productivity plummets despite high annual growth. Graph copyright 2017, Keith Rankin.

Labour productivity is an important economic concept, that should equate to living standards. It is rising labour productivity that makes it possible to remunerate people with rising incomes.

Productivity, by definition, is economic outputs divided by economic inputs. Thus labour productivity for a country is its GDP (gross domestic product) divided by some measure of labour input. The chart shows productivity change in New Zealand from 1990, using two different measures of labour inputs. It also shows annual economic growth rates, which are simply annual percentage increases in real GDP.

In individual industries, labour productivity growth is a measure of the output (economic value-added) of the industry, divided by the amount of labour employed in that industry. In some industries, productivity growth has been very high, thanks mainly to increased knowledge and connectivity, for the most part expressed through improved technology. Indeed the whole ‘future of work’ debate is predicated on the possible social consequences of forecast rapid rises in labour productivity in the industries that could be most affected by ‘robotics’.

Looking at productivity in a single firm or industry is looking at productivity at the ‘micro’ level. However, what affects society most is productivity at the ‘macro’ level. It is possible that, under prevailing institutional arrangements which prevent productivity gains from being properly disseminated throughout the population, productivity gains in some industries actually cause productivity to decline in other industries.

Looking at the chart, we see that productivity changes generally have been aligned with the business (GDP growth) cycle. Further, the gaps between economic growth and productivity growth can, for the most part, be explained by faster population growth during periods of economic expansion.

When we look at the two different measures of labour productivity, the ‘dark red’ measure includes unemployed labour. (The fulltime-equivalent labour force measure counts each part-time employed and unemployed person as half a labour force participant.) So, at times of rising unemployment – such as the early 1990s – the red measure is typically lower than the blue measure; and at times of falling unemployment the red measure of productivity growth tends to be higher. The ‘light blue’ productivity data for 2009/10 reflects declines in labour inputs rather than growth of output.

What is happening in 2017? There’s a sign of something new happening. Productivity appears to have fallen by two percent in 2016/17, despite a high annual economic growth rate of over three percent. There are two important issues that reflect a substantial disconnection between economic reality and orthodox rhetoric.

The first issue relates to the growth process itself. Sustainable economic growth is largely a consequence of improved public inputs, such as knowledge and infrastructure. Good growth is a consequence of economic improvement, not a cause of it. Yet we treat economic growth – all forms of growth – as the font of ‘wealth creation’. Governments – blue ones and red ones – want increased labour supply (more workers) as well as productivity growth to generate an accelerated ‘expansion of wealth’.

What we see in this chart is a substantial increase of labour supply. While this is partly due to immigration, it is also due to unequipped beneficiaries being increasingly tormented into becoming ‘independent from the state’. The result is that these marginal workers (not the immigrants) are increasingly augmenting the productivity denominator while having minimal impact on measured economic output. The policy of increasing labour force participation rates is undermining the goal of productivity improvement.

The second issue relates to the service sector – in particular the precarious personal service ‘industries’. A few examples: liquor supply, touting, hospitality, domestic service, and the (now legal) prostitution industry. A combination of labour‑shedding in traditional industries (industries which are showing productivity gains) and increased cajoling of poor, underskilled, overstressed and undercapitalised people into the labour force, means that the available work in these personal‑service industries must be increasingly shared among an increasing supply of workers offering these services.

What does it mean to increase productivity in industries like prostitution? In a country like Germany it would mean satisfying the market with fewer workers – ‘professionalising’ the industry – allowing displaced sex workers to move into ‘other activities’. But in New Zealand, where the only alternative employment opportunities may be in the borderline criminal sectors (eg scams, drugs), ‘independent’ undercapitalised labour force participants have few options other than to overpopulate sectors of diminishing productivity such as prostitution. Rising denominators – falling productivity – in personal services in New Zealand is simply the flipside to rising productivity in agriculture, manufacturing and other labour-shedding activities.

In China and India, people wanting employment are migrating from low productivity (especially agriculture) to high productivity industries. New Zealand is starting to see the opposite, a relative and absolute expansion of employment in the inherently low‑productivity personal service activities. In New Zealand, coming off a benefit to become a self‑reliant prostitute is now accounted for as a contribution to one measure of economic success. Beneficiaries becoming prostitutes represents an increase in labour supply.

Payment of a public equity dividend – a Universal Basic Income – would enable the benefits of productivity gains realised in some sectors to be dispersed throughout our communities, and would give those displaced workers – and the young people who would otherwise have taken jobs lost through natural attrition – options other than low productivity ethically dubious personal and touting services.

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