Beware talk of Labour Productivity
Marco economic assessment of labour productivity if often simply calculated by GDP divided by workers to imply a national efficiency. Western labour productivity after WW2 has been increasing however at a slowing rate. On average we can see about 2% annual productivity improvements. Unsurprisingly, this is reminiscent of typical growth in profitability of large established firms…….higher or lower economic growth rates would be extraordinary and usually associated with technical or social change and disruption.
The productivity is often viewed with great attention as it is related to national prosperity and implicitly the value of labour – hence wages. Both these are very interesting to political leaders. However we have seen stagnation of real wages, decrease in labour participation while still seeing improvements in productivity over many years. So the benefits of labour productivity to wages and social outcomes seem to be unrelated.
Discussions about labour productivity improvements is often linked to technology however with the increasing pace of technology development and deployment, the rate of labour improvements is declining. That relationship appears blown. However firms and individuals must use modern technology to compete so how can its contribution to productivity be ignored? The competition means that, where possible and economic, technology will be deployed everywhere (pretty quickly) and the related productivity improvements will be reflected in lower prices rather than wage increases. So technology is required but only helps firms stay in business.
Globalisation, or more specifically outsourcing work or production to low paid countries may in fact been a greater contributor to productivity improvements. The time to develop outsourcing capacity provided competitive advantage for early adopter firms and so supported some productivity improvements until competition forced prices to reduce. As wages in low cost countries rose then the benefits to productivity decreased; similarly wages in the west have declined in real terms to compete. The globalisation experience seems to more accurately reflect the history.
Outsourcing, worsening the balance of trade should have resulted in decline of national currency, thereby making wages and the nation more competitive. However that was offset by increasing national debts with capital inflows propping up currency values.
Investments in education, technology and process improvements are required to improve labour productivity however unless these create specific sources of competitive advantage, competition will claim their value beyond maintaining an ability to compete. National leaders would be best placed to focus on supporting truly competitive advantage to improve productivity – and those will never be with general motherhood statements.
