Posts Tagged ‘productivity’

New publication: let’s look at the workplace

Friday, December 17th, 2010


I’m pleased to announce another online publication from Policy Progress. This one is written by Owen Harvey and it’s all original material, looking at the issue of workplace productivity, why it’s important and why we never get to grips with it.

From my foreword:

We all know that New Zealand could do better and be more effective in its economic performance. But when we discuss solutions, too often we gravitate to ‘big-picture’ macroeconomic ‘fixes’, which may (savings rates) or may not (tax cuts) have anything to do with the problem at hand.

Owen Harvey doesn’t. His has been a consistent voice, urging to us to look at and think carefully about what happens within the workplace – and what we can do to improve that.

Owen brings together the best and most progressive work in the ‘management’ literature with an appreciation of public policy settings and the contribution they can make.

This short pamphlet provides a useful introduction to his ideas and their implications, which extend to achieving a more environmentally sustainable way of working.

Owen’s discussion of that last point links in nicely to some of the questioning of the ‘growth agenda’ from the likes of Tim Jackson, Wilkinson and Pickett, and Stiglitz and Sen, that I’ve been writing about recently.

You can download a copy here.

And if you’re interested in reading more of Owen’s work, I’d recommend Being More Like Ourselves: Smart New Zealand Enterprises (with Peter Harris and Andrew Huddart), Lean Thinking and Productivity and a conference presentation, Productivity: making skills count.

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A closer look at Communications Services

Tuesday, July 20th, 2010

In last week’s column I identified that Communication Services was the stand-out performer amongst New Zealand industries in terms of productivity:

  • It had significantly higher productivity growth than any other industry over the period 1978-2008, both in terms of labour productivity and in terms of multi-factor productivity;
  • New Zealand’s productivity growth in Communication Services was far higher than Australia’s over 1986-2008 (the period for which comparable data is available); and
  • As at 2002, our labour productivity level in Communications Services was significantly above than of the United Kingdom.

The first two of these findings comes from a recent Statistics New Zealand report; the third from a 2007 working paper produced for the New Zealand Treasury in 2007 by Geoff Mason and Matthew Osborne of the UK National Institute of Economic and Social Research.

But what activities does Communication Services industry cover, what has driven its phenomenal productivity growth — and are there lessons for the economy as a whole?

Going back to that Statistics New Zealand report (Chapter 15), we learn:

The industry comprises firms providing postal, courier, and telecommunication services.  The last includes wired and mobile communication services, and Internet services, while postal and courier services include standard pick up, transport and delivery services, package and parcel delivery, and express door-to-door courier services.

The following graph summarises how output growth in  the industry has varied from one sub-period to another and what has driven it in each period.

Output growth was strongest over 1985-2000 and peaked in the late 1990s. It is also noteworthy that the main driver of growth has shifted from increased capital input (investment in equipment) in the early years to multi-factor productivity (which implies the industry working smarter and more effectively) in more recent years.

The report also describes how the industry has changed over the period studied:

With technological development, the industry has become much more capital intensive, producing complex outputs requiring high levels of capital infrastructure.  Labour input has declined due to the automation of many activities.  With many new developments over time, such as mobile telephone services, wired and wireless Internet services, and other satellite communication technologies, the communication services industry has changed substantially.

That’s all very well, and does begin to give us an idea of why an industry in the midst of so much change might have increased its productivity more rapidly than other industries in New Zealand.

But what about the comparison with Australia and the United Kingdom? Unfortunately, this chapter of the report doesn’t look at international comparisons, so we are forced to speculate.

These positive results don’t tally easily with all the reports we see showing how much more costly telecommunications services are in New Zealand than elsewhere. Of course, it’s possible that the strong productivity increases compared to Australia represent ‘catch-up’ — i.e. that we were even less efficient compared to other countries in 1978.

But that doesn’t explain the Mason and Osborne result that New Zealand’s labour productivity in Communications Services is 15% superior to that of the UK.

A closer look at that study however provides some valuable additional information about this. Firstly, New Zealand has overtaken the UK only quite recently, in 2001 (Appendix Table A1).

Secondly, the difference is entirely due to the much higher capital-intensity of the New Zealand Communication Services industry.

The average physical capital per hour worked was more than twice as much (229%) in New Zealand as it was in the UK (Table 7). This is very unusual since in most industries New Zealand is much less capital intensive. Moreover, the report suggests that New Zealand’s Communication Services capital intensity may be on a par with the US and France, which generally have much higher capital intensity than the UK (p. 17).

By contrast, the multi-factor productivity of the New Zealand Communication Services industry is quite a bit lower, only about three-quarters (74%) of what it is in the UK. That doesn’t mean New Zealand’s Communication Services doesn’t have high multi-factor productivity by New Zealand standards, but it doesn’t compare to that in the UK (where multi-factor productivity levels are generally higher than our’s).

So it appears that when we say that New Zealand’s Communication Services industry has very high labour productivity, what this primarily means is that the industry has a particularly high ratio of plant and equipment to workers.

We can see the flipside of this by looking at labour input, as measured in Table 1.09 in the Excel spreadsheets that accompany the Statistics New Zealand report. The following graph depicts the Communication Services column of this table.

As you can see, employment in the sector (measured by hours worked) dropped precipitously after 1987, so that by 1996 it was down to 60% of its 1978 level. (Employment throughout the measured sector overall had dropped during this period but only to about 98% of its 1978 level.)

It is likely that this industry had become less labour-intensive in other countries, too. Yet Mason and Osborne report that in New Zealand in 2002 Communications Services accounted for 6.0% of market sector output but only 2.0% of the hours worked, while the UK employment share was bigger at 3.1% even though its output share was smaller (4.1%) (Table 5).

In other words, our industry seems to have been a notably smaller employer for its size within the economy than its UK counterpart.

To sum up then, the Communication Services industry doesn’t offer any particularly useful productivity lessons for the rest of the economy, unless we consider that labour-shedding is the path to prosperity.

This analysis also provides a useful reminder than impressive-seeming figures aren’t always what they seem, especially when it comes to productivity statistics.

Links

Last week’s column, Communication leads the way — New Zealand’s productivity performers.

Statistics New Zealand’s Industry Productivity Statistics 1978–2008 page.

An earlier column covering the Mason and Osborne study.

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Communication leads the way — New Zealand’s productivity performers

Tuesday, July 13th, 2010

This one is Keith Ng’s fault.

Today’s post might quite likely have been another in the Theoretical Foundations series. But then in the middle of last week I got the summons from Keith: he wanted to talk about the new productivity report that Statistics New Zealand had just released. Well, Keith’s a famous blogger at the prestigious Public Address site and also a columnist for Unlimited magazine, so I figured I better comply.

We had a good chat — half an hour or so of data-geekery — and then I headed off and Keith went back to writing up his thoughts on the report (and related issues). You can find out what he came up with when the next issue of Unlimited goes onsale (and online).

Meanwhile, I had productivity thoughts swirling around in my mind. This new publication Industry Productivity Statistics 1978–2008 really does add a lot to our knowledge, particularly when it comes to productivity trends in individual industries. And it includes a detailed industry-level comparison with Australia.

Given that I had done posts before both on industry-level productivity (compared with the UK) and on comparisons with Australia, I couldn’t resist having a further read of the report and sharing some of its findings here.

Firstly, here’s a graph showing the different rates of productivity growth in different industries over the the last thirty years. (The report only covers what’s called ‘the measured sector’ – it leaves out difficult-to-assess industries such as government administration and defence, education and health, and property).

When looking at this graph it’s useful to understand that there are two things that drive labour productivity (a.k.a the amount produced per person).

The first is called ‘capital deepening’, which is basically the amount of equipment that each worker has. This reflects the fact that, for instance, you can shift a lot more dirt with a earth mover than with a shovel. Owen has made the argument in comments previously that an inadequate capital stock (and unwillingness to invest in it) is a big part of New Zealand’s economic problem.

The second thing is multifactor productivity, and that’s the really good stuff. That’s when you can get more production out of the same amount of labour and the same amount of capital. That implies (and it’s always worth remembering that with productivity there’s plenty of room for misinterpretation) that we’re working smarter and more effectively.

So this graph looks at labour productivity growth on one axis against multifactor productivity on the other. (You can click on it to see a full-screen version.)

The first thing that stands out is that ‘Communications Services’ outperforms every other industry by a wide margin on both axes.

The second thing to note is how few industry perform strongly on multifactor productivity. The only other ones are ‘Agriculture’ and ‘Transport & Storage’. ‘Electricity, gas & water supply’ by contrast stands out for a high overall labour productivity driven largely by capital deepening.

Here’s a second graph, from the section of the report comparing New Zealand and Australia. (The timeseries for this comparison only goes back to 1986.)

The graph shows New Zealand with higher overall productivity growth than Australia, but a couple of caveats need to be made about that. Firstly, the figures are for the ‘measured sector’ only. Secondly, while New Zealand is ahead across the full period, this reflects much higher growth over 1986-1996 — Australia’s productivity growth has been ahead of New Zealand’s over the more recent part of the period (1996-2008).

Aside from that, however, the thing to notice is the differences at industry level. As the Statistics NZ report says, variation across industries is higher in New Zealand than in Australia. And the industries where New Zealand can clearly be seen to be ahead are: ’Transport & Storage’, ‘Electricity, gas & water supply’, ‘Agriculture, forestry and fishing’ and in particular ‘Communications Services’.

Now, let’s have a look back at my earlier post looking at Mason and Osborne’s analysis of industry-level productivity in New Zealand and UK, in terms of a snapshot of productivity levels rather than growth over time.

This showed five New Zealand market sectors that stood out as having a productivity lead over the UK: ‘Cultural and recreational services’ (where New Zealand’s productivity was 128% of the UK’s); ‘Communication services’ (115% UK); ‘Accommodation, restaurants and bars’ (113% UK); ‘Finance and insurance’ (112% UK); and ‘Food, beverage and tobacco manufacturing’ (105% UK).

The common denominator between that analysis and this more recent one by Statistics New Zealand is the standout performance of ‘Communication Services’. Two other sector highlighted in the UK comparison actually had declining productivity over time: ‘Cultural and recreational services’ and ‘Accommodation, restaurants and bars’. A third, ‘Food, beverage and tobacco manufacturing’, is invisible within the Manufacturing category for much of the more recent analysis.

So, what is the ‘Communication Services’ sector and why has performed so strongly in terms of productivity? Is this just a historical fluke, or is this an area where New Zealand has an enduring strength? I’ll address these questions in next week’s column.

In the meantime I’d be interested in your thoughts and impressions about the productivity picture that has emerged from these reports.

Links

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Productivity – where we do well and where we do poorly

Thursday, May 27th, 2010

The concerns I’ve stated about New Zealand’s comparative economic performance aren’t unusual. They’re shared by others, often in spades. In a recent edition of Idealog magazine, Vincent Heeringa writes:

In 1909 . . . New Zealand’s GDP per capita was at the head of the pack with the US, Australia and UK. By 2001 . . . we’d been leap-frogged by 16 countries and sat level with Taiwan. At present rates, we’ll be pegged with Kazakhstan in 2025.

Cue the Borat jokes. But how bad is the situation really? As I’ve said previously, I’m keen to get beyond the scary headline statistics, and understand what this all actually means for us in practical terms.

Policy Progress reader Achela has made the point a number of times in comments that our labour productivity — how much we produce per hour of work — is more important than our absolute level of production. So I’ve dug up the following stats from the OECD:

Source: OECD

New Zealand’s relatively low productivity rate echoes our low per capita GDP — in fact, our ranking (22nd out of 30) is identical.

It’s rather dispiriting but also, as I set out in a previous post, a bit puzzling. Are we really that inefficient at making things? And is that true across the board, or are we being dragged down by a few weak areas? Perhaps our economy is just focussed on less capital-intensive and therefore less productive industries?

Fortunately, while most papers on productivity tend to focus on national aggregates (and often leap to wild conclusions), a paper that Geoff Mason and Matthew Osborne of the UK National Institute of Economic and Social Research wrote for the New Zealand Treasury a few years back burrows down to sector level and starts to answer those questions.

The paper is entitled Productivity, Capital-Intensity and Labour Quality at Sector Level in New Zealand and the UK. It compares productivity levels in 21 different market sectors of the economy in 2002 and shows that beneath the unfavourable overall picture (NZ’s average labour productivity was only 77% of the UK’s) there is considerable sectoral variation.

Source: based on Mason and Osborne (2007), Table 5

According to Mason and Osborne’s analysis, there are five market sectors that stand out as having a productivity lead over the UK. These are (with their ANZSIC-1996 standard description):

  1. Cultural and recreational services (128% UK): units mainly engaged in providing cultural and recreational facilities and services. Sub-divisions: Motion Picture, Radio and Television Services; Libraries, Museums and the Arts; and Sport and Recreation.
  2. Communication services (115% UK): units mainly engaged in providing postal, courier and telecommunication services. Sub-divisions: Postal and Courier Services; and Telecommunication Services.
  3. Accommodation, restaurants and bars (113% UK): units mainly engaged in providing hospitality services in the form of accommodation, meals and drinks. Sub-divisions: Accommodation; Pubs, Taverns and Bars; Cafes and Restaurants; and Clubs (Hospitality).
  4. Finance and insurance (112% UK): units mainly engaged in the provision of finance, in investing money in predominantly financial assets, in providing services to lenders, borrowers and investors, in providing insurance cover of all types, and in providing services to insurance underwriters and to people or organizations seeking insurance. Sub-divisions: Finance; Insurance; and Services to Finance and Insurance.
  5. Food, beverage and tobacco manufacturing (105% UK): Sub-divisions: Meat and Meat Product Manufacturing; Dairy Product Manufacturing; Fruit and Vegetable Processing; Oil and Fat Manufacturing; Flour Mill and Cereal Food Manufacturing; Bakery Product Manufacturing; Other Food Manufacturing; Beverage and Malt Manufacturing; and Tobacco Product Manufacturing.

In addition, Metal product manufacturing (probably dominated by Comalco) is just ahead of the the UK, with 102%. Between them, these sectors account for 30% of the New Zealand economy.

Also, the figures for the crucial sectors of Agriculture, Forestry and Fishing (which account for 10% of the economy) are considered problematic and may be higher than the 78% estimated.

Plus, there are two sectors — mining and business services — where New Zealand is behind the UK on labour productivity but ahead on multi-factor productivity. The report says, “This suggests that, although New Zealand firms in these two sectors are on average less capital-intensive than their UK counterparts, many of them make more efficient use of existing resources.”

New Zealand economist Brian Easton has cast a careful eye over this paper in Some Notes on New Zealand Economic Growth Research, and adds that, at the other end of the scale:

it would appear that 73 percent of [New Zealand's] productivity deficit can be explained by the weaker performance of the manufacturing sector, 38 percent by the total distribution sector, and 27 percent by the construction sector. (They sum to more than 100 percent because there are some New Zealand sectors which are productivity stronger than their British equivalent.)

Mason and Osborne also address the question of whether New Zealand’s low rate of productivity is because we are focussed in sectors that (both here and the UK) have relatively low rates of productivity compared to other sectors. They calculate that roughly a quarter of the labour productivity gap relates to this.

Easton also notes that “there is a sense that while there are variations in the productivities between sectors, the Brits are better at deploying their resources in sectors where they are highly productive, rather than in sectors where their relative productivity is lower. At the very least this exercise shows sectoral composition matters.”

He contrasts the work undertaken by Mason and Osborne with other reports on this topic:

Too much of New Zealand’s research is about aggregate productivity, and draws policy conclusions based on that indicator with little – if any – attention to the sectoral differences. It seems likely that unless they address these issues, any conclusions drawn from the research must be at best limited and inefficient, if not darned wrong.

I agree. There are possible pointers in Mason and Osborne’s report for where further, sector-specific research could be undertaken. But is also valuable to understand that New Zealand’s labour productivity is not uniformly lower than that of other countries like the UK. Rather, there is a mix of some sectors where we are more productive and others (a larger number) where we are less productive. This suggests that we do not have a single unitary ‘productivity problem’, and therefore there is not likely to be a unitary solution, either.

That will be a useful insight to hang onto as we continue with the Progressive Path to Prosperity work programme.

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Productivity Pitfalls

Thursday, March 18th, 2010




Despite often bitter debates on how to achieve it, there seems to be a fair amount of consensus across the political spectrum that increasing productivity is a desirable objective. But what isn’t always acknowledged is that it can be quite a slippery concept to measure in any meaningful way.

As a wise person once pointed out to me, the productivity statistics we fixate on are just an accounting entity, created by the relationship between the inputs in the economic process – primarily labour and capital formation – and the output (Gross Domestic Product).

Therefore, if you look at a period like the last decade, you can say that (up until recently) there was strong economic growth and moreover it was quite job-rich growth, with quite large rates of increase in employment – even for a high-growth period.

But you can also rearrange those figures and come to the conclusion that growth in labour productivity (GDP per employee) has been worryingly low.

You’re basically saying the same thing, just in a different way.

This also means that if we have a ‘jobless recovery’ from the recession – where GDP growth recovers, but employment growth isn’t very strong, and unemployment remains high, then it’s likely this will also show up as being a period of ‘high productivity growth’. (Berkeley economist Brad DeLong makes a similar point here.)

This might reflect that fact that renewed growth has been concentrated in sectors that are more capital-intensive and less labour-intensive than others. Which in itself doesn’t really tell us that our workplaces are becoming any more productive, just that the sector mix of economy is changing (maybe temporarily).

(If you use total factor productivity, this reduces these sort of problems, but doesn’t completely eliminate them.)

This doesn’t mean that productivity is meaningless or unimportant. But it does remind us that we need to be careful about the lessons we take from figures.

And it suggests that when trying to understand productivity it’s important to look at the microeconomic level and what’s going on in individual workplaces, how that’s changing, and why, as well as studying the aggregate figures.

That’s why understanding workplace productivity and what drives it is an indispensible part of any productivity agenda – and particularly for any progressive productivity agenda.

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