Why is productivity in the news a lot recently?
Productivity often comes up when people discuss how well the British economy is doing. Commentators usually link this with the debate about Brexit: the worse we are doing, the more they blame our imminent departure from the EU. On the other hand, the better we are doing the more people say we are going to benefit from leaving. I do not intend to enter that argument in this blog post. People use various statistical measures to show how we are doing. These include growth, of which I have written recently, and unemployment. The debate about unemployment turns on whether you think an increase in part-time, low-paid or zero-hours jobs is a sign of success. (For whom?)
What about productivity?
One statistic which many people look at to support their arguments is productivity. Almost everyone agrees we want this to increase, but unfortunately most of the evidence suggests we are lagging behind other comparable countries in this respect. Many people, rightly, have been discussing why that is, but I want to ask a different question: is productivity a meaningful measure of our economic performance? But another question comes first.
What is productivity?
Productivity is the measure of output per person per year (or per day or hour if you like). It seems obvious that you want to produce more for the same inputs or to produce the same amount with reduced inputs, right?
What’s wrong with using it as a measure of performance?
It sounds simple. That’s the trouble. Real life is not so simple and is getting less simple every day. It was probably simpler when most economic activity involved producing physical products. This could be cars, fridges, tins of beans, eggs or even computers. Increases came from improved working methods. In Britain, we once had a lot of inefficiencies built into our production processes, partly due to the reluctance of workers, and especially the trades unions, to agree to change anything. It was also partly due to management’s failure to review and innovate. Therefore, we made big strides forwards when attitudes changed. That was years, possibly decades, ago. There is less scope for such big, simple improvements now.
How can productivity be improved?
It usually comes from mechanisation, meaning the use of more efficient machinery or of better IT. Of course, you can also achieve it, at least in the short run, by making people work harder, through either incentives or penalties. That approach often yields poorer results as time goes by. It is also most effective when people are working at fairly simple, repetitive, easily-measured-tasks. Apart from questions of exploitation and job-satisfaction, that approach has severe limitations. Nowadays we need people to work not just harder or faster, but better. Think how you would measure the productivity of a computer programmer, a carer, a fitness instructor. Even in agriculture, we now want a more sophisticated attitude. It is not just about maximising food production. What about quality? Animal welfare? The environment?
Don’t businessmen (and women) understand productivity?
I think they understand it better than politicians and journalists. They want to maximise profits. That means increasing output only if there is a demand for more of the product, otherwise you get overproduction. Money spent on marketing does not improve productivity, but it might improve profits.
Doesn’t improved productivity lead to more unemployment?
Some people fear that improved production techniques will lead to job losses, unless there is enough demand to sustain greater output. In any one business that could be true, and it could also be true in any one sector. In the economy as a whole , the level of unemployment depends of the total amount of economic activity, which is driven by government policy and international factors, not by technology. (Am I a keynesian? You bet!)
Should we stp measuring productivity?
Not necessarily. It might highlight areas of the economy that need attention. However, more sophisticated measures are needed and we need to ask what we are trying to measure. You might like to read, or re-read, my article on the Three E’s of Management.
Or you might like my book How to Avoid Being Misled by Statistics.