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The Importance of Productivity

Australia is currently in a rather parlous position. Our economy is in trouble with rising debt and projected deficits extending out to the far horizon. Growth in the economy has stalled and consequently we are faced with high levels of unemployment. The intergenerational report depicts an aging workforce and anticipates further budget difficulties as the proportion of our population in work decreases but those reliant on old age pensions increases along with the health costs of an aging population.

Many Australians are in denial about our economic dilemma. They merely point to the fact that in comparison with many other economies we are not faring too badly. But in comparison with the state of the Australian economy in recent decades we are doing poorly. More worryingly, unless we take action to improve the basics of our economy we are in great danger of further serious decline.

Saul Eslake points out that Australia’s declining productivity in the last decade or so has been masked by vastly improving terms of trade, particularly with respect to iron ore and coal. But in the last twelve months or so a marked reversal in our terms of trade has exposed our diminishing performance with respect to productivity improvement. Our productivity growth has fallen by 50% in the last decade or so. This has resulted in the stagnation of real wage increases in recent years. It has also underpinned our recent budget deficits and made it much more difficult to return to budget surpluses.

Most economists agree that there is a necessity to curtail government spending. This seems to have become almost an impossibility with voters reacting to any suggestion of the reduction of welfare payments that many have now come to accept as entitlements. Politicians seem now to have lost the will to prosecute genuine reform. They seem to lack the ability to take difficult messages to the electorate and resort largely to populist measures that, while minimising electoral hurt, provide no long term solutions to our budget dilemma.

When we look back over the preceding thirty years of sustained economic growth, it is easy to see that it was our growth in productivity that seeded our improvement in living standards.

The micro-economic and industrial reforms of the late eighties and the nineties resulted in Australia improving its economy in virtually every measure by international standards. Productivity growth is a virtually painless way of improving our economic circumstances since the welfare of most Australians is enhanced. Technological advances eventually lead to structural changes in the economy but the extra wealth accumulated eases the pain of transition.

Unfortunately, many politicians and most of the union movement can only envision a productive Australian economy with high employment occurring by taking us back to the nineteen sixties. Now that we are exposed to the world economy, we need to realise that our role as a manufacturer of physical products is limited. No doubt there will be niche markets where our skills and intellectual property will give us an edge and therefore remain viable for us. But in reality we need to come to understand that basic manufacturing activities are the province of developing countries and efforts to bolster our manufacturing capability in competition with them can only lead to a reduced standard of living. Our long and costly dalliance with automobile production should serve as an example of this folly.

Instead of fruitlessly pursuing the past, we need now to engage with the future – a future where our competitiveness is going to rely on utilising emerging technologies, which will create different products and services, and lead to jobs that look nothing like their historical predecessors. Freeing up our labour market, improving work practices and ensuring our training and education regimes support the emerging new economy is crucial to our success.

 

But this is also a future which will be fashioned by our research and innovation.

 

Now this is not likely to be achieved incrementally. To embrace the emerging opportunities will require some fundamental changes.

 

In a recent speech to the National Press Club, (which I circulated with a previous blog essay) Catherine Livingstone, President of the Business Council Australia, pointed out:

 

“Innovation requires the mobilisation of an entire ecosystem:

 

  • the building of knowledge infrastructure through both research and business
  • a skilled work force
  • creative workplaces
  • business models built around the customer and competition
  • engagement in global supply chains
  • a culture of experimentation and entrepreneurship
  • contestability of government services, and government acting as a demanding customer in its procurement activities.

 

It is time for government, the union movement and business to come to a meeting of the minds as to what improving productivity actually requires.

 

Use the word, and it is incumbent on people to engage in the complexity and the detail of what it entails.”

 

Productivity improvement is a challenge for both business and unions.

In my experience, unions, above anything else, are motivated to expand their membership. This, in itself, is an impediment to labour productivity. Just as organisations are trying to ensure that their labour costs are minimised, unions are trying to maximise the numbers of workers in any enterprise to augment their membership.

Recent events in the Royal Commission into Unions indicate the lengths that unions will go to to inflate their membership without regard for the benefits to their members. So in general terms I think it is fair to say that unions are inimical to labour productivity. Consequently we have this perverse situation where unions try to maximise their membership in the short term which results in burgeoning labour costs which often results in the demise of enterprises in competitive markets causing inevitable job losses which consequently reduces union membership! That this is not such a great business model is testified by the reducing union membership in industry. The only area where union membership is being maintained is in Government enterprises which are not subject to competitive pressures and where Labor Governments collude with unions to maintain membership. (The re-election of Labor in Queensland provides a great example. The Labor Government immediately put in place measures to coerce public servants to join unions and gave unions open slather to enter workplaces to harass employees to join unions.)

But outside the Government sector more and more employees are resiling from union membership. Much of the blue-collar workforce that was once the traditional base of union membership now aspires to run their own businesses and find unions an impediment in that process..

So it is not difficult for me to conclude that labour productivity will be resisted by the union movement.

Mind you, management doesn’t have a great record in the creation and support of productive workplaces either.

As I have written in other essays, the main drivers of labour productivity seem to be:

  • Smart exploitation of technology;
  • Good work design that can remove the shackles of outmoded work practices;
  • Competent employees who are given appropriate skills;
  • Employees who are motivated to want to do the work.

Management in very few workplaces address all these issues.

My experience firstly as a manager and latterly as a management consultant would suggest to me that management’s greatest failure is in not addressing the motivation issue.

Whilst then I would advocate that Australia should be striving to lift productivity as a way of rectifying our budget dilemma and lifting our standard of living I am not particularly optimistic that we can put in place the enablers of such productivity improvement.

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