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A non-crisis

13 May 2015 By Edward Hadas

Productivity growth is slowing down. So say the statistical wizards of the Organisation for Economic Co-operation and Development, which gathers data from rich countries. Many economists and some politicians are deeply worried by the trend, especially in the UK – the Bank of England wished productivity stronger in Wednesday’s inflation report. They shouldn’t be concerned.

The supposed challenge comes from the productivity of labour, which the statisticians define as the ratio of output, measured by real GDP, to the total hours of paid work. The reported numbers do indeed sound depressing. During the first half of the 1990s, the OECD reports that productivity increased at an annual rate of 2 percent or more in Japan, Germany, France, the UK and Italy. In the United States, the rate was 1.3 percent. For the five years between 2009 and 2014, the productivity growth rate of all six of these economies was 1.1 percent or less. In the United States, it fell to 0.9 percent.

However, the declines do not actually indicate that the pace of technological progress is slowing, that capital investments have become less effective or that lifestyles are hardly improving. They basically show that this measure of productivity has moved further from reality.

The simple productivity calculation made sense when most paid labour took place in fields or factories, as it captures many of the effects of replacing human effort with machines. Add a tractor or a better metal press and count how much production increases.

Now, though, productivity rarely increases by making more of the exact same goods. Rather, the gains come through primarily making old products better and developing totally new ones. Such qualitative changes, however, are essentially different from changes in quantity. Changes in qualities cannot be measured.

How much is labour productivity improved when the same number of hours are needed to put together a latest-generation smartphone as were previously required for a bulky old 2G device with terrible reception? There is no right answer to that question. Statisticians make valiant efforts to compare real values, but their judgment of the real value added is almost entirely arbitrary.

The productivity judgments are even more random for services, which now account for about two-thirds of GDP in developed economies. In such important services as education and healthcare, which the World Bank says account for 5 percent and 17 percent respectively of U.S. GDP, it is not even clear what productivity means. People often covet more personalised instruction and care, which generally count as less productive.

Or consider the rise of casual dining at the expense of fast food, a trend which is hurting McDonald’s. Even the most efficient table service requires far more labour than a meal served at the counter, but the decrease in measured productivity is not a sign of a less productive economy by any normal standard. A society’s ability to pay for more restaurant labour is a sign of increased affluence.

As the share of services in the economy increases, the standard productivity measure becomes ever less useful. In the United States, government statistics indicate that this portion has risen by an average of 0.3 percentage points annually since 1997, while traditional indicators of output such as electricity use have stagnated. In other words, developed economies have moved into a post-productivity age.

A look at actual economies, rather than at arbitrary numbers, does not suggest a slowdown in labour productivity. Workforces have more education and technologies keep advancing. A possible slowdown in capital spending, especially by governments, is worrying. However, spurious productivity calculations only confuse the debate on how much investment is right for ageing, already rich economies.

In this era, there is no point in bemoaning statistics which show declining productivity growth in any developed economy. Yet the British central bank has company in its anxiety, for example a 33-page paper from London’s Imperial College Business School on the “UK Productivity Puzzle”.

But there is no puzzle, no conundrum. The reported productivity growth rate has declined because the statistical net gathers an ever-shrinking proportion of the improvements in the economy. It makes sense for central bankers and other economy watchers to look at trends in new orders, employment and nominal GDP, but not at a calculation which offers no insight into either current or longer-term trends.

The bogus productivity worry can lead to good policies, such as increased investments in basic research. However, it can also encourage the elimination of jobs which do not obviously add to GDP. Such cuts automatically increase reported productivity, but they also tend to increase unemployment and underemployment. These are clearly more serious problems in developed economies than unnecessarily inefficient production.

The genuine economic to-do list is long enough. Along with labour market woes, it includes expensive welfare states, financial dysfunction and global poverty. There is no excuse for wasting time and energy on a non-problem.

 

 

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