Figures for the economy's productivity performance haven't looked good
for the past decade, causing consternation among economists and business
people. But a careful study by the Productivity Commission has failed
to find any particular problem, nor anything we could do to make the
figures look better.
Productivity is a measure of the efficiency with
which the economy turns inputs of labour and capital into outputs of
goods and services. Thus productivity is measured as output per unit of
input.
The more we can improve productivity the better off we are.
We have in fact being increasing it a little almost every year since
the Industrial Revolution, and this is what has made us so much more
prosperous. So if you believe the goal of economic management should be
to increase our material standard of living (which I don't), nothing is
more important than ever-improving productivity.
The simplest (and
probably least inaccurate) way to measure productivity is to take the
quantity of goods and services produced during a period (real gross
domestic product) and divide it by the number of hours of labour
required to achieve that production.
Doing this each year shows
that our "productivity of labour" improved unusually rapidly in the
second half of the 1990s, but then showed little further improvement
during most of the noughties. Over the past two or three years, however,
it has returned to a reasonably healthy rate of improvement.
But
you can improve the productivity of labour simply by giving workers more
machines to work with. And this tells us nothing about the efficiency
with which the economy's physical capital is being used. So in recent
years it has become fashionable to focus on a more sophisticated measure
called "multi-factor productivity".
This is the growth in real
GDP (output) that can't be explained by any increase in inputs of both
labour and physical capital. So, in principle, multi-factor productivity
represents "technological progress" - the invention of better physical
technology and the discovery of better ways to organise the production
of goods and services. It's technological advance that does most to
raise material living standards.
When you look at our performance
over the past few years you find that, though the productivity of labour
has been improving at a reasonable rate, multi-factor productivity
hasn't improved. It was this that staff at the aptly named Productivity
Commission set out to investigate in a study published last week.
They
found that the flat performance of multi-factor productivity in the
market economy was explained mainly by an actual decline in the
multi-factor performance of manufacturing. So they focused their
investigation on manufacturing.
Estimates by the Bureau of
Statistics show that between 1998-99 and 2003-04 multi-factor
productivity in manufacturing improved at a rate of 1.3 per cent a year.
But between 2003-04 and 2007-08 it fell by 1.4 per cent a year. Since
then (up to 2010-11) it has deteriorated at the slower rate of 0.8 per
cent.
Delving further, the researchers found that two-thirds of
the deterioration between the first two periods could be explained by
just three of manufacturing's eight sub-sectors. From worst to least
worse: petrol and chemicals, food and beverages, and metal products.
Trouble
is, they could find "no overarching systemic reason for the decline".
That is, no problem or problems you could tell the government it needed
to fix.
What they found were several factors that made the figures
look bad but weren't actually bad themselves, plus one factor we all
know about, can't do much about, but have reason to hope will improve
soon: the high dollar.
The metal products industry's poor
performance was explained mainly by a big expansion in alumina refining
capacity which had yet to come on line. Obviously a temporary problem.
The
petroleum and chemicals industry's poor performance was explained to a
significant extent by increased investment by petroleum refineries to
meet new environmental standards. That is, there was an improvement in
the quality of their output which the figures didn't pick up.
The
food and beverages industry's poor performance was partly explained by a
change in consumer preferences in favour of products made in
smaller-scale, more labour-intensive bakeries. No probs if that's what
the punters want.
In both petroleum and chemicals and food and
beverages the poor performance was explained also by reduced use of
production capacity, caused largely by the effect of the high dollar in
reducing exports and increasing competition from imports.
But now I
must give you the product warning economists keep forgetting. Like so
many other concepts in economics, multi-factor productivity is simple in
principle but as ropey as hell in practice. Putting a number on the
concept requires you to make a lot of unrealistic assumptions (perfect
competition, equilibrium, for instance) and use statistics that don't
accurately measure what they're supposed to measure.
As the
researchers acknowledge, multi-factor productivity is measured as a
residual: after you estimate the amount of production you subtract an
estimate of the amount of labour used and an estimate of the amount of
capital used (particularly dodgy) and what's left is multi-factor
productivity.
It's what a modeller would call an "error term" -
the net result of all the mismeasurement of output, labour input and
capital input. So, as the researchers acknowledge, the figures they have
used can't be taken as a reliable measure of technological progress.
My
word for it is ragbag: technological progress may be in there
somewhere, but so will be a lot of other things, real and non-existent.
You
can work out the figures for multi-factor productivity, but if they
look good you don't know whether they really are, nor why they are. If
they look bad it's the same.
What the Productivity Commission's
study tells me is that even with figures that look really bad, it can
find nothing amiss. Worrying about measures of multi-factor productivity
is jumping at shadows.
