Low productivity isn’t lazy

Good post on the Productivity Commission blog, Prod Blog.

When it comes to labour productivity, or productivity more generally many people in society assume that an economist saying “productivity is low” is the same as saying “people are lazy”.  But this is far from the case.  Lisa Meehan clears that up for us:

Poor labour productivity doesn’t mean that Kiwi workers are lazy.  Labour productivity measures how much output is produced per hour worked; it doesn’t tell us anything about how hard we’re working.  In fact, as we discuss in our paper, New Zealanders work long hours compared with the OECD average.  The problem is that despite these long hours, NZ has low GDP per capita – that is, the problem stems from poor labour productivity.

Put another way, ‘labour productivity’ is a convenient (and useful) metric to think keep tabs on our wider productivity performance.  But, by itself, the catch-all labour productivity measure tells us little about the performance of workers alone.

Personally, I’ve had many people get quite angry at me about the idea that productivity is low – they will scream about how they are working as hard as they can, and trying to produce the best work place environment that they can.  And economists are definitely not claiming otherwise.

The key point is that the value of goods and services produced for each hour of work we are putting in is lower than many other developed countries.  What this means is an important question, and one that helps to guide the idea of where policy can help.  As Lisa says, policy sets the rules of the game – and the ultimate goal of these rules should be to engender a situation that allows the preferences of individuals in society to be satisfied in a way consistent with our view of “social welfare”.  When the rules are inappropriate for these aims, there is scope for government to help out.

Sidenote:  I see this:

He’s been getting a bit of a hard time around the office from those of us who think this is all part of his plan to win the title of ‘NZ’s sexiest economist’.

I will keep Paul Conway’s name in mind when asking for nominations next year – I suspect I’ll have to think about next years vote more carefully than this years, there may need to be categories.

  • VMC

    You say that economists do not mean people are lazy when they say ‘productivity is low’. But what do they mean when they say ‘labour productivity is low’? If they don’t mean the people who do they work are producing less than they might why put in the word ‘labour’. There are many factors of production, so by emphasising the ‘labour’ word, economists are indeed letting all the other possible causes off the hook. And since most labour get directed by managers (who also provide their tools and equipment, lets start talking about managerial productivity!

    • Language is interesting – when economists say labour productivity they are imagining a cobbs-douglas production function just sitting around. As a result the level of capital, technology, and other forms of labour all have an impact on the marginal product (and the average) of labour.

      This is so ingrained that when I think “labour productivity” I usually start thinking about the stock of capital pretty much immediately!

      However, in the last couple of years especially, I’ve had a whole number of non-economists say that it makes them feel like they are being attacked for what they do at work – which I’m pretty sure is not what any economist in the universe means! It was nice to see the Productivity Commission get that a cover off on their blog 😉

      • VMC

        I wonder about the “not what any economist in the universe means” bit. Many economists are rather moralising as I am sure you will know – and language like ‘labour productivity’ suits a moralists, I think. Am glad you have friends who are prepared to challenge you on the language front.

        • Having a clear interpretation of our moral judgments is important – this is true. But I have not yet met an economist who believes low labour productivity = laziness, the most common ones are “not enough capital”, “poor management”, “distance from market”, and “excessive labour input” (as the marginal product of labour falls – so if we really ramp up hours worked, average productivity will decline).

          I am always “discussing” economics with everyone I meet, I’m just lucky some people are willing to tell me what they think 😉

  • MillAhab

    If you want to develop a better informed cynicism on the nature of many workplaces and the
    idiosyncrasies of the marriage of management, labour, and capital and the resulting productivity outcomes I suggest checking out ‘the Org’ by Tim Sullivan and Ray Fisman:

    http://www.businessweek.com/articles/2013-01-08/em-the-org-em-stands-by-the-status-quo-for-business-management

    http://online.wsj.com/article/SB10001424127887324581504578235710908551732.html

    Q. What do the authors conclude is the cause of poor labour productivity in about 99/100 cases?
    A. P!ss poor management which unfortunately in New Zealand we generally have in abundance.
    .

    • Aha, but for it to be “relatively” poor we need an explanation about why NZ is worse than other countries – not just an explanation of the failings of management in of itself 😉

      • MillAhab

        Touche, my razor is that NZ firms are not exposed to a significant enough level of competition that would force them to develop the level of managerial competence that they would require if they were to operate successfully in another market.

        As I am sure you would agree it generally holds that NZ’s best performing firms are those that successfully compete internationally in markets with low barriers to entry.

        We also have a long tail of underachieving firms that in a market such as the US would have likely been out-managed into non-existence some time ago. That is not to say that poorly-manged firms don’t exist in somewhere like the US but that generally ours on a comparative basis are even more poorly managed.

        What are your thoughts?

        • Heya, ahh didn’t mean to come off as touche just wanted to raise the point – my masters thesis was about how firms may over hire managers as a form of capacity precommitment, so I’m sympathetic 😉

          Indeed, in managerial surveys NZ often comes off quite poorly and lack of competition seems like a fair driver.

          My main issues with the managerial explanation stem from measurability (given the types of surveys we rely on) and endogeniety (managerial performance is likely endogenous determined by a number of the other factors behind relatively lower productivity). Atm I find a lack of scale and a lack of competition due to size and distance from market to be the most compelling explanations – and I see managerial performance as endogenously determined by these. Happy to change my view as the evidence appears though 😉

  • JC

    I think we have to stratify our businesses by size and/or similar measures to find how productivity goes. If small size generally equals lower productivity then we are most likely talking culture and No 8 wire mentality.

    Conversely small size may also give us good innovation in areas of work that we like.. like sailing 🙂

    Without knowing too much about the drivers of productivity I suspect that culture and a desire to employ as many bodies as possible is significant in NZ.

    JC

    • I suspect population density, and thereby urban design as well, may play quite a big part in it – I think we can sometimes throw a bit much in the culture basket 🙂

      Nonetheless, we are going to get to see a whole bunch of research over the next few years!