Productivity is low for reasons that are hard to explain. But maybe we have been looking at the 'problem' in the wrong way - perhaps our historical benchmark was unique and can't be repeated

Some people (like me) think there is a productivity puzzle.

For a decade or more now, we have been fast-tracking technology features that clearly allow users to do a lot more exciting things for very little cost. On the face of it, 'output' is up, while inputs are down. By my old-fashioned thinking, that should show up in overall productivity, especially as this new tech is becoming ubiquitous.

But it isn't. New Zealand's productivity measures are poor, and not getting any better.

In fact, it isn't just a New Zealand problem. Low productivity growth is everywhere. And it is not getting any better in most other countries either.

Why not?

It has been argued that the GFC impacts have been masking the improvements. Just when tech benefits rose to scale, the GFC added a whole bunch of cost inputs (like laid-off workers) that had no outputs. The problem with this argument is that we are well past that event - especially in New Zealand - and the productivity results aren't any better.

It is also argued that the 'outputs' counted in the measurement of GDP aren't designed to capture the tech benefits. More specifically, some say that they aren't measured in 'final' output, rather are pushed aside into intermediate outputs. That may or may not be the case, but the raw fact is, people have been looking for a decade now and not found these uncounted benefits. If they are significant, you would think someone would have noticed them by now.

Still others have argued that it takes a surprisingly long time for tech benefits to show up economy-wide. Or this reason, or this one.

Frankly, it's embarrassing, not the least for economics. It has all the hallmarks of a real puzzle.

Unless it isn't.

English economic boffin Adair Turner is suggesting that there is nothing to explain.

In a paper that has been described as "scintillating" he is suggesting that tech innovation and low measured productivity is exactly what we should expect. And he suggests, this will be the future.

In the past, technological progress and productivity growth have tended to coexist because the workers shifted as a result of the new technologies. They moved from one sector (say, farming) to another (manufacturing) and in both sectors rapid productivity growth occurred.

But Turner says it will be different from now on. New technology's impact on total productivity growth results in benefits to a smaller group who are choosing to consume those benefits and their additional consumption is of services that are hard to automate, like personal services and artistic assets. At scale, that means overall productivity is undermined by that consumption.

The older situation where the shifting of resources from one area of the economy to another (agricultural labour to manufacturing labour) may be a one-off. Now we are shifting economic labour from manufacturing to services. Manufacturing productivity is zooming (the cost of things is diving) but the much larger service sectors can't deliver similar gains. So we can only see a low average change in productivity.

It's a services handbrake. And it won't necessarily get better in the future as societies age. The provisions of personal services are high-cost activities (needing high levels of employment), but the output values are relatively low. That is a recipe for low productivity, long into the future.

And if we can organise things so that our incomes rise, that will just make things worse in a productivity sense - because we will spend those higher incomes increasingly on personal services.

For example, demand for healthcare services will mean healthcare workers will capture more of our incomes (think doctors and nurses, also think the tech companies making medical machines for 'essential' and 'better' services) while providing essentially unchanged outputs. We are part of this problem; we want the best especially if the taxpayer is paying. It is probably similar in education. And in both these huge sectors, as long as they are state-owned and centrally managed, things won't get any better - they will only get costlier without any productive improvement (that is, costs will rise as fast as benefits). The same might be the future of tourism activities.

And the production of 'things' will get less and less expensive with more and more benefits (that is more productive - again, think NZ farming) but have a much lower cost impact on our incomes and lives (less of our incomes are now spent on food, and for some food spend, more and more of it pays the wages of the service people delivering eat-out 'experiences'). There is no advantage at all trying to make cars, or mobile phones, or any other mass consumption item locally. If we tried, then we wouldn't have any disposable income.

Turner thinks the future is high tech and low productivity.

Get used to it, he says.

It's a long paper (47 pages) but I thoroughly recommend you find the time and the motivation to read it (especially if you wish to comment below).

This is how he starts:

I set out my arguments in six sections

1. When, not if.
It is likely that we are in the early stages of a technological revolution which will eventually result in the automation of almost all economic activity, almost all work activities. When considering automation potential, the question is when, not if.

2. Explaining the Solow paradox
Nobel Prize winner Professor Robert Solow famously commented that “computers are everywhere but in the productivity statistics”. But there is here no inexplicable paradox since super rapid technological growth is bound to result in a proliferation of low productivity jobs, zero-sum competitive activities, and increases in real consumption which never show up in GDP statistics.

3. Meaningless measures in the Hi-Tech Hi- Touch economy
Rapid technological progress will make GDP measures decreasingly useful indicators of improving human welfare and will have the paradoxical effect of creating an economy dominated by inherently physical and subjective assets and capabilities, and by zero sum activities, with income distribution strongly determined by asset ownership and rents

4. “Average is over”?
In rich developed countries, rising income and wealth inequality is inevitable unless we choose deliberately offsetting policies.

5. The old ladder destroyed
Historical experience illustrated only one way to achieve rapid economic catch up – starting with low wage export-oriented industrialisation. In a world of robots, that old ladder will no longer exist.

6. Implications for economic theory
In a world of ubiquitous robots, many of the assumptions of neoclassical economics become decreasingly valid or relevant.

If you are like me, you probably don't often read long economic papers. But this is one you probably should make an exception for.

We need a way to get out of the services trap - we need to find a way to shift workers from a low-productivity service sector to a high-productivity service sector and get that amazing boost the rural-to-factory shift gave us a century ago.


http://cms.ineteconomics.org/uploads/papers/Paper-Turner-Capitalism-in-the-Age-of-Robots.pdf

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37 Comments

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If my employer banned access to Interest.co.nz during work hours I think they would see productivity increase.

Adair Turner paper is relevent to all OECD countries. Maybe NZ has some specific productivity issues and Paul Conway, Director of the Productivity Commission discusses NZ's specific productivity problems. Ref https://www.newsroom.co.nz/2018/07/12/151020/a-gdp-recipe-of-sweat-toil-...
1. Small firms and small markets
2. A lack of foreign and local investment
3. Finding the labour sweet spot - a growing workforce needs to be matched with growing investment - the role of the education system, policy makers, and business to train workers in the skills that they need for the workforce.

Regarding point 2 is it really an issue? If it was a real issue I would have expected the government to be encouraging investment not discouraging it whenever possible ( gas exploration, foreign buyer ban, considering capital taxes, etc).

That is indeed what you'd expect from a government that had the slightest clue about economic and commercial reality, or listened to people that do

The current "Government' is much like the 3 monkeys - Blind Deaf & Dumb.

You might have missed the point of the three wise monkeys there champ. "See no evil, hear no evil and speak no evil" nothing to do with being deaf, dumb and blind at all.

haha ... that is exactly why we have low productivity ... lol
it is this interpretation of the three monkeys ....soft mamby pamby idiocracy "See no evil, hear no evil and speak no evil" and do as little as possible.

MdM - you've been told before that economic literacy is hogwash - just a religion thayt worked until it didn't. This article is about the fact that it is isn'ting, and it appears to be isn'ting permanently.

Do the reading I suggested.

Economists haven't the slightest clue about the real world, which just happens to be where real things happen. Productivity gains are merely efficiency gains. Come on, google Tim Morgan, Tullett Prebon, Perfect Storm. Read it then come back to the discussion. Just spouting ideological rhetoric is a waste of all our time at this juncture.

I've read Paul Conway's report. Here are some extracts from the original, on the topic of NZ's immigration policy and rate of population growth:

"Immigration policy could also do more to improve human capital and skills matching within the New Zealand economy. PIACC results show that the overseas-born population in New Zealand are highly skilled relative to immigrants in other OECD countries but still less skilled than the New Zealand-born population on average. It also shows a relatively high incidence of qualification mismatch among immigrants in New Zealand.

As with labour market dynamics in general, the broader impacts of immigration on the New Zealand economy are not well understood and in need of deeper study. However, available evidence implies a risk that strong migration inflows might restrict wage growth and encourage a reliance on low-cost labour by some firms and industries.

While strong employment growth has kept pace with strong immigration inflows, many immigrants are poorly paid and working in unskilled occupations in lower-productivity industries (McLeod, Fabling & Mare, 2014). This may supress investment and productivity improvements and work against efforts to increase the employment of lower-skilled New Zealanders.

Moderate Population Growth to Encourage Capital Deepening

Immigration has had a strong impact on the New Zealand labour market {around a quarter of New Zealand's current population were born elsewhere compared with a worldwide average of about three per cent (Fry, 2014). Recently, with lower departures and increased arrivals, immigration has surged to a net inflow of about 60-70 thousand people per year, contributing up to 1.5 percentage points to New Zealand's population growth , which is consequently one of the fastest in the OECD. If low investment constrains the ability of the New Zealand economy to produce housing, infrastructure and business capital, then reducing high labour force growth would be an important key in lifting capital intensity. Reducing inward immigration from currently very high levels is the only practical way of doing this."

http://www.csls.ca/ipm/34/Conway.pdf

You're missing a really important piece of the puzzle. There can be no productivity without customers. With burgeoning inequality it means we have a reasonably small consumer base.

It's the sort of paper that is gonna take a lot of perusal and rolling around in the 'ol grey matter before any substantive comment can really be made. Not, mais naturellement, that the common taters won't leap in boots and all anyway, in the usual social media tribalistic fashion I have come to expect.

Congrats for winkling it out. It's gotta be in the running for one of the seminal 21st century papers, methinks, just as Keynes, Kuznets, Robbins and Friedman have their stars in the pavement of 20th century economic thought.

""rising income and wealth inequality is inevitable unless we choose deliberately offsetting policies"" isn't that always true? From Singapore to USA to North Korea governments redistribute wealth - in the last case making for greater inequalitiy. Even without a government (say failed state Somalia) wealth is redistributed but via the gun not taxes. It ought to be our govt policy to redistribute wealth but to do so fairly without sponsoring an undeserving beneficiary class. For example there wasn't too much wrong with the old universal child benefit.

You want Government to redistribute wealth "fairly". I'd be interested in your response to Thomas Sowell's question: What do you think is your "fair" share of the wealth that somebody else has worked to create?

Dunno, what percentage of the wealth created by the production line workers and machines do the shiny bums in the corporate suite retain? That could be a good starting point for the discussion.

OK. What do you mean by "shiny bums in the corporate suite"? The marketers who work to ensure that products are sold at a good price? The designers who ensure that products are likely to appeal to consumers? The lawyers who ensure that other firms can't rip off the ideas? The financier who persuades investors to fund the machinery? The logistics manager who ensures that products get to where they are wanted, in good condition, in the right quantity and on time?

Certainly, it's the worker and the machine who create the actual widget that rolls off the production line. But the widget isn't "wealth" unless and until it is something that somebody values enough to be willing to pay for it. That requires the contribution of the "shiny bums". And there's no reason to expect them to make that contribution for free.

And there is no wealth created by any of those jobs if the widget isn't made in the first place. So here starts the argument about who contributes what to the pot, and who should get to reap the rewards.

Indeed, and it's extremely difficult and complex to work out. Some countries leave it to markets - in this case, workers and employers and investors deciding respectively whether they are willing to provide their labour, and whether they are willing to employ, and whether they are willing to put up their money, for the returns offered - to work it out for themselves.

Those countries have tended to do better - still imperfectly for sure, but better - than countries where the government has tried to work out what everybody should contribute and what everybody should get in return for their contributions.

However, the question is not about that process; it's about the Government's interference in that process. Where somebody decides that they want a share of the wealth that is created when capitalist fat cats, shiny bums and horny-handed sons of toil combine their efforts to ensure the creation and delivery of a widget in a way that matches the desires of a widget-buyer, so that the widget-buyer is happy to pay for it and both parties are better off as a result of the exchange. Somebody who made no contribution to any of that. What should be their share?

Except of course the govt did contribute to that.. They provided for the healthcare of the workers, the basic education of the workers, the basic infrastructure that the enterprise runs on, the legal framework that enables the lawyers to practice law etc etc.

I base my answer to Mr Sowell on what I do for my family. babies get everything they need plus a few extras, kids rather less, teenagers get plenty of investment capital (school books, uniforms, college fees) and then less and less until they and I consider they are adults - and at that point nothing. So what I earned by work is depleted to go to those who for good reason can't work themselves.

My point is not what do we do if we choose to redistribute but that but redistribution is a fact: even if it is only to provide a military, police, legal and prison service to protect the wealth I have earned by my hard work. Better to accept the fact and decide policies accordingly.

A major problem with wealth is the increasing inability of small resourced business to even be allowed to participate let alone compete when Govt creates a stultifying level of regulation usually sponsored by large Corporates and Bureaucrats with vested interest in maintaining their own positions. When the UK removed restrictions on what property owners could do without bureaucratic interference the results are amazing - just watch George Clarks Amazing spaces and other series in same vein then compare with Grand designs to see that regulation enforced by idiots delays or at worse prevents economic activity & creativity. Just imagine what NZ would achieve if a future (National ) Govt took a sledghammer to much of our ill thought out regulations , the creativity is still there - Rocket Labs a great example, Martin Jetpack another.

You may wish to look at where Martin jetpack is at the moment before trotting them out as a fine example of free enterprise. They have delisted from the nzx main board after their shareprice dropped to basically nothing as they haven't created a viable product.

In the land of no tax, death is the only certainty.

We don't see productivity because it is linked to the pay (hours) people work.

I work 40 hours, I get paid for 40 hours.
I do not get paid more if I work more, I am not allowed time off if I finish earlier.

The fact I have set up systems to enable me to do aspects of my job in 2 hours instead of 12 is of no reward. Rather that time is now mine to do what I want (within reason) and within the confines of my office. Hello Interest.co.nz.

So my measured productivity remains static.

If we moved to a paid regardless of hours, you may see that productivity has in fact doubled/tripled/quadrupled etc... by virtue of people spending 2 hours in the office each day instead of 8 - yet achieving the same result.

I think corporates love the idea of productivity based pay it is the socialists who object to it. Imagine the increased incentive to be productive if you were paid per unit of productivity as opposed to per hour!!! You could spend 2 hours in the office for your base pay or you could make 4 times as much by working 8 hours at your increased productivity rate!

It sounds good in theory, but it fails in practice.

Most jobs can't find more productive work (can a nurse create more patients? can a Checkout operator make people buy more?, can a panel beater encourage more dents?)

If I can do the work of 4 people, then 3 are out of work. Net productivity remains the same.

It is generally accepted that fatigue sets in if always operating at 100% (either mentally or physically). So how do you maintain income, without productivity decreasing?

You are right identifying the classic dilemma - is a Fireman more productive putting out extra fires or preventing them? Society to some extent recognizes that it pays to have what at times appears over capacity to ensure when required the capacity is available.

A smart government would reduce the working hours of all Wellington Head Office public servants to a 4 day work week - leaving them on the same pay rates/salaries. That way, we'd improve productivity by one-fifth immediately and negate the need for pay reviews altogether for quite a number of years.

Better for the planet as well in terms of energy/carbon reduction associated with 1/5th less travel/commutes.

Really ? 20% less work for the same pay? Do you really think outputs would increase in the intermediate term? (They might in the very short term, but quickly they would revert to 20% lower I would think.) In that case productivity falls - that is, less outputs for the unchanged inputs. Higher cost for the outputs acheived. Doesn't sound 'smart' to me.

"Do you really think outputs would increase in the intermediate term"

It's not about increasing productivity, it's about improving efficiency.

Why work for 5 days, when working for 4 achieves the same result.

You then free up time for the person to be more productive in other areas.

Yes, Noncents has got it right, David - my point is that outputs (job descriptions, KPIs etc.) would remain unchanged - hence (I think) productivity would be improved and future salary rises could be avoided.

New Scientist magazine released its Blueprint for a Better World in 2009. It was one of the Top 10 ideas for a better planet;

1. Beware of common sense (i.e., policy makers need to base decisions on hard evidence instead)
2. Legalise drugs
3. Give police your DNA
4. Redefine the bottom line (an argument against GDP as the primary measure of socioeconomic success)
5. Find out if we can cool the planet
6. Tax carbon and give the money to the people
7. Learn to love genetic engineering
8. End pillaging of the high seas
9. Generate a feed in frenzy (to the electricity grid)
10. Take Friday off…. forever

NewScientist, Issue 2725 (9 September 2009)

Sorry Kate, but I don't think so. "outputs (job descriptions, KPIs etc.)" is only true in the Goverment sector. In the private sector, outputs are things that customers will pay for (of their own free will). Outputs are goods and services.

Yes, I can see that Government workers might be able to work four days and get paid five and little effectively changes. But that is more to do with the nature of public sector 'outputs'. They are not in demand in the normal way, they are required by command (and may or may not ever get delivered).

But that won't be the case anywhere else. To get the output that customers want by applying less labour time will require investment, mainly in high-performing equiment or software. The providers of that investment will want a return so it comes with cost. This is what is happening with robots, new IP, VR, etc. The outputs are what customers want. The inputs are less. The benefits go to the provider of the more productive system.

If all that happens is the everyone 'takes Fridays off ... forever", then everything will become 20% more expensive - unless pay is adjusted down to compensate. And that is not better productivity. The only way Government workers could be sustained on a 4 day week with 5 days pay is to take the cost off of others who are not in that system (ie higher taxes).

The biggest issue with the coming 'robot revolution' is that many people will resist retraining and still want the pay they used to get. That general attitude will undermine productivity and could well mean overall we end up getting less but it costs more. (That is, we all get poorer.)

Yes, I appreciate the distinction between the public and private sector - and in addition, one could only consider it with government sector employees that are not customer-facing. So, for example, not nurses; teachers, police, etc. - thus creating pay equity issues. The idea being though, that the savings made by issuing no pay rises and setting in concrete the existing pay scales for these 4 day week employees for say, the next decade, would (in theory) free up more money for pay increases to the customer-facing government servants.

Here's what the NS article says in expanding their point:

The four-day week could boost employment, save energy and make us happier.

FANCY a three-day weekend - not just once in a while but week in week out? You may think your bosses would never agree to it, but the evidence suggests that employers, employees and the environment all benefit.

The four-day week comes in two flavours. One option is to switch from five 8-hour days to four 10-hour days,
meaning overall hours and salaries stay the same.

So neither were they suggesting that pay would necessarily stay the same. My point is that the employees themselves would be unlikely to accept such a change if the pay changed as well.

We need a way to get out of the services trap - we need to find a way to shift workers from a low-productivity service sector to a high-productivity service sector and get that amazing boost the rural-to-factory shift gave us a century ago.

Moving from a services based economy to another services based economy is not going to let us escape the services trap.

We need to get off this rock and expand into the solar system, transition to an expansive non-service based economy.

What would happen to Auckland then... :-)

So far we haven't had the real story.

Work is a function of energy used, productivity gains are merely energy-efficiency gains. Relating them to human output (which is less than 1% of all energy used, and much of the 1% fossil-fuel-food-fed at that) is nonsense number one. Nonsense number two is expecting them (efficiency gains) to double, then double, then double, then.... because that is what percentage increases do.

Obviously you reach a point where you can't double. Comes on sooner than you think, does exponential growth.

But if you're measuring 'progress' with an artificial piece of bullshit - and floating, inflated-away 'money' is only equaled in bullshit terms by GDP - which chooses to avoid measuring real things) then you're going to be flying blind. And your'e going to get very frustrated. And if your only learning was from mainstream economics this last lifetime of time, you're going to be absolutely incapable of coming up with an explanation.

https://www.resilience.org/stories/2018-07-12/understanding-the-new-norm...

Low productivity and an anemic economy is practically a guaranteed outcome in NZ.

NZ has the lowest R&D investment as a percentage of GDP in the OECD, largely due to a tax structure which incentivises mal-investment into non productive 'assets' like property and not business investment per se. The talented are either forced to leave NZ or crushed by underutilisation of their skills, general managerial and political apathy as well as being subjected to rentier extortion from the ordained and entitled landlords.