Productivity stuck on auto-creep

Tim Scott’s piece on productivity earlier this week led me to this ACAS report on the subject. As you might expect, they focus on what has been happening in the workplace:

A range of macro solutions have been offered by Government and others, including capital and financial investment in infrastructure. But it is now understood that these can only yield lasting improvements if workplaces are operating at their best. The way workplaces are organised, the part played by managers and leaders, and the role and involvement of employees can help deliver better outcomes for individuals, organisations and the economy.

In an ACAS paper published in February, Ian Brinkley remarked:

The macro-economists have tortured just about every dataset they can get their hands on in just about every way possible.
It is always possible that a new insight will provide the missing part of the explanation, but so far we are coming up short.

In other words, lots of very clever people have looked everywhere and still can’t work out what’s wrong.

He continues:

There is a growing consensus that the bit of the productivity puzzle we cannot easily explain is based on what is going on in the workplace – in other words, there is a significant part of the fall in productivity shortfall that is attributable to employment relations in its widest context.

Or, as Tim says,“It’s the workplace, stupid!”

A recent paper by the National Institute of Economic & Social Research (NIESR) suggests they might be right. The productivity fall, say the report’s authors, has happened across the board.

The most striking feature is the widespread weakness in total factor productivity within firms, pointing to the importance of a common factor in explaining productivity weakness.

Commenting on the paper in the FT, Matthew Klein says:

Adding to our confusion is a fascinating new paper from the National Institute of Economic and Social Research, which shows the UK productivity problems aren’t concentrated in any particular sector and (mostly) can’t be blamed on the inability of good firms to grow at the expense of bad ones. Moreover, there is no noticeable difference in the performance of companies that relied heavily on bank lending before 2008 and those that didn’t, nor is there a significant difference between big and small companies.

Rather, all businesses experienced a big drop in underlying productivity since 2008.

So the collapse in productivity isn’t because of dependence on bank lending nor zombie firms taking resources that should go to better ones. The productivity problem can’t be blamed on the skill level of the workforce either. What we seem to be seeing is a general and sharp decline in productivity across UK organisations.

So what has happened? What has been going on in Britain’s workplaces?

The NIESR report makes a suggestion, though, tantalisingly, it leaves the discussion for another day.

[We conclude that other common factors, which we do not explore in this article, for example general demand weakness coupled with flexible wages, are likely to have been central in explaining the stagnation in UK productivity growth.

This goes back to the hand car wash argument, where cheap labour means that firms don’t need to invest in equipment. Instead, new and existing firms just find ways of profiting from the ready supply of cheap labour.

Some might argue that the labour market needs to be more flexible so that managers can push workers harder and sack those who don’t perform but recent IMF paper concluded that labour market deregulation does nothing to improve productivity and might even make it worse.

Screen Shot 2015-07-02 at 18.19.41

Research in the US and in the UK, France and Germany has shown that unfair dismissal laws encourage firm level innovation. by providing protection for employees to take risks and by encouraging firm to take risks on new projects.

A flexible labour market and stagnant wages, therefore, might have the opposite effect. When managers have more power, employees keep their heads down and their bosses get lazy.

As Gary Miles of Roffey Park said when the Beecroft proposals were announced, removing employment protection lets poor managers off the hook. It absolves them from tackling performance issues. If it gets easier to sack people without explaining why, you don’t need to spend time trying to understand the source of the problem, you just blame the worker, sack him and get someone else. Of course, Beecroft’s proposals were not enacted but the raising of the unfair dismissal threshold and the introduction of tribunal fees has had a similar effect. An employer’s risk of being taken to a tribunal is much reduced.

All this is circumstantial, of course but so far, every attempt to explain the productivity puzzle has drawn a blank. The UK’s stagnating productivity has come at a time when employment protection has been eroded, training investment has been in decline and non-regular employment, such as zero hours contracts, self-employment, temporary employment and part-time work, has increased. As I said earlier this year, the productivity puzzle leaves Britain’s managers with some serious questions to answer. With one of the largest graduate workforces in the EU and one of the largest shares of high-skilled jobs our productivity should be higher than it is.

Like ACAS, the UK Commission for Employment and Skills has been calling for improvements to management practices for some time. Yesterday, Sara Mosavi said that management needs to shift up a gear if Britain’s productivity is to be improved. She’s right but when cheap and flexible labour allows you to coast along on auto creep and still make money, why would you bother?

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12 Responses to Productivity stuck on auto-creep

  1. sdbast says:

    Reblogged this on sdbast.

  2. “but so far, every attempt to explain the productivity puzzle has drawn a blank.” Not EVERY attempt. See: Rightshifting and the Marshall Model, which explains it clearly, at least for knowledge-work firms.

    – Bob

  3. ThinkPurpose says:

    Reblogged this on thinkpurpose and commented:
    Cheap labour and lazy management thinking= a perfect storm

  4. Kamo says:

    I am somewhat biased, but in my personal experience many of the senior managers I deal with have become “generic” clones peddling the same washed out shtick. They go on training courses which “equips” them with generic tools and techniques which they use as the basis to spout forth about “ruthless prioritisation” and “automation” and “efficiency”, problem is they have precious little idea of how to kick on past those stock responses because they lack underlying expertise or tacit knowledge to build solutions for issues with specific characteristics. Once you’ve actually prioritised and automated where possible it’s very unhelpful for the same senior manager to trot out the same lazy, worn out response. Instead of building on and complementing a genuine understanding of the actual workings of the specific business they are engaged it, these generic managerialist techniques seem to substitutes for that genuine understanding. I find it a bit like allowing a mechanic to perform open heart surgery because they’ve read a Haynes manual on cardiopathic medicine, they may be the very brightest mechanic whose been to the very best public school and read PPE at Oxbridge, but you’d still prefer the surgeon who has actually spent years and years really understanding and building expertise in cardiopathic medicine.

  5. Quaestorix says:

    What you say and what is in the excellent ACAS report feels instinctively right and it is good to see that they stress the importance of HR’s contribution in improving the situation. One thing which puzzles me. If this is right, I wonder why US productivity significantly higher than it is in the UK both absolutely and on trend given that employment protection is even less there. Is it because of more investment in technology perhaps?

  6. Patricia Leighton says:

    Regarding productivity and having worked and researched in France, Germany and the Netherlands and l think a major problem is poor management and management systems. Patricia Leighton

    Sent from my iPad

    >

  7. Jamie says:

    This is a very interesting topic and is very important for Britain’s future. However, despite the fact that I normally like your blog, I am very sceptical of your conclusions.

    The Productivity Problem Industry (PPI) has set itself the task of explaining Britain’s productivity problem and has failed despite the fact that “lots of very clever people have looked everywhere”. Nevertheless, management is declared guilty despite the fact that “all this is circumstantial, of course”. This is exactly what poor management would say. “We have tried our best so it must be someone else’s fault”.

    It is not clear to me what precisely is being measured in national productivity statistics. Here is a quote from a recent FT article.

    “Note this definition of productivity is different from the one we used in our charts above, which is based on the ONS’s attempt to account for changes in hours worked and the quality of the workforce”

    Even within a single article two different definitions of productivity are being used. However, neither is spelled out. This matters. I have read quite a few articles about the productivity problem and have seen very different conclusions. NIESR says “the productivity fall … has happened across the board”. However, here is some data from ONS which suggests that there are considerable variations by industry. Which is correct?

    http://www.ons.gov.uk/ons/rel/elmr/economic-review/october-2014/art-oct-er.html#tab-Industry-composition

    This suggests to me that there are significant problems with the compilation and use of the statistics: what precisely is being measured in each industry; what sources are used for the raw data; what adjustments are made to account for things like the quality of the workers; how do different researchers reach very different conclusions; which conclusions should a reader believe?

    It seems to me like the single most useful thing that the PPI could do would be to explain, using examples, how productivity is measured in different industries. It might start with itself. How is the productivity of academic economists and statisticians measured? It’s not obvious how this would be measured or even what the units of measurement would be. [Of course, the PPI is just type of professional service so the same questions apply to any professional service e.g. consultancy, law, advertising, R&D in electronics or pharmaceuticals where the value of the service provided is often intangible].

    The same then applies to all other industries. How are they measured? For example, how is the productivity of the vast number of different activities of the public sector collated into a homogenous total? Is it a measure of physical throughput or financial value per person hour or something else? The public sector doesn’t sell anything so how would any financial value be calculated?

    I have looked for a resource which would explain how macroeconomic productivity is defined and calculated but I have been unable to find one. Is such a resource available? Have any bloggers discussed how the statistics are compiled as opposed to how they are analysed? My gut feel is that productivity figures are probably only valuable when comparing like with like e.g. one factory producing cars with another, or one industry versus a similar industry. In the public sector, each segment would require its own measures in order to see anything valuable. HMRC could use tax return throughput or similar but how would you measure the productivity of the military where, in ideal circumstances, they are required only to train and be on stand-by?

  8. metatone says:

    To answer Quaestorix in part, our experience (as a company who provide various kinds of support in the innovation arena) in the US and UK indicates a couple of issues.

    1) Austerity and recession create a vicious circle. AKA aggregate demand matters. Investment of any kind remains hobbled in UK companies by a recession mindset. One of the dirty truth that economists like to obscure is that productivity improvements are very hard to come by without increased investment.

    2) The culture of management in the USA (for all the faults which are well documented) has an optimistic bent. They do believe in trying to get things done better/faster/cheaper. Sometimes it works, sometimes it doesn’t. However, fatalism rules in UK management circles, so very often people don’t really try.

    3) The Oxbridge influence hobbles UK business by Oxbridge educated managers prioritising hiring consultants and providers headed by Oxbridge types. Some are very smart – many are mediocre.

    4) It’s perhaps instructive as well that the major consultancies in the UK scene could be divided into those who began as management consultancies and those who began as accounting firms. The indigenous UK firms are mostly of an accounting heritage. This is symbolic of more differences in the wider business culture.

  9. Pingback: What Humans Aren’t | Creative Ideas for Starving Artists

  10. Dipper says:

    I have questions but no answers.

    1. In banking (and other industries) many people are now engaged in compliance and regulation. Does this add value? My view is it does. A product or service that has been through a verification process that delivers guarantees is worth more than the same product or service that has not been through that process. But is that reflected in the productivity figures?

    2. Is it correct that in-work benefits are effectively a subsidy to relocate low-paid jobs and the workers from continental Europe to the UK? In which case how is the subsidy reflected n the productivity numbers?

  11. Mark L says:

    …and here’s the Treasury’s take on productivity. After all the politics in the main body of the report, Annex A appears to have been written by an actual analyst in HMT.

    https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443898/Productivity_Plan_web.pdf

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