Productivity and bad bosses

The speech by Bank of England chief economist Andy Haldane last month was another valiant attempt to get to the bottom of the productivity puzzle. Why did productivity decline after the recession and why has that decline been particularly sharp in the UK?

While it might, he says, be convenient to blame a financial services sector for over inflating UK productivity before the recession and knocking the stuffing out of it afterwards, this is only part of the story:

It is sometimes asserted that, without the collapse in financial services output associated with the financial crisis, the UK’s productivity performance would have held up. It is certainly true that financial sector productivity was probably over-stated in the run-up to the crisis.44 Nonetheless, the subsequent sharp fall in financial services productivity is plainly not the whole story. Of the 1.7 percentage point fall in the UK’s productivity growth since 2008, less than a third can be accounted for by financial services (Table 2).

Perhaps, then, something is going on at firm level. His analysis of the productivity of thousands of UK organisations shows that, while some firms in the UK are as productive as any in the world, this country has a long tail of low productivity businesses.

These data enable us to examine the distribution of productivity across firms. Chart 16a plots this distribution in 2014, based on the ONS data. It is wide and elongated, with a long, thin upper tail of high-productivity firms and a short, fat lower tail of low-productivity firms. This shape means that modal productivity among UK companies is around 50% lower than mean productivity.

Might that simply be because some industries are less productive than others?

Up to a point, says Mr Haldane, but there are greater productivity differences between firms within the same industry than there are between sectors. Within each industry, a few firms are improving their productivity while others are being left behind.  Furthermore, that gap has been getting wider over the last decade or so.

Furthermore, this difference between the most and least productive, known as productivity dispersion, is much greater in the UK than it is in many other countries. And again, that difference has widened over the last decade.

The paper then goes on to look at other factors, like ownership. Foreign owned firms have less of a long tail of low productivity firms than UK owned ones.

Every so often, some politician or journalist comes out with the Lazy British Workers hypothesis. But somehow, foreigners seem to get better productivity out of British workers than domestically owned firms do. Our car factories, for example, once a laughingstock, are now reckoned to be among the most productive in the world.

Size is also a factor. Among small firms, those with fewer than 50 employees, the long tail of low productivity is particularly pronounced.

John Van Reenen and the World Management Survey identified a similar distribution when they looked at management practices. (For more on this see previous post.)

Cross-country differences account for less than 10% of the diverging management scores: the biggest management differences occur across firms within the same country. The distribution of scores highlights the fact that much of what drags certain countries down is a persistent ‘tail’ of underperforming firms, those that score less than a two on our five point scale. While this tail is largely absent in the United States, it is evident in the UK and especially pronounced in developing countries such as Brazil and India.

Our research shows that large and persistent gaps in management quality remain across countries, mainly driven by the tail of underperforming firms. The UK clearly has a deficit in management quality, and this deficit is likely to be a key factor explaining the persistent productivity gap with other countries such as the United States and Germany.

Could at least some of the UK’s poor productivity be down to poor management? There is strong evidence to suggest so, says Mr Haldane.

Looked at quantitatively, there is a statistically significant link between the quality of firms’ management processes and practices and their productivity. And the effect is large. A one standard deviation improvement in the quality of management raises productivity by, on average, around 10%. This suggests potentially high returns to policies which improve the quality of management within companies.

But it is also quite likely, he says, that many firms don’t even know that their productivity is poor:

The policy question is how to effect those improvements. One idea which offers real potential comes from the Productivity Commission chaired by Sir Charlie Mayfield. This starts from the assumption that not only is there a long tail of companies, but that many are unaware of that fact. For the same reason most car-owners believe they are above-average drivers, most companies might well believe they have above-average levels of productivity.

In fact, we know most companies have below-average levels of productivity and a large fraction of them have seen no productivity improvement for several decades. The Mayfield Commission aims to create an app which enables companies to measure their productivity and benchmark themselves against other companies operating in similar sectors and regions.

By shining a light on companies’ relative performance, the aim is that this would serve as a catalyst for remedial action by company management. Indeed, the aim is to provide firms not only with a means of benchmarking themselves, but with tools to improve performance along identified areas. These online tools would be a mechanism for speeding-up the process of technological diffusion to the long tail.

At the risk of sounding cynical, though, I wonder how many firms care about productivity. Gross Value Add per worker is of interest to economists and ultimately determines how far living standards increase and how much tax revenue the country gets. But whether it is of interest to people running businesses is another matter. If you can make more profit simply by throwing more poorly paid people at something then why worry?

There is some evidence to suggest that this is what has been happening in recent years. The UK has experienced the opposite of creative destruction. High productivity firms have disappeared and low productivity ones have started up. As Albert Bravo–Biosca and Stian Westlake found, the allocative efficiency of the UK economy fell during to 2000s. The net effect of new firms coming into the market was to reduce productivity. A Bank of England paper covering a slightly later period, produced similar results. (For a discussion of both see previous post.) As Mike Haynes said, the UK is suffering from unproductive entrepreneurship, the hand car wash enjoying a revival while the more efficient machines stand idle.

At an ACAS event just over a year ago, Charlie Mayfield gave an example from his own sector of how cheap labour discourages productivity investment. In many French supermarkets the prices are updated with digital displays on the shelves. There is no point, he said, in doing this in the UK as it is cheaper to pay people to go round and update the prices. In France, however, with labour costs being much higher, the investment in the computerised system pays for itself.

Don’t get me wrong, I’m not knocking the initiative. Encouraging businesses to understand productivity and to measure things like value added per worker can only be a good thing. But measuring stuff and changing the way you manage people is hard. If you are making a reasonable profit, why bother? Sure, you might make a bit more if you could do the same with fewer people, or more with the same people but getting to that point requires a bit of thought and investment. If you can solve your problem by taking on a few more people it might take less effort.

Andy Haldane’s speech and the evidence he presented is further proof that some of the cause of Britain’s chronic productivity problem lies in workplaces and the way people are managed. Whether there is enough incentive to make enough bosses change their ways is another matter.

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44 Responses to Productivity and bad bosses

  1. gunnerbear says:

    So long as there is a massive supply o’ cheap labour….things won’t change….

    …..oh, it’s also very, very difficult to boost productivity in an economy where the only growth seems to be in coffee shops ‘n’ nail bars…..

    • Blissex says:

      Indeed, as II compare «So long as there is a massive supply o’ cheap labour….things won’t change….» with this:

      «Our car factories, for example, once a laughingstock, are now reckoned to be among the most productive in the world.

      As a commenter somewhere else pointed out, UK car factories are no longer car factories: they are just assembly warehouses, as their purpose to snap together car blocks 70-80% manufactured abroad by cheap foreign labour so that the minimal UK assembly value added qualifies them for “make in UK” tariffs under cleverly defined EU “rules of origin”. Of course they are going to show greater on-paper “productivity” than actual factories doing actual manufacturing as was done in the past.
      That UK “maquiladora” “car factories” are still actually car factories is one of the many flip chart fairy tales we have to deal with…

    • Blissex says:

      «very, very difficult to boost productivity in an economy where the only growth seems to be in coffee shops ‘n’ nail bars»

      As I wrote in another comment, for several decades there has been booming growth and very high “productivity” in property ownership and production and sales of traditional high quality financial products like PFI and PPI.

      But as Frances Coppola has argued, there has been actual “productivity” growth, which has considerably boosted average reported productivity, over the 1982-2007 period in mining (scottish oil mining) and downstream industries, as barrels per hours worked surged in a miracle of actual “productivity”:

      http://www.coppolacomment.com/2016/07/the-untold-story-of-uks-productivity.html
      «Notice when productivity started to slump. It was much earlier than 2008. In fact the data (which ONS have helpfully provided in Excel) show that output per hour started to fall in Q4 2006.»
      «The UK’s massive productivity growth from 1990-2006 was due to oil, not financial services. Even energy utilities downstream from North Sea Oil had a greater productivity rise than financial services. And both oil and utilities suffered a massive collapse.»

      The sectors with the highest “productivity” since 1980 have all been about asset stripping, financial asset stripping for property etc., and physical asset stripping for mining etc.; the “miracle” days of thatcherism and blairism.

  2. Simon Jones says:

    Fascinating piece. What your analysis seems to show is that firms in the UK prefer to ‘satisfice’ profits rather than maximise them. The question is what would incentivise them to trade labour for capital (minimum wage increases? ability to exert their employment rights? more rights for ‘contingent’ labour?) – and what might be the social consequences of doing so (higher unemployment?)

    • Blissex says:

      « firms in the UK prefer to ‘satisfice’ profits rather than maximise them»

      That’s actually most businesses in the world, very few relentlessly maximize profits at any cost. Most businesses maximize a balance of CEO/executive pay and CEO/executive job satisfaction, and that does not really require maximizing profits.
      Conversely, the highest “productivity” sectors where “profit” maximazion has been done have been those where the main goal of CEO/executives has been asset stripping.

      It is nothing new: it is the age old “sharecropper” problem, the prototype of all principal-agent situations, where if the owner is too harsh on the sharecropper the sharecropper has little incentive to maximize output, and if the owner is too lax, the sharecropper has every incentive to asset strip the property.

  3. Rae says:

    Fits with experiences of many young workers in the private sector. Poor/ non existent personnel management (Human Resources) is a common theme. The IT sector is a classic. Whiz kid entrepreneurs with start-up companies which grow quickly but are essentially still techies with little idea/ interest in staff solve their problems by firing and hiring.

  4. Dipper says:

    What interest would the average UK shop or factory worker have in being more productive? The working tax credit system delivers an effective tax rate of over 90% for many people, so any extra work or skills are not worth acquiring. If you create an incentive system that does not reward work but does reward being depressed, it should not be a surprise to find many people don’t work much but do suffer from depression.

    The example came from a friend who was getting some work done by a plumber who said his friends kept asking him why he bothered doing going to work. They ended up going on the benefits web site and calculating what would happen if he earned another £10,000. According to the site, he would keep £800 of it.

  5. Dipper says:

    … And just to bang on about Brexit, the UK and Sweden are in the EU but not in the Euro. So if the EU is an economically sealed area this means the UK’s main role has been to absorb the surplus labour and goods that come from a chronically deflationary Euro-zone. If the UK were to become more productive then that would mean sending labour and goods back to the Euro zone, neither of which would benefit the Euro zone. The Euro came into being at the beginning of 1999 so the slide in UK productivity coincides with the introduction of the Euro (and the deflationary policies of the ECB having sway over most of the EU).

    • gunnerbear says:

      Yep…Germany getting all the advantages of having a s**t currency….

    • British industry’s poor productivity has been a chronic problem for over a century. It didn’t arrive with the euro. The reason why our car industry is owned by foreign companies is because it failed to consolidate in the 30s and 40s, under-invested in the 50s and 60s, and made a mess of nationalisation in the 70s and 80s. The workers are much the same and the trade unions are the same. The one key variable that has radically changed is the management.

      • Jabez says:

        “The workers are much the same and the trade unions are the same. The one key variable that has radically changed is the management.”
        Not quite.
        Didn’t Nissan make it a condition of their building a plant in the North East of England that there be only _one_ trade union in the factory?

    • gastro george says:

      A comparison with Sweden is interesting. Sweden almost has a national policy of modernism, of early adoption and of high investment. As an example, their customs was fully computerised about 30 years ago. At the same time, they also have one of the highest levels of immigration. Yet one of the most successful European economies.

      • Dipper says:

        Sweden will be interesting to watch. Will it join the Euro? Will it be able to absorb the high levels of immigration and still retain what we regard as the successful features of Swedish social democracy?

      • Blissex says:

        «Sweden almost has a national policy of modernism, of early adoption and of high investment. As an example, their customs was fully computerised about 30 years ago. At the same time, they also have one of the highest levels of immigration. Yet one of the most successful European economies.»

        That amusingly is exactly the “communist” economic policy advocated by “far left trot” J Corbyn.

  6. bill40 says:

    Anyone who has worked abroad will know exactly just how low the esteem is for British management, basically we are a standing joke and everybody knows this. The state of management, especially now, has another cause that Haldane won’t raise and Rick hasn’t.

    Our banking system is shite, not just bad, shite.(

    It is here that I will sympathise with the mangers of smaller companies. The UK has no banks that like to deal with SME’s they lend on property only. Where is the Uk equivalent of KfW? Or the co-operatives that thrive in Europe? In the UK we have Dragon’s Den FFS.

    Why go to the trouble of explaining a plan to a person (if you’re lucky) who is almost guaranteed not to understand your proposition. Just throw umpteen 16 hour, tax credit topped labourors at the problem.

    • metatone says:

      Yes, SME financing structures are repeatedly overlooked as a factor in underinvestment.

      • gunnerbear says:

        Why would any business invest in capital when it has access to stacks o’ cheap labour…the cost of which is subsidised by things like Landlord Housing Benefit and stacks o’ in-work benefits…..

      • Phil says:

        I know someone who runs a company who’s sole raison d’être was helping SMEs navigate the government funded finance schemes available to them in return for a cut.

  7. ChrisA says:

    And yet when I visit the UK it seem to be doing just fine, shops full of people, new restaurants expensive cars and expensive houses. Perhaps measuring productivity is just hard.

    • Jim says:

      @ ChrisA. Depends which part of the UK you visit. If you just hang out in London/SE you might feel the UK is one of the most productive parts of Europe. You won’t get that feeling in large parts of the rest of the country.

      • gunnerbear says:

        Yup…travel up to somewhere like Grimsby and see just how ‘good the times are’. Or even a bit further up e.g Hartlepool. There are places all over the UK that for decades have been s**t on by the economic policies of the Red and Blue Scum… ..and now the Reds and Blues (and their die hard supporters) don’t understand why huge chunks of the country despise the Reds and the Blues…

      • Dipper says:

        The key seems to be whether a town is connected to major metropolitan areas. In the SE that means London. So Brighton and Poole, both commutable to London, have done very well. Hastings and Weymouth, neither commutable to London, stagnant. Cheshire and significant parts of Yorkshire have done well. Coastal humberside, not so well.

      • Blissex says:

        «If you just hang out in London/SE you might feel the UK is one of the most productive parts of Europe.»

        And it obviously must be: London/SE property ownership are the most productive industry in the world, with 100% net rates of return on invested capital for 35 years.
        The second most productive industry in the world is also based in the London/SE: financial services selling high-productivity products like PPI and PFI, which also have paid huge booming bonuses to their executives.

        «Chatham and Gillingham in North Kent are commutable to London, and they’re shitholes.»

        Losers must live somewhere even in the SE. Not every town or village can be gentrified at once by the highly productive property owners and financial services executives working in London.

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  9. jnbvd says:

    If it is easier to get higher profits by using “cheap” labour, why focus on that productivity measure? Why is it better to produce with automation, if it is costlier? Explain.

    • Dipper says:

      One reason why cheap labour is cheap is because the employer is not paying the full living wage to the employee. Often it is topped up by the state, so in effect the employer is getting a state subsidy to not automate.

      • jnbvd says:

        Yes, that has been documented in the US. But still, if labour becomes costlier so that replacing it with machine becomes more attractive, then why would that be better for society? I can understand that now we can produce our food with 1/40th of the labour of 100 years ago, but at this time, why would unemployment from automation be better than using “cheap” labour? Explain.

        • Dipper says:

          From a strictly parochial UK view point, given we have little unemployment there seems little benefit in subsidising domestic labour and importing labour from the EU. The knock-on of importing labour is a significant increase in population and significant pressure on accommodation costs.

          • jnbvd says:

            From definition: Labor Productivity = Gross Domestic Product (GDP) / Hours Worked. It would make sense to also include “Inflation Adjusted Hourly Salary” to the equation of Labour productivity measure to see whether workers are better off than before.

          • Dipper says:

            @ jnbvd one of the key issues arising now is accommodation cost. Properties that were once priced on the basis of a family with a breadwinner doing a manual task are now priced on the basis of benefits and/or multiple occupancy from transit workers coming from parts of the EU. I’m not sure how this fits in with what economist measure.

            I am constantly surprised that the “left” goes on about the problems of people on benefits finding affordable accommodation whilst simultaneously championing Freedom of Movement which by the EC’s own projections will contribute to the UK population increasing by 25% in just 30-40 years. Perhaps the two may be in some way related?

          • jnbvd says:

            Here in Canada there not is such a backlash against immigration as in the UK. Most people now seem to agree that, because of low native birth rates, immigration will help population and labour growth to ensure availability of necessary labour force for an increasingly aging population, as well as support reasonable economic growth. While we do have plenty of land to build on, housing is getting very expensive in high population (i.e. immigration-centic) growth cities like Toronto and Vancouver. There is not enough housing supply for the demand there.

          • Dipper says:

            @jnbvd – my brother is an immigrant to Ontario so I get a regular update on Canadian politics.

            IMHO all domestic politics is ultimately a family argument. It is very hard for someone outside the country to pick up the many nuances and specific histories of a country. I spent some time in Toronto which to my eye seemed a highly successful multicultural city in much the same way London is, so the arguments about immigration and Freedom of Movement must seem quite backward and insular. However, it is tied up in history both between UK and Europe and within the UK.

            The easiest way for me to explain Brexit to a Canadian is to ask how enthusiastic you would be about Nafta if there was a clear statement of intent from the USA for Canada to eventually become a state of an enlarged United States and to adopt the US dollar as your currency.

          • jnbvd says:

            Of course. The political aspect of it is different. But you could still have Brexit, with no change in immigration (which may actually happen in the UK).

          • Dipper says:

            … well we could. But right now a lot of people in the UK feel that they are being sidelined because it is easier to employ people from Europe. Once we leave the EU we can hold the government to account and ask why they are not training more staff here in the UK instead of recruiting people from outside. Whilst we are in the EU the government can simply say that FOM means there is nothing they can do about immigration.

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  12. jnbvd says:

    @Dipper You probably know already that we have a targeted immigration policy in Canada. UK is one of my favorite places to visit – actually going to Liverpool/Isle of Man/Wales/Cornwall in 3 weeks for a 6 weeks road trip.

    • Dipper says:

      @jnbvd yes I was aware. There is lots to admire about Canada and how it goes about its business.

      I hope you enjoy your trip down the west coast of the UK. Lots of great places to visit and I hope you get a warm welcome wherever you go.

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