Productivity – WHY!

We are hearing a lot recently from big business and our politicians about productivity, but nothing appears to be driving change in this area.

Productivity, we are hearing a lot about this term recently, so what is productivity, well, there a couple of explanations, but I will stick with a basic version and that is “Measurements of productivity are often expressed as a ratio of an aggregate output to a single input, or an aggregate input used in single output, typically over a specific period of time”.

This definition then suggests that to improve productivity, we need to reduce the amount of an input (in most cases it can be defined as $ inputs to make it simple, as material units of input are much harder to measure consistency across businesses) to achieve an output. For example, using energy and labour costs as the inputs, then if a business needs x amount of energy to produce y output than (Total Output / Total Input = Productivity) the equation will = $ value of output/$ value of energy. This then leads to the question, if energy costs are going up and there is no increase in $ value of output then productivity is declining. The same goes for all input categories including aggregation of inputs.

What is critical is that as business expenses increase (especially energy and labour), then as consumers we are getting less for our dollar. This means less food, heating, transport, recreation and increase in material input cost such as building materials. While ever government head toward an energy production sector that is inefficient, driving costs up (Australia use to be one of the lowest cost energy producers in the world, and we are now one of the highest), and encourage higher labour cost without any corresponding productivity improvement, then we as consumers are losing big time.

The outcome of this reduction in productivity is the increase in cost of goods and services, exactly what we as Australian consumers are experiencing currently. For business, the outcome is declining competitiveness against global producers, both manufacturing, food production and service providers. This means our industries have an option to move overseas where costs are less (but where quality might not be a good). Following on from this is reduced employment opportunities and a reduction in industrial economic activity (as our industries leave Australia).

So, what are the options, well while I have never been a fan of government control (especially left of centre governments), one of the best decisions made by government in my time in business is the labour accord that embedded productivity in wage growth during the Hawk-Keating era. This effectively embedded any demands for increased wages to an improvement in productivity.

This problem needs to approach from two sides,

1. Government needs to acknowledge that we have problem, and
2. Businesses need to assess their business operations and look to maximise resource use efficiency, specifically a combination of allocative and productive efficiency.

I am not seeing either side really focusing on what to do in this space, as governments (state and federal) are so focused on renewables and non-productive areas of the economy, and business appears to be following government leads.

If we keep going the way we are, our transformation industries (food processing, manufacturing and construction for examples) will exit the country and we will again be an economy that produces raw materials such as food or minerals.

To fix the problem, both business and government needs to sit down and look at where we need to be doing over the next few years with a vision on where we will be in 10, 20 years’ time. The question we need to ask, is do we want industry. If so, we need to invest in skills that support business analytics and establish policies that encourage productivity. Innovation is not the total answer, as long-term Capital MFP suggests, our investment in technology innovation and other capital investments for most industry sectors has been declining since the mid 1990’s. We do need innovation and technology as the agriculture and finance sector attest to. However, it is not the be all and end all of productivity. Businesses need to get back to basics and look at business operations to see where operational efficiencies can be accomplished and improve resource use, not just material and labour inputs.

Until we do this, we will continue to be a declining productivity country with the corresponding results.

Have a good week!