Productivity and its costs

In preparation for the recent 2012 Ron McCallum Debate AIER developed a background briefing note covering current research and debate surrounding the question – Workplace Relations: Is productivity the imperative? At what cost?

Below is a summary of this background briefing note. For a full copy of the document click on the link at the bottom of this summary.

What is productivity?

Everybody agrees that improvements in productivity are essential to improving economic living standards but fewer people agree as to how this should be done.

Defining productivity is relatively easy – it is a measurement of the volume of inputs [labor, capital, etc] that is required to produce a certain level of output.

Measuring productivity is much harder and in the non market sectors of the Australian economy – those that do not produce tradable goods – it is not usually even attempted.

Frequently, productivity is simply thought of as labor productivity – the amount of employee working time required to produce a certain level of output.

But, properly considered, final productivity is the end result of a range of factors including levels of general education and vocational skills, investment in infrastructure and new technology, access to efficient financial services, managerial effectiveness and workplace culture.

Industrial relations law policy and practices may also play a role, although partisan debate about this one factor often drowns out important discussion and focus on other factors.

What’s happening with Australian productivity?

Although it was a healthy 0.6 in the December quarter 2011, productivity growth in Australia has slowed in recent years. Average annual growth over the past 20 years has been 2.1% but much less over recent years.

The Hawke – Keating governments drove micro-economic change to improve the performance of the Australian economy in a number of ways, many of which were specifically targeted at improving productivity, such as through the acquisition and use by employees of new and higher level skills.

Enterprise bargaining was also designed to boost productivity at the workplace level through gain-sharing bargaining. Other drivers that have been identified include investment in infrastructure, boosting innovation levels, increased competitive pressures, improved management and developing collaborative workplace cultures which will assist and encourage change.

Productivity: who benefits?

An important question for Australian society is how the benefits of improved productivity should best be flowed to its citizens: through increased real wages, reduced prices, improvements to the ‘social wage’ or whether it is retained as increased profit levels. The introduction of superannuation for all was in part based on productivity gains.

The benefits of improved productivity have traditionally been flowed to all workers through productivity based increases in minimum and award wage rates. Recently, this system has broken down: workers in the bargaining sectors have benefitted through higher wages but award wage workers, including lower paid workers have not had the benefit of increases in wages based on economy wide productivity increases.

Some workers, particularly women workers in the health and welfare and other public services have missed out through their inability to bargain about productivity.

The wages share of national income has also been declining, as the profit share goes up.

Are industrial relations laws important?

There is considerable debate about the role of industrial relations systems and their relationship to national productivity performance.

The available data suggests that there is not a strong connection between the two: over the past 10 years productivity growth has been weak under successive legislative regimes: the Howard Government’s Workplace Relations Act, WorkChoices and the Fair Work Act.

In some minds, anything that limits labor market flexibility inhibits productivity, almost by definition. In many cases, however, calls for increased flexibility are just calls for cutting the cost of employing labor, which is not related to productivity as properly understood.

For many years, there has been a world-wide debate about whether employment rights and the existence of unions inhibit or encourage better productivity performance.

The briefing paper looks at this issue in some detail – a number of economists and management experts believe that the effect of unions is positive: they reduce labor turnover and by increasing wages encourage employers to turn to productivity boosting systems and technology.

Workplace rights and productivity

Other studies show that positive workplace cultures are essential to allowing innovation and change in enterprises that will improve productivity. Smart managers and workers who do not fear the consequences of change are much more likely to embrace and welcome change.

In any case, in any modern economy, the costs of increased flexibility need to be considered carefully – the widespread introduction of precarious forms of labor such as casual, fixed-term and contract labor has social as well as economic costs. A disposable workforce will not be one that welcomes and embraces change.

Taking away the rights of workers to job security and a voice in the workplace is a short-term and short-sighted approach to encouraging innovation.

The way forward…

The Australian Institute of Employment Rights believes that the debate about productivity is a vital one for Australia. AIER is concerned that the demands by some for increased flexibility impose too high a cost on workers through reduced employment conditions.

Such demands will not produce real productivity improvements.

Productivity should be seen as the end result of the input of many factors – not just labor and not just industrial relations law.

Attention must be paid to those who have not benefitted from Australia’s economic growth or on whom the costs of flexibility have fallen hardest.

Decent work, tripartism and collaborative workplaces are a key to not only more productive workplaces, but more just ones as well.

Productivity Discussion Paper 1 August 2012