I have this morning received a letter from Dr Alan Hall which I’m sure he won’t mind me quoting from, in which he points out that measures of productivity based on GDP don’t capture the increment to Australian real incomes arising from the huge swing in the terms of trade in recent years. As many readers will be aware Dr Hall has been seeking to draw attention to the difference between real GDP and real gross domestic income (or GDI, which is GDP adjusted for changes in the terms of trade) for some years, including in a letter in today’s Financial Review. Dr Hall makes the point that it is not possible for productivity to be falling and real standards of living to be rising simultaneously.

In more direct response to Fred Argy’s first point, to the extent that Australia’s 1990s productivity gains were the result of ‘micro-economic reforms’ (which is what most of the research on the subject suggests), rather than (for example) to increased levels of human or physical capital per worker (and studies which I have seen on this subject, for example by the OECD, suggest that it is difficult to attribute much of the 1990s improvement in Australian productivity to them), the absence of any significant productivity-enhancing reforms in the past eight or so years remains worrying.

And I agree with the substance of Fred’s second point; as I noted in the original article, to the extent that Workchoices (or other policy changes) induce increased labour force participation by persons whose productivity is noticeably lower than those currently in employment then the impact on aggregate productivity will, at least initially, be negative.

I would partially disagree with Fred’s suggestion that ‘increases in red tape, national security etc’ are common to all OECD countries. Although I acknowledge this is a subjective opinion based largely on personal observation, I nonetheless think Australia has exceeded many other countries (with the possible exceptions of the US and the UK) in mandating stricter security procedures, heightening intrusive surveillance by government agencies of individuals’ activities and affairs, and in imposing greater reporting obligations on managers of businesses, than most other OECD economies.

In explaining the productivity slow-down, we really should be looking for something distinctive to Australia as productivity is growing much faster elsewhere e.g. in USA and Sweden. Increases in red tape, national security regulation etc. are common to all of them. Pofits could be different because of the export price boom but even that is marginal. I think it is a mixture of bad statistics, investment gestation lags (especially in mining) and the influx of low productivity workers but I am only guessing.

As to the future it appears that 1995-6 will show a further reduction in the productivity trend since 1999. Beyond that, I supsect Workchoices will on balance worsen the situation. It gives employers increased downward labour cost flexibility and thereby lessens the pressure on them to improve efficieny – it works like a rise in tariff protection. Similarly the stringent welfare to work measures involve dragooning somne people into work who really need mental therapy rather thaqn jobs. While there will also be an improvement in workplace resource management, Workchoices and welfare to work together may well have a negative impact on productivity in the future.

However a good deal of the increase in labour force participation so far this decade has been accounted for by older-age males, among whom the long-term trend of declining labour force participation during the 1980s and 1990s has been decisively reversed. Presumably, people in this age group have chosen (or been allowed) to remain in the workforce, or have rejoined it to a greater extent than people of similar age in earlier years. It’s not obvious that these people necessarily have lower levels of productivity than those of the workforce as a whole.

Given the strength of employment growth its not at all implausible that the strong employment growth is dragging average labour productivity down. Most people are not aware just how strong employment growth has been – a bigger proportion of the Australian population is now in paid work than ever before in our history.

But it would take a careful and detailed study to see if the effect is big enough to account for apparent slowdown in productivity growth. And so far none have been published.

On ‘Jonno’s more serious point, the evidence from recent history is that there are two things that could kick-start a productivity increase. The first is a revolutionary new technology – although history (think electricity or computers) also suggests that it can take some time (decades even) before organizations figure out how to use new technologies in ways that boost productivity and re-configure production processes accordingly. The second is increased competition, which prompts owners or managers of organizations to strive for productivity gains lest their organizations be marginalized.

The more interesting question is: what does it take to kick-start a productivity increase?

As I said in my original post, I think these and other measures are intended more to create the impression that governments are doing something about reducing the risk of another attack, or to scare people into accepting measures that they would otherwise (and in my view rightly) regard as obnoxious, rather than materially reducing that risk.

And these measures are out of all proportion to the risk involved – a risk which, as noted in an article by The Economist’s Max Rodenbock which was reprinted in the ‘Review’ lift-out of last Friday’s (5th January) Financial Review, is about the same as being felled by an allergic reaction to peanuts, or six times less than the risk of being killed by a drunk driver.

What I was thinking of, in relation to the increase in the number of people working in “national security” (eg in the intelligence agencies or to staff the X-ray machines at airports) was, if their work results in the prevention of terrible acts/attacks (eg bombs not going off), could the impact of that be used as some sort of measure?

I suppose that one measure of their “productivity” might be something like “number of deaths prevented per unit input of labour”?

I did concede in my original article that the decline in productivity growth over the past few years could be due, at least in part, to the possibility that those who have gained employment during this period are (as Rafe suggests) ‘less productive’ in some material way than those who have been in the workforce for longer. Intuitively this makes some sense, in that as the unemployment rate has fallen to levels not seen in three decades, employers could find themselves taking on people who they would have rejected in earlier years (and indeed from personal experience many of those could well be now working as security guards at airports!).

The problem with this as anything other than a minor explanation is that a large proportion of the newly created jobs have gone to people who were not previously counted as ‘unemployed’, but have instead gone to people who were either not in the workforce or not in Australia at all (ie to migrants). This may well be what DW Griffiths was alluding to.

It may well be that detailed studies of changes in productivity in individual industries or workplaces (as Sacha suggests) might shed some more light on this, although such studies are usually carried out by management consulting firms and their results are often confidential to the employers who commission them.

However one simple example may illustrate that there could be something in this. Employment in the mining industry rose by 70% over the four years to the September quarter 2006; yet over the same period real gross value added in the mining industry has risen by just 3%. Arithmetically this implies that output per person employed in the mining sector (a cruder measure than output per hour worked, but at the industry level that’s all we can readily calculate) declined by 34% over this period. Presumably that’s because the mining sector has been employing lots of people to dig new holes, or to make existing holes bigger, and to build new means of getting stuff out of those holes and onto ships – but the stuff actually hasn’t started coming out of those holes yet. This could be a significant part of the overall productivity story, although I doubt that it’s all of it.

It will be apparent from my last few paragraphs that the ‘value added’ by the hordes of people now making life miserable for everyone else in airports and public buildings, or producing and filing reports that no-one will ever read (not even – and I have direct experience of this – the regulators who require them to be produced) is pretty close to zero; and that (to answer Sacha’s question directly) we would be no worse off, in fact we would probably be better off, if their ‘work’ wasn’t done at all.

An idea just came to mind – on the question “what is the “output”

Has anyone dared to put a figure on the deadweight loss in complying with the complexities of the tax law?

You aint getting no argument from me on stagnation under the current regime!:)

There have been productivity gains from computers. One of my relatives used to spend some of his school holidays in a bank working out the interest on savings accounts by hand. All his calculations had to be checked by a supervisor as well!

Without having any time to research this, is it possible that reduced productivity growth is a function of getting less productive workers into the economy (low unemployment) thus lowering the average but not in any way that reflects a reduction at the higher levels of complexity and skill. In other words it is just one of the many instances where the aggregate measure is unhelpful or misleading.

Rafe the rate of decline in the unemployment rate was much higher in the mid- and late- 1990s than in the last five years, so it seems doubtful that the effect you’re describing was behind the recent slowing in productivity growth.

Shifting resources into security probably has the same effect, depending how you are meauring productivity. In fact is is just possible that the whole approach is misconceived.

Which begs the question: what is the “output” of people employed in compliance, regulation and security? Alternatively, given your ideological bent, if the government effectively mandates such employment, or spends taxpayers’ money on it, would it not be a natural assumption that “deadweight loss” describes the effect of such employment on productivity and the broader economy?

Productivity’s a notoriously messy area, but I find myself agreeing with most of what Saul’s saying here: Howard’s government has presided over much stagnation (and some regression) on the micro-economic reform front.

Shifting resources into security probably has the same effect, depending how you are meauring productivity. In fact is is just possible that the whole approach is misconceived.