Real or Nominal Productivity Slowdown?


(published as “Real productivity is an efficiency measure” in the Financial Times Letters to the Editor 16.8.2018)

The Financial Times (among others) has been deploring for a long time that UK productivity is lowest among the G-7 countries (most recently Chris Giles „Productivity crisis is most severe in the western world“ FT 13.8.18) and that it has been growing most slowly or even falling. This is  a problem because „productivity, output per hour worked, is the way nations become richer, living standards rise and governments have the resources to improve public services or cut taxes“. So far, so ok.

The problem lies with Giles‘ definition, when he says that „labour productivity is normally measured as the value of goods and services produced for each hour worked“. Here he confuses real productivity as an efficiency measure, where input (labour hours) is compared to physical output (e.g. the number of cars, or a production index), with a value measure where physical efficiency is combined with the ability of the producer to set prices. Productivity measured in such a way confuses efficiency with monopoly power and price-setting ability. This becomes even clearer when Giles states that before the present „slump“ high productivity growth was achieved by „industries such as computing, finance and professional services“ whose growth performance has dropped sharply after 2008″. While it is difficult to measure the physical output of service industries, it is clear that the mentioned group has high price-setting power, and thus can charge prices which might be above competitive prices. This would have little to do with efficiency.

I also doubt whether the activities of the financial sector before 2008 should be the benchmark for today‘s performance of the sector. Their stellar „productivity performance“ may have contributed significantly to the Great Recession.

What seems to be happening to depress „nominal“ productivity is that businesses have much more negotiating power vis-a-vis weak labour unions than previously, being able to pay low wages to workers; it is also true that the UK employs a larger percentage than other countries of unskilled, low-wage workers (many of them immigrants).

Efforts by the statisticians should be directed towards gaining data on „real productivity“, the true, technical measure of efficiency. If that keeps falling, then yes, the UK has a problem (in addition to the misguided and incompetent way to lead the BREXIT negotiations).

By the way: It might also be opportune to inform the reading public of the more important productivity measure, namely „total factor productivity“ which measures efficiency gains beyond using more capital and labor. This measure is the true driver of our material well-being.

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2 Comments

Filed under Crisis Response, Socio-Economic Development

2 responses to “Real or Nominal Productivity Slowdown?

  1. Anton Rainer

    As an Old Keynesian (New Keynesians are not Keynesian), I do not care too much about productivity, because it is mainly dependent on effective demand and/or working time on the supply side. For comparisons over time, I would (with Kurt) prefer real productivity measures, although these are influenced by prices, too. For regional comparisons for a given period, it is not that clear. I do not think that higher per-hour-productivity – quasi automatically – leads to richer nations and higher living standards. With high unemployment and insufficient demand, an increase of productivity may lead to even higher unemployment and less value-added. Not to forget Andreas’ argument that living standards are also dependent on goods and non-goods (damages) not included in GDP (and therefore in usual productivity measures) and – what is seldom mentioned – job satisfaction is an important factor. If higher productivity is “purchased” by more unsound stress, I doubt whether this can be seen as a higher living standard.

  2. As always excellent to read commentary. There is no end to suggestions from economist friends: It is high time to include the use of “free” (unpriced) natural resources on the input side of productivity calculations (especially multifactor productivity indicators) while also counting man-made improvements of the environment (hope they exist) on the output side. The OECD would be an excellent place to carry out such a project. Unfortunately the “Going beyond GDP” project stopped short in the no-man’s land of wellbeing…

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