Productivity matters for everyone

In recent years one economic trend in particular has become increasingly important for policymakers across most western economies and that is productivity. It has become such a significant issue because while most other economic metrics eventually began to recover following the 2008 crash, productivity has remained stubbornly weak.

In simple terms productivity is a measure of how efficiently output is produced from inputs. However, productivity is a somewhat contested word, in that it can mean different things to different people depending on the context. In particular, there is quite a difference in how the word can be perceived when used in the micro sense as opposed to the macro.

People will most likely have heard about productivity in the micro sense in discussions about their job and their pay. Companies regularly use the productivity of workers or teams of workers in order to curtail or formalise pay increases.

For many workers this use of the term productivity carries negative connotations. This is chiefly because when measuring productivity not all inputs in the production process are treated equally. In many pay negotiations the burden of productivity gains is solely on one input, labour.

If a firm is experiencing low productivity growth, the problem is not necessarily with the workforce. If a company has not invested in machinery and new technologies, workers can put in as much effort as possible, but achieve little gain. Furthermore, productivity should not be the only metric by which pay is determined. A company with moderate productivity growth can experience much higher profitability rates and these should be equally important in deciding workers remuneration.

If the firm is the micro level, then the national economy is the macro level. Macro or national productivity measures how efficiently national output is produced by the entire workforce. It measures total output for a country or region and divides it by the number of people it took to produce. While productivity at the national level is less of a day to day concern for most people, many of the same connotations apply.

Looking at productivity figures for the UK economy one could be forgiven for thinking that the country as a whole had become quite lazy over the last 10 years. This, however, would be to make the same mistake that many employers do at the micro level.

Indeed, a lack of investment in the economy overall is believed to be one of the central reasons for weak national productivity. The growth in wages has also been quite subdued over the last 10 years and this has allowed employers to hire another worker rather than invest in new technology. This trend would also help explain why employment recovered quite quickly after the recession and why wages have not.

Earlier this month, productivity in the UK made the headlines again only this time the news was positive. Measured as total output per hour worked, productivity in the UK increased by 0.9% in the third quarter of 2017. That might not immediately sound that impressive but it was the largest increase recorded since early 2011.

However, the cause of the increase in productivity was not a sudden surge in output but rather a fall off in employment. The UK did not produce more with the same number of workers, it produced the same amount of output with less workers.

It may seem odd to celebrate the fact that less people were involved in producing total output as it is tantamount to celebrating greater unemployment. However, such an event was inevitable. The UK economy could not continue on its current productivity path or else it would risk a crisis in living standards.

Living standards are determined by many things, but wages are key. Just as in the micro example the level of wage growth in the UK economy is often tied to the growth of national productivity. If France can produce the same output as the UK with fewer workers, wages in France will exceed those of the UK. If the trend in productivity continues so will the trend in wages.

It is for this reason that nearly everyone should be concerned about productivity. The difference in productivity levels between Northern Ireland and the rest of the UK explains much of the gap in wages, particularly in the private sector. Wages at the micro or macro level should never be entirely determined by productivity but the connection between the two is undeniable.

A lack of investment holds back productivity and holds back wages. The most recent UK figures are encouraging, but one swallow does not a summer make. It is in the interest of both firms and workers that the level of investment in capital, both human and physical, rises to meet the challenge of securing prosperity and living standards in the Northern Ireland economy.

This article appeared in the Belfast Telegraph on Tuesday 16 January.

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