In this blog and its associated NERI Report Series no. 35 written by NERI economist, Chris Smart and SIPTU researcher, Michael Taft. Chris Smart discusses their research on domestic productivity.
Productivity is something we should all be worried about. Productivity growth determines our growth in living standards, the growth of wages, and the growth in tax revenue we generate to fund much needed public services.
While our headline productivity is lauded as being one of the highest in the world, buoyed by multinational firms, the emergence of a two-track economy is well documented. Our domestic firms produce significantly less value than their multinational counterparts, leaving them less capable of competing internationally or providing decent living standards for their workers.
In a study jointly published by the Nevin Economic Research Institute and SIPTU, we show that, when looking specifically at Ireland’s domestic economy, we fall significantly behind our European peers. We utilise Eurostat data to focus solely on domestically-owned firms and compare them with domestic firms in our European peer group – other small open economies (Austria, Belgium, Denmark, Finland, Luxembourg, Netherlands, Norway and Sweden). We find that Irish domestic productivity lags well behind.
Importantly, Irish workers work more hours than their peers and generate less value per hour; after accounting for inputs, the amount of value generated which is left to be shared between workers and firms is less in Ireland than comparable peers. Although annual productivity may be comparable, Irish workers are working on average just over 200 more hours per year than their peers, and this rises to as high as almost 300 more hours in sectors such as Manufacturing. This is one of the most visible consequences of our relatively poor productivity performance.
Irish domestic productivity trails all other EU peer group countries in the market economy. We would need to increase the amount of hourly value-added by 17 per cent to reach the average of our peer group. Perhaps thinking about the gap in these terms isn’t particularly intuitive; stated another way and tying back into the hours worked disparity highlighted above, we’re compensating for our productivity shortfall by working more hours, taking less holidays, and generating lower wages for our workers and lower profits for our firms. Closing that productivity gap could allow us to reduce some of that disparity with our peers in terms of the number of hours we work, for example.
Further detail on individual economic sectors is available in the report, highlighting particular shortfalls in areas such as Retail, Manufacturing, Transportation and storage, Hospitality, and ICT.
It is also worth noting that this is not just an issue of low productivity in the same subsectors relative to peers; while someone employed in Food manufacturing produces about two thirds of the value added per hour worked relative to their peers, we also have higher shares of workers in these inherently low productivity sectors, with about 1 in 4 of our Manufacturing employees involved in Food manufacturing, compared to about 1 in 6 in our peer countries.
While the research does not specifically set out to diagnose and solve this productivity deficit, there are some barriers highlighted which may be holding Ireland back; low investment, our peripheral location, lack of scale, access to affordable capital, entry barriers which limit market competition, and lack of employee voice.
While these causes are up for debate, and indeed that debate between unions, employers, and Government is essential for diagnosing and treating the causes of our productivity deficit, it is worth noting just how little disagreement there appears to be that this is an important concern. Organisations such as the National Economic and Social Council (Section 2.2.4) and the National Competitiveness and Productivity Council (Section 5.2.3) have highlighted our relatitely weak domestic productivity preformance, and indeed the Irish SME Association (ISME), reacting to the findings of the report, echoed many of the same concerns.
If we can all agree there is a problem, and the will is there to fix it, then all that remains is to devote the time and energy to coming up with the best possible solutions to ensure our domestic economy continues to thrive and to deliver profitability for firms and meaningful improvements in living standards for workers.