Home > Uncategorized > The productivity stagnation – not a global phenomenon.

The productivity stagnation – not a global phenomenon.

Productivity 1

Long story short: labor productivity, as economists define it, is best understood as the amount of ‘stuff’ the income (wages, profits, rents, interest) related to one hour of work can buy (this is a somewhat idiosyncratic take on productivity. Look however here). Productivity is, as economists define it, not any kind of physical entity. It is supposed to be ‘value added’, or total income cq. the nominal value of net production, per hour of work. For about two centuries, give or take some decades, productivity has increased. Not anymore. At least: in a whole bunch of seemingly quite distinct countries (graph 1). This is, in a historical sense, really surprising. And economists spend a lot of ink about it: why did this happen? Which disease, nay, evil!, did beset the western economies! And it does require explanation. For any kind of explanation, however, we still need a more general picture of productivity developments in rich countries (I first wanted to include Japan in graph 1, too, but it turned out that Japanese productivity growth, though low, is clearly superior to these countries). Graph 2 shows developments in most of Europe.

Productivity 2

 

The Greek case is of course engineered. The Troika wanted the Greek to have lower purchasing power and successfully killed of lots of reasonable paid jobs in the medical and the government sector. Italy is a strange case, as the productivity stagnation already dates from around 1990: absolutely weird (though Mexico shows a somewhat comparable development). And quite some countries (Belgium! The Netherlands!) indeed show a dismal track record – at least when compared with preceding centuries and surely when compared with the Post 1948 world. Productivity increases in non-euro Eastern Europe (except the Czech Republic) are however high and comparable with historical developments. Looking at East-European countries it is remarkable that productivity growth in Estonia and Lithuania stalled during the last years. High increases in Spain were due to the demise of the (low productivity) construction sector but recently other sectors seem to have picked up productivity growth, too.

Anyway – productivity stagnation is not an universal pattern. Which does not explain the stagnation in countries where it happened. But it does put the USA/UK/Finland/Switzerland experience in a perspective. A hypothesis might be that declines in ‘real’ wages (Finland! the UK!, the Netherlands!, the USA!) also lead to declines in ‘real’ profits (less spending!) while at the same time a lower interest burden (zero interest policies of central banks) also depresses macro interest income – and therewith the amount of ‘stuff’ total income potentially can buy..

  1. June 12, 2017 at 8:41 am

    The ones with good productivity growth are all central-eastern European countries benefiting from EU-accession related catchup. The middle group includes some more of those. Special case. Some others in the middle group, particularly Spain suffer from a dismal employment performance, which can rasie productivity. Take all these cases off and there is not much left in terms of well-performing industrial countries.

    • merijntknibbe
      June 12, 2017 at 10:46 am

      Agree with your main point (Spain indeed had and has a dismal employment experience since 2008, but since about 2 to 3 years, employment is increasing rapidly again. Total employment is still way below bubble level. This should not be misunderstood. There was an unsustainable financial development in Spain but, during the bubble, not an unsustainable employment increase. The financial bubble had to burst, but there was no reason why employment had to fall that much. Which means that Spanish employment is indeed dismal. however, employment growth during the last 2 oe 3 years is quite high which means that the productivity increase during recent years can not be explained by shedding of unproductive labor). My point: there is an enigma – when it comes to rich Industrial countries. While there are quite some differences between these, too. Compare France with the UK. France has a much higher average productivity to begin with – and seems to increase its lead over the UK (even when French productivity increase itself is not very high in a historical perspective).

  2. anobserver
    June 12, 2017 at 10:28 am

    Isn’t the most reliable measurement given by total factor productivity, instead of just labour productivity?

    • merijntknibbe
      June 12, 2017 at 11:00 am

      This depends on what you want to know. When milk production of cows increases this can be ‘explained’ by genetical changes, by an increase of the amount of feed per cow or by more capital (i.e. larger cows in combination with robots with enable farmers to milk the cows three times a day, which increases production). TFP is, literally, an average of an index of labour and an index of capital (or even more factors of production). In the case of cows, the amount of labor will dwindle while the amount of capital increases, which will yield a rate of total factor productivity growth than just looking at labor alone. In a technical sense this is not entirely right – the use of more capital might enable more productivity enhancing changes when it comes to feeding or milking and it is not right to enscribe this to the value of capital (which might be higher because value added increases…). In an economic sense this is somewhat different. Capital is Always owned, by somebody. Which influences decisions. At this very moment I’m reading a book about Frisian cooperatives (Van der Zee,T. (1933). De Friesche boeren-coöperaties in haar maatschappelijk verband. Sneek: Brandenburgh & co). This book clearly shows that coöperative dairy factories, as they tried to increase income of farmers instead of profits for share holders, took a strong lead in increasing quality of dairy products to obtain higher prices for milk (while private factories tried to lower prices of milk), using basically the same amount of capital. Just using capital without any regard for ownership seems to lead us astray (mind, again, that the value of owned capital is influenced by the value of products sold).

      • anobserver
        June 12, 2017 at 1:26 pm

        Well, since you bring an agricultural example, and relating to your question mark about Spain: from what I see in supermarkets here and know from readings, that country is a major player in agricultural and fisheries products (fruits, vegetables, olive oil, canned fish).

        That sector has also been a massive provider of low-skilled jobs (often taken by illegal immigrants from Africa).

        Can the solution to the “riddle” of Spanish employment/productivity be found there? Perhaps an expansion of the export-oriented agriculture linked to changes in the production techniques (more capital-intensive ones)?

    • Risk Analyst
      June 12, 2017 at 8:35 pm

      I’m still trying to figure out if this makes any sense, and since you focused on dairies, here is my concern of measuring productivity by revenue per labor hour. Here in the US, the price a dairy will get for its milk is significantly impacted by government price supports, the degree of monopsony from the local buyer, and feed costs which are greatly impacted by local weather. So, if I understand this article correctly, this productivity measure will show a large increase in dairy productivity if the government increases subsidies, but will show a decrease in productivity due to a lack of rainfall in one year. I’m not sure such an impact measures how productive a worker is. And to extend this idea, based on revenue, the banking sector had a huge increase in productivity in the past three decades and had a large impact on the slope of the US curve in the above chart. But is the ability to carve up and securitize mortgages into CDOs really the productivity that we want to measure?

      • merijntknibbe
        June 13, 2017 at 7:34 am

        Dear Rick,

        it is indeed the case that when financial types are able to extract huge fees (for instance in case of an takeover of another company) which are financed by money created by a bank to enable this turnover this turns up as high productivity for the financial sector.

        One of the reasons why British productivity does not increase (see the graph) is in fact the decline of wages/incomes in the british financial sector; very probably this plays a role too in some other countries.

  3. Norman L. Roth
    June 12, 2017 at 5:11 pm

    June 12, 2017

    It’s hard to believe that after more than a century of warning and analytic discussion {since Thorstein Veblen} “Productivity” is being bandied about as if it’s a quantifiable variable that can be “scientifically” manipulated and compared through absolute time. See chapter three of TELOS and TECHNOS.
    The scarcely hidden and comically discredited “measure” of TOTAL FACTOR PRODUCTIVITY still weighs like a gigantic dung-heap on the minds of contemporary economics. And it certainly destroyed Robert Solow and his M.I.T .colleagues sixty years ago.. As John V. Neumann pointed out at the time. Not to mention all that “spurious quantification” of capital, as if it’s a physical substance that can be accumulated and compared through time series like mass and energy.. See chapter five of Telos & Technos.
    This remains a special trauma for “progressive” neo-Marxist practitioners of CAPITAL inequality-conspiracy theory.
    It’s hard to figure out whose worse. The neo-classical junk academics or their “progressive” critics. But it’s not so mysterious why so many neo-classical econs turn into hybrid “progressives” in their dotage.

    GOOGLE: {1} Norman L. Roth {2} Norman L. Roth, Technological Time {3} Norman L. Roth, economics of work

    • merijntknibbe
      June 13, 2017 at 7:31 am

      Reading Veblen on this, now. Patience, please!

  4. Grayce
    June 12, 2017 at 8:15 pm

    Who espouses this: Productivity is the ratio of output over input. If you get more widgets for a given amount of cost of production, then you are more productive. If you expend more in the cost of production for a given number of widgets, then productivity is down. Productivity gains must be “captured” (put into someone’s pocket) or it is a theoretical exercise. Over time, the control of units makes comparisons difficult. (Monetary units do not hold onto value over time.) It seems that the quest to understand productivity in one place is hard enough, yet to compare across countries is less stable. Doesn’t it seem that the best one can do is make relative observations and avoid “proving” one theory is right above all?

  5. June 12, 2017 at 9:08 pm

    Here is a very simple hypothesis: stagnating productivity is caused by stagnating wages. The problem is in the way productivity is determined: by dividing the value of what is produced by the number of hours needed to produce it. That is a very poor indicator of actual productivity, which anyone other than an economist would interpret as the quantity and quality of goods produced.

    Economists have breaking their heads on why productivity growth has been so slow for years. It shouldn’t be rocket science: wages have stagnated, technology has increased productivity, which has allowed producers to lower prices, thus reducing the value of the product. Lower value divided by the same amount of labor means lower productivity – as calculated by economists.

    Re. the example of milk in The Netherlands I would suppose the price of milk in real terms has declined considerably because of a combination of fierce competition, overproduction and technological development that still allows producing at such lower prices. Though in this case the price of labour is likely to be less relevant than in Spain, where cheap migrant workers have allowed lower production costs and thus, lower prices – meaning value.

    Economists need to find a better way to calculate productivity then the simple division of value by amount of labour. In particular because the reasoning also goes the other way: low wages are a consequence of low productivity. Thus economists justify the abysmally low salaries of workers in modern factories in low-income countries. Workers there produce at least the same, in terms of quality and quantity, as workers in rich countries in similar factories. Perhaps more, due to the pressure of their employers to maximize output and their weak negotiating position. But the value of what they produce is much lower than in rich countries, because their low salaries allow their employers to sell at much lower prices.

    Or am I getting this totally wrong?

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