Energy and Productivity - Part 2: What impacts productivity?

During March and April of 2018, Perpetual Guardian – a New Zealand based company that manages trusts, wills and estate planning – trialled a program of working four days and getting paid for five. Jealous? Well according to the results of a study on the trial, the partaking employees’ ability to manage their work-life balance increased by 24 percentage points while the amount of work completed actually increased.  

In the first article for this series, I discussed what productivity is and why it is important. This writing will delve into how individuals, companies and governments can influence measured productivity. I mentioned previously that productivity can be broken down into three categories; labour, capital and the remainder, called total factor productivity (TFP).

Labour productivity is calculated as the total outputs per capita (usually GDP) divided by the total amount of inputs per worker (average hours worked*number of people working). This means that increasing output or decreasing hours worked would ceteris paribus - keeping everything else constant – increase productivity.

Capital productivity could be calculated in a similar manner, by finding the amount capital available per person. It should be mentioned though that finding accurate data on the amount of capital in the economy can be challenging, so most productivity statistics will focus on labour productivity.

So what causes changes in measured labour productivity? As Perpetual Guardian discovered, it can be productivity enhancing to cut the number of hours worked if the amount of work produced doesn’t fall. Spain went through a similar experience at the time of the financial crisis. Their construction industry had seen an unsustainable boom in the lead up to the crisis, after which Spain shed an incredible number of workers and the unemployment rate skyrocketed.

As this decline exceeded that of the dip in output during the financial crisis, unlike many other countries, Spain actually saw growth in productivity during this period. This imminent shedding can only go on for so long and hence Spain’s productivity growth has fallen since, which is depicted in Figure 1.

Figure 1: Total Economy Database [TED], 2018.

Figure 1: Total Economy Database [TED], 2018.

Lasting productivity growth is hard to create, which is what William Nordhaus was getting at, using the affordability of light as a simple measure to show productivity’s drastic increase over human history. For example, the introduction of new fuel sources in the industrial revolution spurred the development of revolutionary new technologies, reflected in the productivity rates of the time.

In the twenty-year period between 1856 and 1876 productivity growth exceeded 3% seven times, with the growth rate reaching a tremendous 6% in 1870. That’s more than six times the current labour productivity growth rate. If countries today could even achieve half of that level of productivity growth, governments would break out into dance. However, that does not mean we should not set such ambitious targets.

There are a number of things that impact productivity that we as individuals have control over. For one, we decide how hard we work. Of course, companies and governments can influence our level of motivation, but ultimately, the decision is still ours. Companies may structure pay so that it is tied to performance, bonuses and such incentive payments, or cultivate environments where the employees are happy to work.

Bryson & Forth (2016) estimated the impact of various management practices and found that the practices that have the largest impact, asides from training, is quality targets and appraisals which improved productivity on average by 0.15% in 2011. Governments then decide the amount of welfare an individual can receive and how much tax we must pay, which will influence whether or not we find it worthwhile working that bit extra. Governments, however, can also set minimum wages, health and safety regulations or even limit the number of hours one has to work. All these things and more can impact how much effort you or I put into our work.

It is not just all about how hard we work though. Another important factor is the skill of the workers - with the right training, people can become far more effective at their jobs. Investment into an individual’s skills can be funded by the individual, the company or even the government. Ensuring that the workforce is adequately trained is a key factor in determining productivity.

The department of Business, Innovation & Skills in the UK conducted a study on the impact of education and training on productivity after the financial crisis. This found that “training has a sizeable and significant effect on labour productivity across the countries studied between 1995 and 2010. A 10% increase in the total amount of training variable per employee would increase productivity by 2%” (Aznar et al., 2015. pp. 8). That is quite significant considering that most countries are struggling to reach a growth rate of 2% in productivity.

An often-overlooked factor is that of the health of the workforce. If people are often unwell then the amount of work they will be able to complete will be severely limited. People’s day-to-day decisions ultimately play a large part in influencing their health, however, support from the company or a national health care system can go far to improving the health of the people. In 2013, about 69 million workers reported missing days due to illness, which translated to a total of 407 million days of lost time at work (West, 2014), time that is likely paid for but where little work would have been completed.

The tools we are given to complete our jobs also plays a big part in determining our efficiency. With old rundown machinery or old computer systems the work will naturally take longer. Investment into adequate amounts of capital is a large determinant of a country’s productivity. Just consider how much today is completed on the computer - if you have to wait regularly for the system to reboot or unfreeze you simply aren’t going to get as much done in a day.

Goodridge et al., (2014) found that capital contributed to an increase in productivity growth of 0.99 percentage points on average between 2007 and 2011. Compare this to the fact that they find an average growth during this period of -0.47% and it should highlight the importance of the tools we use.

An important driver for long term productivity growth is that of technological progress, such progress however doesn’t come from nowhere. These developments are preceded by years of research and development which requires resources for a result that might not even manifest. It is important for both countries and companies to cultivate an environment in which investment into such research is incentivised.

This can be through the creation of strong patent and legal systems or funding for promising projects. On the flipside it is also important for there to be adequate competition in the system. The last thing you want for productivity growth is for a company that dominates the market to spend most of its time ensuring the status quo rather than innovating their way forward. The extent to which the government should play a role in incentivising productivity will depend on your view of the markets.

Some will argue that the bureaucracy and red tape that any such legislation creates will only hinder productivity growth. Take for example compliance requirements for financial institutions, surveys have found that since the financial crisis employees are spending more and more time on ‘non-productive’ activities (Paleja, 2015).

On the other hand, some will argue that the re-training programs that Germany for those out of work, implemented before the financial crisis, was one of the major reasons Germany’s productivity growth rates rebounded so strongly after the crisis (Bellman et al., 2015) – Figure 2.

Figure 2: TED, 2018.

Figure 2: TED, 2018.

All-in-all productivity is influenced by a wide variety of factors, and the aim of this post wasn’t to develop a comprehensive list but rather give a taste of some of the more prominent factors that contribute towards productivity. It is important for us as employees as well as employers to be aware of those factors. For it is not only in our employers’ best interest to get the most out of their money spent on us but also – as established in the previous post – in our interest as human beings who want to see our standards of living continuing to improve.

Bibliography

Aznar, A. R., J. Forth, G. Mason, M. O’Mahoney and M. Bernini, (2015), ‘UK Productivity and Skills in an International Context”, Department of Business, Innovation & Skills (BIS), Research Paper 262. Available at; https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/486500/BIS-15-704-UK-skills-and-productivity-in-an-international_context.pdf Last accessed 13th December 2018.

Barnett, A., Batten, S., Chiu, A., Franklin, J., & Sebastia-Barriel, M. (2014). The UK Productivity Puzzle. Bank of England Quarterly Bulletin, Q2, 114–28. 

Bellmann, L., Gerner, H., & Laible, M. (2016). The German Labour Market Puzzle in the Great Recession. In Productivity Puzzles Across Europe. Oxford University Press.

Bryson, A., & Forth, J. (2016). The UK’s Productivity Puzzle. In Productivity Puzzles Across Europe. Oxford University Press.

Paleja, A. (2015). The UK’s Productivity Puzzle? What Business Really Thinks. Confederation of British Industry (CBI).

Perpetual Guardian. About us: Four-Day Working Week Trial. [website]. Available at; https://www.perpetualguardian.co.nz/our-services/four-day-working-week-trial Last accessed 13th December 2018.

West, J. 2014. 5 Factors that Affect Your Employees Productivity. National Business Research Institute. Availble at; https://www.nbrii.com/employee-survey-white-papers/5-factors-that-affect-your-employees-productivity/ Last accessed 14th December 2018.

Figures

Figure 1 &2: Total Economy Database [TED]. (2017). Output, Labor, and Labor Productivity 1950-2017. available at; https://www.conference-board.org/data/economydatabase/index.cfm?id=27762