Solving The Productivity Dilemma

Posted on August 31, 2015


Most standard measures of productivity are outdated and even harmful. Productivity matters at the level of the individual firm. Measuring it at an aggregate, national level is of doubtful value.

This article was first published in the Huffington Post

Productivity is at the top of everyone’s list of issues that need to be addressed. The narrative goes that Europe is lagging behind other countries, and especially the US, in productivity and, maybe more important, in the rate of productivity growth thereby continually eroding European competitiveness. Governments continuously make statements that improving productivity is one of their key goals.

This is the standard discourse in politics and economics and there is some truth to it. But such discourse, is, by its nature, reductive. The concept of productivity is challenging to understand let alone measure meaningfully on a national basis. Most measures of productivity were designed decades ago since when the nature of our economies has changed out of all recognition. Whether one compares productivity as GDP per person or GDP per hour worked; whether one believes that the most important metric is in local currencies or in standardized US$ or adjusting for purchasing power; whether one believes that GDP is actually a useful measure at all; all these are debates that occupy economists but each metric tends to give a different answer.

Nevertheless, a broader, less technical concept of productivity – the idea of getting the greatest return out of resources used – is probably something that many can agree upon. Where the debates start is when one tries to define both ‘resources’ and ‘return’. Are measurable financial return or purchasing power the only reasonable metrics? Should we be considering wellbeing, happiness, health, life-expectancy, a decent environment and a thousand other metrics in our assessment of return? What of resources? Should we just be considering capital and hours worked? Should we also be considering environmental degradation and human degradation (ie. burnout, progressive demotivation, etc) as part of our input metrics? What of, for instance, an activist organization (reasonably considered a firm) that, maybe employing volunteers that may even take time off paid work, can be highly productive (in their own terms) by stopping the indistrialization of a natural space the consequence of which may be a reduction in GDP growth potential. Does this represent an increase or a decrease in productivity?

These are, of course, largely unanswerable questions at the aggregate level. Each one of us wants to lead our life differently and have a different view of what we would consider reasonable inputs and reasonable outputs. Some of this can be aggregated at the level of the firm since companies and other organizations tend to have clear ideas of their business model and what constitutes productivity for them. However, it is doubtful whether aggregate measures of productivity beyond that are useful – and they may even be harmful.

That said, at the level of the firm, it is relatively simple to notice that productivity in Europe languishes below that observed in the US. As Europe, like other developed economies, shifts from a manufacturing economy to a service economy, it is clear through everyday observations that we have not yet mastered the art of improving service productivity. Take my own experiences. Whenever I rent a car in the US, it takes me ten to fifteen minutes between showing up at the counter and driving off in my car. Anywhere in Europe, it is a much more prolonged – and generally frustrating – process. When I needed my internet line fixing in the US, the technician arrived within a day and was done within twenty minutes. In Amsterdam, KPN gives me an appointment within three weeks and, during the last visit, it took visits by four technicians over three days to fix the problem. US restaurants seem to have the knack of turning over their tables efficiently without making one feel pushed out thereby getting a much greater return on their fixed assets. In London, Amsterdam, Paris, Madrid and many other places, I have waited twenty minutes or more for someone to bring the bill so I can vacate my table and a new set of customers can occupy it. Is it any wonder that productivity is low?

If one believes that productivity is relevant at the level of the firm but not meaningfully measurable in the aggregate, it raises the question as to whether governments can reasonably do anything to help improve aggregate productivity or whether responsibility must rest primarily with individual firms. Unfortunately, when business encourages government policies to help them improve productivity, they tend to be policies that encourage a race to the bottom – labour market flexibility, reducing social costs to lower expenditures, subsidies, de-regulation that allows more environmental pollution, and so on. None of this encourages European firms to increase productivity by engaging in a race to the top. None of it encourages innovation, efficiency and meaningful differentiation in tomorrow’s world.

It used to be said that countries that try to compete through lowering exchange rates are doing nothing but mollycoddling their firms rather than promoting management action to increase productivity. Such actions actually undermine rather than increase long-term competitiveness. The same can be said of any policies that create a soft business environment that does nothing but allow firms with lazy management teams to survive. It may seem paradoxical, but the best way for governments and policy makers to encourage increases in productivity and assure long term competitiveness may be to create a progressively tougher business environment thereby encouraging firms to invest, innovate and look to participate in new market areas that are still to emerge. Wrapping firms in cotton wool is a sure way to slow but steady degeneration of the European economy. So is allowing oneself to be guided by outdated, aggregate measures of productivity that are no more than blunt instruments that may do more harm than good.

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