Productivity.

The Tailor of Folk Suits. [A]

Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker. – Paul Krugman.

It’s an election campaign and pollies are not debating productivity. Imagine that.

Well, they aren’t debating many things. For example, last year, by this time, all the talk was COVID. Today? Not a peep. More importantly, climate change is at best an afterthought.

 

But it’s productivity that the economically-minded Very Serious People, like Laura Tingle, have in mind as the most important thing ever:

The good news is that growth and employment are strong. The bad news is inflation and interest rates are rising and are going to keep rising and wages are only just starting to pick up. That brings us back to one of those issues we just aren’t talking about in this election.

Which is? Cut to Danielle Wood, CEO of the Grattan Institute:

If we’re serious about getting real wages growth for the longer term, we really need to be talking about productivity and that is actually something that’s been missing from this election campaign.

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I already presented this chart:

Let’s try that again, with some added notes. Nominal wages growth reached a peak during the second half of 2008, when it registered 4.3% (point G). The green continuous line shows the general tendency since then: downwards.

To be sure, we’ve seen recoveries against that tendency. One runs from C to D; another, from E to F. Both, however, were partial: D is lower than G, just like F is lower than D. Those recoveries did not fully regain lost ground. That is consistent with the trend being … well … downwards, isn’t it?

They were also short-lived, lasting from a few months to a little over a year.

So far, Tingle’s pick up is the jump from A to B (that is, from a low of 1.4% in the second half of 2020 to 2.3% by the end of 2021).

Based on those facts, prospects of wage growth don’t seem great, right?

Yet, it’s entirely possible that Tingle’s recovery could be long-lived. It could also lead to levels higher than F and maybe even D or G. The information discussed here does not preclude any of that. In other words, that historical tendency could now suddenly reverse direction (the green dash/stroke line).

The question is not the possibility, but the likelihood. To be blunt: would you bet on that? (If the bet involves attractive stakes, I’d like to hear from you).

We’ll come back to this in a moment.

 

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Remember: those are nominal rates. They do not discount the effect of inflation on wages.

The latest ABS release reports that prices grew by 2.1% during the March quarter alone. But year-on-year inflation to March was 5.1%. That inflation is overwhelming Tingle’s nominal wage pick up.

 

For over a decade the RBA had failed to get inflation to 3% (red horizontal line): had that target been achieved, however, nominal wages would have had to grow by no less than 3% to ensure wage-earners do not lose acquisitive power.

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Last time I mentioned governments had subtler forms to slow wages growth. Remember?

Well, last week the RBA lifted the cash rate, from 0.1% to 0.35%, to the surprise of many and displeasure of some. The rationale? To tackle inflation.

However unpleasant that unexpected news is, it is much apposite. That action works against low unemployment and wages growth:

In the case of macroeconomic policy, the United States and other wealthy countries have explicitly adopted policies that focus on maintaining low rates of inflation. Central banks are quick to raise interest rates at the first sign of rising inflation and sometimes even before. Higher interest rates slow inflation by reducing demand, thereby reducing job growth, and reduced job growth weakens workers’ bargaining power and puts downward pressure on wages. In other words, the commitment to an anti-inflation policy is a commitment by the government, acting through central banks, to keep wages down. It should not be surprising that this policy has the effect of redistributing income upward.

Now, VSP may suspect that sounds suspiciously like MMT-talk and, because of that, will dismiss it out of hand. Indeed, that is something Bill Mitchell has been saying for a long time.

But, sorry VSP, you shouldn’t be so quick. And I suppose you probably do not know it, but Mitchell is not alone saying that.

As a matter of fact, Ross Garnaut, much venerated among local VSPs, recently discovered what Mitchell had been saying for years.

Morevoer, that quote comes from an author even Paul Krugman (the world’s most authoritative judge of a person’s seriousness) has anointed as a fellow VSP: Dean Baker (2016. Rigged; Kindle Locations 187-191).

Perhaps we shouldn’t put too much faith in Fraudenberg’s unemployment beginning with a 3: the necessary condition for wages growth. After the RBA move, something tells me that wage pick up sounds dubious. Do you still want to bet?

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Enter Wood (and Krugman). We better talk about productivity, then.

 

Productivity is a kind of rhetorical ace in the sleeve of the economists. The source of all sorts of wonderful things which otherwise wouldn’t happen; in their view productivity must constrain wage growth. If it doesn’t something awful, awful, I tells ya, is bound to happen.

Okay, but what precisely is productivity and where it comes from?

A simple conceptual model could help.

Suppose you are a tailor, specialising in made-to-measure men’s suits and jackets. You work alone, at a small shop, much like the old bloke in the opening picture.

A customer comes into the shop. You stop what you are doing to speak to him and take his measurements. You need to determine what is it he wants: single, double-breasted or clergy-type/Nehru jacket? Vest? What about the trousers? What sort of fabric: tweed, cotton, cashmere, silk, velvet? What colour?

That takes you considerable time. If you somehow can cut that time (if you are more productive, that is), the time you save you can use in other tasks. You can do more things in the same length of time. As Krugman put it: you raise your output.

Suppose the time you saved allowed you to make two suits, instead of one. This may not save in materials (two suits still require double amounts of fabric, after all), but it does save in overheads. If you had a staff, it saves wages.

 

Time is indeed money. Being more productive saves you money: you can increase your profit margin, without raising the price. Alternatively, you can lower the price – becoming more competitive viz a viz your competition – without reducing your profit margin. What you do with the money you saved through increased productivity is up to you.

You can be more productive by doing things faster or more skilfully, but increased productivity can also come from material sources: reducing wastage (fabric wastage, in this example) for instance (believe it or not, there’s software that does precisely that): waste not, want not.

Sometimes you don’t need to do anything to raise your productivity. Suppose your atelier is in an area plagued by power outages. When power is out, you can’t do anything. More reliable electricity supply improves your productivity.

But, let me repeat: What you as business owner do with the productivity savings is up to you. You certainly can, but you don’t need to share it with anybody. In particular, if you have workers you don’t need to share with them, even if it comes from them working faster or more skilfully or if the “wastage” you saved is from OH&S measures you skip.

In fact, wage theft, from the business person’s standpoint, is no different from productivity. When office workers do overtime without any additional pay, they are more productive from their employers’ perspective: that extra time worked is not counted as worked.

Every business person – even the smallest among the small – knows that. Some may avoid wage theft or breaking the law, but it’s ultimately up to them.

Very Serious economists like Krugman and Wood seem utterly incapable of grasping that idea.

They live in the NAB ad world. If you watch Aussie free-to-air TV you know that ad: an adorable little girl looks out the window as people go about their business on the street below and wonders what’s money for. For economists, the money business owner saves from productivity increases is for “looking after your best worker”. Maybe they should ask capitalists first.

 

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And yet, there is a simple, demonstrated way to lift workers’ wages, in Australia and overseas:

(source; see also)

(source)

As always:

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Image Credits:
[A] “The Tailor of Folk Suits”. Author: Maja Stosic. Source: WikiMedia. File licensed under the Creative Commons Attribution-Share Alike 3.0 Serbia license. Nobody, least of all the author, endorses me or my usage of the file.