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Productivity crisis: What me worry?

GB Geo-Blog

Productivity crisis: What me worry?

There never is a shortage of sloppy economic analysis. Today’s example deals with Bill Watson’s discussion of productivity.

In his commentary in today’s Financial Post, Bill Watson seems to dismiss the notion that there exists a productivity problem in Canada. I will focus on just two of his comments.

“If people generally are paid according to their productivity that solves a large part of the productivity policy problem. They have a very strong incentive to increase their productivity.”

First of all, most people work in teams, and as a result, it is very difficult to accurately measure each person’s contribution to the team and to the employer’s bottom line. Furthermore, it is very difficult for an employer to determine any prospective employee’s potential productivity and eventual contribution. Thus, while in theory there should be a strong positive correlation between an individual’s productivity and his/her compensation, the reality is much different.

Secondly, each employee’s productivity depends critically on various types of investment decisions made by the employer. If someone ends up working for a company whose senior management fails to make the key investments or happens to encounter a string of bad luck, this individual’s productivity in this job will decline through no fault of his/her own.

Employees should have the incentive to work hard and contribute to their companies’ success, but at the end of the day, the strategic decisions and investments made by senior management will make or break the company. Among these decisions are those dealing with human resource policies, which will be critical for encouraging the cooperation and performance of employees.

The second comment of Watson: “Might it be that investments that make sense to productivity experts on productivity grounds just aren’t very smart from a business point of view? If so, which way should our businesses be going? Following their bottom line or doing what productivity experts recommend?”

There is more to productivity growth than investing in new technologies and more equipment. Consider Apple: Apple has outsourced most of the manufacturing of its products. Yet, Apple has been extremely successful and profitable by being the innovation leader in its target consumer electronics segments. Has Apple created significant productivity growth as a result? Most definitely! Have Apple’s employees in the U.S. benefited? Of course!

Watson seems to believe that if companies invest in more equipment and/or the newest production technologies, and as a result, the productivity of their employees rises, so too will their wages. Hence, unit labor costs will not change, and so profits might not increase, making such investments poor decisions.

However, even in this simple model, if a company does not improve its productivity, while one or more of its competitors do, the company will likely lose its best employees who will be attracted to the competitors by higher wages. Consequently, this laggard company will find its unit costs increasing, and its competitiveness eroding.

Productivity growth is multi-faceted. Investments in product development, product design, production equipment, production technologies, supply chains, human resources, marketing, distribution channels, etc. drive productivity growth. More importantly, these investments also drive the competitiveness of companies. If companies do not make such investments, they will fail.

Productivity or profits are not the options facing companies. Productivity/profits or failure are the options.

Watson, like most academic and government policy economists, has never incorporated the contributions of Michael Porter and Josef Schumpeter into the traditional economic models. Thus, when it comes to discussions of productivity and competitiveness, the standard economic analysis is very sloppy.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.


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