Released on: 11-Mar-2015
Alas, too often, people who should know better have tended to make ‘productivity’ synonymous with longer hours and less job security.
As an economist, I love hearing real-world examples of how firms are raising productivity. Last year, I visited a manufacturing firm that makes mining machines. So baroque had the production line become that when they revamped the layout, the firm found that it was able to get the same work done on a line just one-thirteenth the length. The result was a one-third improvement in productivity for the company.
Visiting Fortescue’s operation in the Pilbara, I heard about its company-wide competition called ‘Have a Crack’, with the prize being $50,000 for the best productivity-boosting suggestion. The winning idea increased the efficiency of the machines that load iron ore onto bulk carriers, saving the company tens of millions of dollars each year. Not a bad return on investment.
Internationally, economists are increasingly noticing that boosting productivity is about modest tweaks rather than big breakthroughs. By listening to those on the factory floor, the firm is able to make small, incremental changes that together help raise living standards.
Technological breakthroughs matter too. Here, the big debate is whether innovation is slowing down or speeding up. At a recent conference I attended at the OECD, this debate was brought into sharp relief by presentations from two of the world’s leading economists.
In the pessimistic corner was US economist Robert Gordon, who pointed out that average productivity growth in advanced countries has fallen significantly over the past decade. Gordon worries that this slowdown is due to structural changes. Other economists have also pointed out that the 20th century saw an outpouring of innovation, from planes to television, penicillin to microcomputers. On some metrics, they observe, the rate of innovation seems to be tapering off. As PayPal co-founder Peter Thiel puts it, “We wanted flying cars, instead we got 140 characters.”
Leading the charge for the optimists was US economist Joel Mokyr, who argues that two systematic factors are fuelling innovation. First, science’s toolkit now includes technologies such as adaptive optics and automatic gene sequencing, which can spur research progress in the same way that the glass telescope underpinned Galileo’s astronomical studies. Second, the internet permits the cross-fertilisation of ideas across disciplines and continents. Mokyr argues that the pace of technological progress is rapid. He points out that people living in innovation ages often don’t realise it at the time.
As a congenital optimist, I’m naturally drawn to Mokyr’s explanation. But even if technological progress has a bright future, it’s important to consider the impacts on inequality.
Over the past generation, we’ve lost over 100,000 jobs for keyboard operators, but created over 200,000 positions for information technology professionals. And on average, the new jobs are more skilled than the old ones.
Innovation also exacerbates inequality in another way. When machines become more productive, their wages don’t rise. Instead, the money goes to the owners of capital. So rapid technological advance not only widens the gap between highly skilled and less skilled workers; it also widens the gap between those who own the new machines, and those who do not.
Like it or not, technological advance and inequality are inextricably bound together. We need innovation as a driver of productivity. But new technologies have a tendency to widen the gap.
Put another way, many of us are drawn to innovation because we love creativity. But as Schumpeter’s memorable phrase “creative destruction” reminds us, creativity tends to come with destruction.
So what are the answers? Last week’s Intergenerational Report contained some discussion about technological change, but not in enough depth or detail. Equally troubling is that the Intergenerational Report failed to properly grapple with the question of inclusive growth — combining productivity with equity. Indeed, the report never once mentions inequality.
This is a pity because, without taking proper account of egalitarianism, it’s too easy to fall into the trap of thinking that the solution to sustainably lifting productivity lies in cutting wages. Advocates of this approach believe the nation is suffering from a ‘wages explosion’, despite the fact that we’ve just had the slowest rate of real wage growth since 1997.
Under this conception, plenty of workers will never produce enough output to justify their wages. Only by cutting minimum wages and eliminating penalty rates — the spruikers say — can we raise productivity.
A better approach isn’t to cut pay, it’s to raise output per person. By boosting the quality and quantity of education, investing in science, improving public infrastructure, and engaging with the world, we can raise people’s productivity. By maintaining a means-tested social safety net, we can ensure that the most vulnerable are looked after. This approach favours a race to the top, not a race to the bottom.
Andrew Leigh is the shadow assistant treasurer. This is an edited version of a speech delivered to a business breakfast in Perth.
This is an edited version of a speech given by Andrew