The Australian Government’s recently released white paper on Australia in the Asian Century identified productivity as one of five key areas for action, at a time when we are engaged in a major national debate on productivity.
Soon after the release of the white paper, two reports on Australian productivity were released: the McKell Institute’s Understanding Productivity: Australia’s Choice, by Roy Green, Philip Toner and Renu Argarwal; and the Ernst & Young Australian Productivity Pulse. There is a high degree of convergence between all of these documents that lift the debate above the blame game that has dominated it to now.
Unlike some contributors to the recent national debate, none of these three documents targets industrial relations reform as the key to improving productivity. All of them agree, however, that skills and innovation are central to lifting productivity growth.
Australia in the Asian Century highlights “five pillars of productivity”: skills and education, innovation, infrastructure, tax reform and regulatory reform. The McKell Institute’s report focuses on the importance of management skills and innovation. The Ernst & Young survey found that the three main contributors to individual productivity according to employee respondents were people management, organisation structure and design, and innovation.
However, Green and his co-authors argue that part of the problem with Australian productivity may be the labour market deregulation since the 1990s that has shifted jobs to low productivity sectors of the economy, notably in hospitality and retail.
There are resonances here with the New Zealand experience of complete deregulation under the Employment Contracts Act 1991. Since then, New Zealand wages have fallen behind their Australian equivalent by 25-30%, but productivity growth has also declined. There is little incentive for employers to invest in new technology or innovation if cheap labour is readily available.
In simple economic terms productivity is the ratio of total outputs to total inputs. Outputs can be represented by GDP at the national level, or total number of widgets or value of production in an organisation. Labour inputs are measured by number of employees, or more accurately, number of hours worked.
However, inputs include those from capital, even if commentators frequently refer to labour productivity only. If businesses do not invest in innovation and new technology, work practices alone cannot produce high productivity.
At the same time, there may often be lags between investment in new technology or innovation and growth in outputs. Australia’s productivity may have been reduced by investment in mining infrastructure that has not yet come into full production.
We know productivity is largely determined in the workplace, but the traditional economic understanding of productivity works best at the national level of the whole economy. Once we drill down to organisations it is not always so clear.
In manufacturing we can easily identify the number of widgets produced as outputs. But it’s not so easy in the service sector, which accounts for three quarters of our employment. What outputs do we measure as productivity in schools, hospitals, art galleries, aged care facilities and the like?
Can hospital productivity merely be measured in terms of how quickly patients are turfed out of beds, or should quality of service be a consideration? These issues are particularly important as Australia in the Asian Century envisages service provision to Asia as a key economic activity.
Many businesses do not have effective performance measurement systems in place, especially in the service sector. An important starting point to address the issue of productivity would be to encourage small and family businesses to adopt effective performance measurement. This issue goes to the requirement for upgrading management skills mentioned in the McKell Report.
For the large services sector quality of service is a critical and achievable factor for measurement, through, for example, customer satisfaction surveys. This is not the same thing as productivity, but at an organisational level it can be an indicator. It also affects the bottom line, as poor service provision will hinder market growth. To compete in Asia in this sector, service quality will be important in a growing and discerning middle class market.
Quality of the work environment is also associated with high productivity in substantial research in Scandinavia over many years. My own research comparing New Zealand and Denmark shows that quality of work environment, including well-being, job satisfaction, employee voice and workforce development through training, impact on indicators of productivity such as employee engagement and quitting behaviour.
Employee voice may also contribute to innovation, and quality of the work environment is clearly where management skills are important.
Ray Markey will be among the speakers at Macquarie University’s The Future of Work Symposium Series in Sydney on November 29.