tag:theconversation.com,2011:/us/topics/productivity-growth-11122/articlesproductivity growth – The Conversation2023-08-29T04:17:20Ztag:theconversation.com,2011:article/2123522023-08-29T04:17:20Z2023-08-29T04:17:20ZWith one exception, the Intergenerational Report is far less scary than you’ve heard<p>What if nearly everything that’s been written about this month’s Intergenerational Report is wrong? </p>
<p>I’ll explain. But first, here’s a sample <a href="https://www.afr.com/policy/economy/why-our-children-are-at-risk-of-a-poorer-future-20230821-p5dyb7">of</a> <a href="https://www.afr.com/policy/economy/fewer-workers-to-shoulder-soaring-income-tax-take-20230824-p5dz58">the</a> <a href="https://www.afr.com/politics/federal/ageing-population-driving-140b-blowout-in-spending-20230820-p5dxzu">headlines</a>: “Young Australians at risk of a poorer future”, “Fewer workers to shoulder soaring income tax”, “Ageing population driving $140 billion blowout in spending”, and so on.</p>
<p>On radio it was worse. One ABC presenter referred to a “<a href="https://ministers.treasury.gov.au/ministers/stephen-jones-2022/transcripts/interview-hamish-macdonald-rn-breakfast-abc">ticking tax bomb</a>”.</p>
<p>The picture painted is one of a future in which (old) dependants have far fewer people of working age to care for them, in which tax climbs dramatically to pay for the care of the elderly, and in which the next generation is poorer than this one is.</p>
<p>And to be fair to the people who’ve said these things, some of the language in the <a href="https://treasury.gov.au/publication/2023-intergenerational-report">Intergenerational Report</a> is like that, but not the numbers.</p>
<h2>Each report less scary than the one before</h2>
<p>Let’s start with the most fundamental problem identified in the report: that in 40 years’ time (each Intergenerational Report looks forward 40 years) there will be many fewer Australians of traditional working age for each Australian aged 65 and over – what the report calls the “<a href="https://treasury.gov.au/publication/2023-intergenerational-report">old-age dependency ratio</a>”.</p>
<p>Back in 2002 the government’s first intergenerational report found that whereas there were 5.3 Australians of working age for each Australian aged 65 and over at the time, by 2042 there would be only half as many – just <a href="https://treasury.gov.au/publication/2002-igr">2.5</a>.</p>
<p>This latest report finds that whereas there are now 3.7 Australians of such age for each of us aged 65 and over, by 2063 there will be 2.6. While not quite as dramatic as the fall projected in first report, and happening two decades later, this is still a big stepdown.</p>
<p>Except that ratio is not a useful guide to the ratio of people of working age to the people they’ll need to support. That’s because young people need support too.</p>
<h2>Australia will be older, but also less young</h2>
<p>Whereas old people need aged care workers, young people need child care workers; and they both need workers to make the goods and services they use. What matters is the total dependency ratio: old and young combined.</p>
<p>Examining only half the ratio (the half that look worse as the population ages) without also examining the other half (the half that looks better as the population ages) is hard to justify – unless the argument is that the Commonwealth is responsible for aged care and the states for schools.</p>
<p>But that ought not be relevant when talking about the supply of workers.</p>
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<a href="https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=967&fit=crop&dpr=1 600w, https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=967&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=967&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1216&fit=crop&dpr=1 754w, https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1216&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/544900/original/file-20230827-21-5fnf71.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1216&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Less childcare, more aged care.</span>
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<p>Australia will need more aged care workers as a proportion of the population in 40 years’ time, but it is also going to need fewer teachers. </p>
<p>What will matter is the ratio of potential workers to <em>all</em> people aged (say) under 15 as well as aged 65 and older, both old and young.</p>
<p>That total dependency ratio also told a dramatic story in the first report. The number of Australians of traditional working age to those aged either under 15 or 65 and older was set to slide from 2 to 1.55.</p>
<p>But the slide isn’t big as this time. The ratio is set to slip from 1.82 (which we are finding manageable) to 1.57, but over 40 years.</p>
<h2>Old people will find it easier to find jobs</h2>
<p>One of the reasons why the “fewer workers to dependents” story has much less sting than it was going to is we have had many more migrants than we were going to, and the migrants and students we have let in are nearly all aged 15 to 64.</p>
<p>Another, and this would have happened regardless of migration, is that as people of traditional working age become more scarce, people of non-traditional age (65 and over) are taking up and staying in paid work. Back at the time of the first report, only <a href="https://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6291.0.55.001Nov%202005?OpenDocument">5%</a> of Australians aged 65 and older were employed. Now it’s <a href="https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia-detailed/jun-2023">11.5%</a>.</p>
<p>Partly this is because of a rule change (the pension age is now 67), partly it is because work is less physically demanding (an awful lot of us have office jobs) and partly it is because employers are no longer as prejudiced – they’ve had to accept applications from older workers and have discovered they are not too bad.</p>
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Read more:
<a href="https://theconversation.com/slower-ageing-slower-growth-the-intergenerational-report-in-7-charts-211695">Slower ageing, slower growth: the Intergenerational Report in 7 charts</a>
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<h2>On present projections we will be much, much richer</h2>
<p>As for the idea that young Australians face a <a href="https://www.afr.com/policy/economy/why-our-children-are-at-risk-of-a-poorer-future-20230821-p5dyb7">poorer future</a>, that’s unlikely to be the case if we do indeed run short of workers (and have to pay them more) and it certainly isn’t what’s projected in the Intergenerational Report.</p>
<p>The report has living standards, as measured by real GDP per person, an extraordinary <a href="https://images.theconversation.com/files/544886/original/file-20230827-10875-vpciz1.png">57%</a> higher in 2042, even with lower-than-previously-assumed productivity growth. </p>
<p>That’s right, although things won’t be the same for everyone, on average the report has future generations better off materially than present generations, just as they are better off materially than generations 40 years earlier.</p>
<p>It ought to be noted that the first intergenerational report in 2002 predicted an even bigger growth in living standards, and this one says climate change could trim its projections, although the numbers in the report are woolly and the Treasury is still <a href="https://ministers.treasury.gov.au/ministers/jim-chalmers-2022/transcripts/national-press-club-address-qa">building up the capacity</a> to properly model climate change.</p>
<p>But 57% – or even 50% or 40% – is still an enormous increase in living standards.</p>
<p>On the numbers in the report, intergenerational inequity will be the opposite of what’s usually claimed: the next generation will be so much better off financially it will be easily able to stump up a few more dollars in tax.</p>
<h2>We will easily be able to stump up extra tax</h2>
<p>And the extra tax the next generation is asked to stump up won’t be “soaring”, despite what the headlines say. </p>
<p>The projections in the report suggest we might have to pay an extra 3.9% of GDP in tax to fund the things we will need, but not all at once, and not the full amount until 2063. By that time (as mentioned) GDP per person will be much higher.</p>
<p>Most of the extra projected government spending (60%) is unrelated to ageing. A lot of it is to fund the cost of new and better health treatments, of the kind we’re pretty certain to want given our higher living standards.</p>
<p>I’ve read the 300-odd pages of the report pretty carefully, and (with the exception of the section on climate change) I’m yet to find anything particularly alarming.</p><img src="https://counter.theconversation.com/content/212352/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Far from finding an ‘ageing time bomb’, the report paints a picture of a society in which the ratio of working Australians to dependents is little changed, with climate change the only big concern.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1956602022-12-01T21:34:53Z2022-12-01T21:34:53ZFour-day week trial confirms working less increases wellbeing and productivity<figure><img src="https://images.theconversation.com/files/498263/original/file-20221130-14-xvzlkn.jpg?ixlib=rb-1.1.0&rect=211%2C10%2C6498%2C4456&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Shorter working weeks can make people happier and more productive.</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/close-smiling-dreamy-african-american-man-1916347676">fizkes / Shutterstock</a></span></figcaption></figure><p>A group of companies that have been trialling a four-day working week have <a href="https://www.bloomberg.com/news/articles/2022-11-30/want-a-four-day-work-week-show-this-research-to-your-boss?leadSource=uverify%20wall">recently reported</a> increased revenue, with fewer employees taking time off or resigning. While it’s easy to understand the effects of a shorter week on worker wellbeing, the positive effects on company earnings and productivity may be more of a surprise – but research backs this up.</p>
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<p>These firms have been participating in a trial organised by <a href="https://www.4dayweek.com/news-posts/4-day-week-pioneering-pilot-program-a-huge-success-new-research-reveals">non-profit 4 Day Week Global</a>. The four-day working week trial, which involved 33 companies and nearly 1,000 employees, saw no loss of pay for employees – <a href="https://4dayweek.co.za/faqs/#:%7E:text=based%20on%20the-,100%2D80%2D100%E2%84%A2%20model,-%2C%20developed%20by%20co">organisations paid 100% of their salaries for 80% of their time</a>. But employees also pledged to put in 100% of their usual effort over the shorter working week.</p>
<p>And this kind of strategy doesn’t just work for nine-to-five office jobs. Iceland trialled reduced working hours between 2015 and 2019 in a scheme that included hospitals, schools and social service workers. The country considered it an “<a href="https://www.bbc.co.uk/news/business-57724779">overwhelming success</a>” and reduced hours – without a reduction in pay – has since been rolled out to 86% of Iceland’s workforce.</p>
<p>Throughout history, our working patterns have adapted to the challenges of the day: whether that be more time toiling at an industrial loom, or a farmer shifting their hours to eke out productivity during fading daylight hours. But now, almost a century on from Henry Ford <a href="https://www.bbc.co.uk/bitesize/articles/zf22kmn#:%7E:text=Henry%20Ford%2C%20the%20legendary%20car,a%2040%2Dhour%20working%20week.">introducing the two-day “weekend” to his factories</a>, many nations are still stuck with a 40-hour week split across five days of work, regardless of the industry. This way of working is increasingly at odds with our 21st-century lifestyles. </p>
<p>The latest findings from the 4-Day Week Global pilot are in line with ongoing research into working patterns that show reduced hours boost employees’ mental health and their productivity. It also brings other benefits such as reducing emissions by cutting commutes and providing the basis for evaluating our lives in more than just monetary terms.</p>
<h2>Better mental health</h2>
<p>Despite much economic growth since the 1970s, very little progress has been made on freeing up time for workers. Worse, in some cases, the trend has started going in reverse: Americans now work <a href="https://www.economist.com/finance-and-economics/2018/12/22/why-americans-and-britons-work-such-long-hours">more hours than they did in 2000</a>, for example.</p>
<p>That is starting to take its toll on employee wellbeing and mental health. It doesn’t take much to realise that becoming <a href="https://ourworldindata.org/search?q=GDP">many times more productive</a> over the past century (thanks in no small part to technology) means our human brains are being asked to process a lot more during a five-day work week than in the past. This has led to huge increases in stress, anxiety and <a href="https://www.mckinsey.com/mhi/our-insights/addressing-employee-burnout-are-you-solving-the-right-problem">burnout</a>.</p>
<p>This is hitting national health services and families particularly hard. But employers are also bearing the cost: accountancy firm Deloitte estimated the annual cost to employers of mental health issues is <a href="https://www2.deloitte.com/uk/en/pages/consulting/articles/mental-health-and-employers-refreshing-the-case-for-investment.html">£45 billion in the UK alone</a>. This is mostly due to absenteeism, or worse “presenteeism” – where a person is physically present at work but not engaged because they feel ill. </p>
<p>The UK’s Office for National Statistics estimates that there were <a href="https://www.hse.gov.uk/statistics/dayslost.htm">17 million worker days lost</a> to stress, depression or anxiety in the UK in 2021-22. And the same trends show up for <a href="https://www.oecd.org/employment/mental-health-and-work.htm">most other wealthy countries</a>.</p>
<h2>Increased productivity</h2>
<p>Of course, company bosses might think: “If my employees are working 20% less time, surely output will drop, too?”</p>
<p>But several studies have shown <a href="https://cepr.org/voxeu/columns/teams-become-more-productive-when-their-hours-are-shorter">that is not the case</a>. In fact, countries doing the least hours of work are often the most productive on an hourly basis. These countries, such as Denmark, Norway and the Netherlands, are also <a href="https://worldhappiness.report/ed/2022/happiness-benevolence-and-trust-during-covid-19-and-beyond/#ranking-of-happiness-2019-2021">the happiest</a>. All work less than 1,400 hours a year on average, compared with the US and UK average of <a href="https://data.oecd.org/emp/hours-worked.htm">about 1,800 hours</a>.</p>
<p>My own <a href="https://ssrn.com/abstract=3470734">research</a>, in collaboration with British Telecom, helps explain why working less hours doesn’t necessarily mean an equivalent loss in output. We were able to show the positive effect of feeling better during the week on weekly productivity. We found evidence of more sales and more calls per hour when workers were happy. </p>
<p>Based on our research, we believe the work-life balance changes and improvements in wellbeing coming out of the 4 Day Week pilots could lead to an increase in productivity of about 10%.</p>
<p>Of course, a 10% increase in individual productivity will not immediately make up for employees working a day less. But these productivity gains would reduce the cost of a transition to a shorter work week. So there might still be a need for investment and subsidies from government and business alike to support this change, but people and the planet have much to gain from doing so.</p>
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<img alt="Two men and two women, standing on line, waiting to board a train, checking phone." src="https://images.theconversation.com/files/498266/original/file-20221130-16-k4na1d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/498266/original/file-20221130-16-k4na1d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/498266/original/file-20221130-16-k4na1d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/498266/original/file-20221130-16-k4na1d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/498266/original/file-20221130-16-k4na1d.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/498266/original/file-20221130-16-k4na1d.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/498266/original/file-20221130-16-k4na1d.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">A shorter working week could have wider benefits such as cutting emissions from commuting.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/people-waiting-train-subway-station-mixed-695631085">William Perugini / Shutterstock</a></span>
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<h2>Cutting emissions</h2>
<p>It’s also important to think more holistically about the benefits of the four-day week beyond productivity and wellbeing. A shorter week might even reduce the UK’s carbon footprint by cutting commuting – assuming that most people won’t travel or will travel significantly less on their day off. A four-day week could have a positive effect on gender equality as well, since the pilots suggest that women report the largest increases in wellbeing.</p>
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Read more:
<a href="https://theconversation.com/beyond-gdp-changing-how-we-measure-progress-is-key-to-tackling-a-world-in-crisis-three-leading-experts-186488">Beyond GDP: changing how we measure progress is key to tackling a world in crisis – three leading experts</a>
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<p>The four-day week debate also scratches the surface of an ongoing discussion among economists. GDP has long been used as the ultimate measure of a nation’s progress, often with the effect of seeing policymakers chase growth at any cost. But a country is much more than its gross domestic product. </p>
<p>Seeing the successful results of attempts to implement a four-day working week might convince business and policy leaders to redistribute some of the gains in GDP in terms of our most precious commodity: our time. Now that could be considered real progress.</p><img src="https://counter.theconversation.com/content/195660/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jan-Emmanuel De Neve is a Director of the World Wellbeing Movement which counts the 4 Day Week Global organization among its founding members. </span></em></p>Companies trialling four-day working weeks are considering making it permanent.Jan-Emmanuel De Neve, Director, Wellbeing Research Centre, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1895482022-08-30T05:07:16Z2022-08-30T05:07:16ZWhat is productivity, and how well does it measure what we do?<figure><img src="https://images.theconversation.com/files/481730/original/file-20220830-14-73epxh.png?ixlib=rb-1.1.0&rect=110%2C297%2C3033%2C1528&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>This article is part of The Conversation’s series looking at Labor’s jobs summit. Read the other articles in the series <a href="https://theconversation.com/au/topics/jobssummit2022-125921">here</a>.</em></p>
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<p>One word gets mentioned more than “jobs” and more than “skills” in the briefing paper for Thursday’s <a href="https://treasury.gov.au/sites/default/files/2022-08/2022-302672-ip_0.pdf">jobs and skills summit</a>. It’s “productivity”.</p>
<p>Which is odd, because although many of us think we know what productivity is, and although many more assume productivity can be easily measured, it’s a surprisingly slippery concept.</p>
<p>In a report released earlier this month, the Productivity Commission (yes, we have an entire commission devoted to productivity) makes the idea sound simple.</p>
<p>It presents <a href="https://www.pc.gov.au/inquiries/current/productivity/interim1-key-to-prosperity/productivity-interim1-key-to-prosperity.pdf">an equation</a>:</p>
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<p>productivity = output divided by input </p>
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<p>The commission makes the reasonable point that producing more output (of anything – flowers, healthcare, food) per unit of input, so long as the quality is maintained, ought to be the goal of life.</p>
<p>Who wouldn’t want to clean a house in five hours instead of ten? Who wouldn’t want to manufacture a car in five hours instead of ten?</p>
<h2>Who wouldn’t want more for less?</h2>
<p>You could use the freed-up time to kick back or make more of what you really want. And because you were producing more per hour worked, you would be in a good position to get a pay rise.</p>
<p>The commission is careful not to say you <em>would</em> get a pay rise. Instead it says that where there <em>have</em> been sustained pay rises above inflation, they have almost always been underpinned by increased productivity.</p>
<p>How much of the pay-off from an increase in output per hour worked goes to wages depends, among other things, on <a href="https://theconversation.com/despite-record-vacancies-australians-shouldnt-expect-big-pay-rises-soon-180416">bargaining power</a>.</p>
<p>Since 1990, the share of the spoils (technically, the share of total factor income) going to profits has climbed from 24% to 31%, while the share going to wages has fallen from 55% to 50%.</p>
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<p>But it ought to be beyond doubt that the only guaranteed way to be able to lift living standards is to lift productivity. Beyond a certain point, working more hours won’t help, because, in the words of the commission, “there are only so many hours in the day to work”. </p>
<p>Nor will using more resources. They are finite. The only certain way to continue to get more of what we want is to get more from what we’ve got – which is the definition of productivity.</p>
<p>And just lately, productivity growth has slowed <a href="https://treasury.gov.au/sites/default/files/2022-08/2022-302672-ip_0.pdf">to a crawl</a>, to what the briefing paper for the summit describes as the lowest rate in half a century.</p>
<h2>Lifting productivity has become harder</h2>
<p>It’s probably not because we’ve run out of ideas, although it might be because we used up a lot of good ones. Back when <a href="https://www.fairwork.gov.au/tools-and-resources/fact-sheets/rights-and-obligations/enterprise-bargaining">enterprise bargaining</a> was introduced in the early 1990s, when we were asked to find improved ways of doing things at work in return for pay rises, we did it. But it became harder to keep finding gains as big.</p>
<p>More broadly, the extraordinary success of the productivity gains we made in manufacturing and agriculture have made them less important as employers. Now most of us (almost <a href="https://www.pc.gov.au/inquiries/current/productivity/interim1-key-to-prosperity">90%</a>) work in services. And services are hard to automate.</p>
<p>Worse still, it’s hard to tell what the output of many services is. There’s a reason the debate about the government’s commitment to defence is couched in terms of <a href="https://theconversation.com/the-end-of-2-australia-gets-serious-about-its-defence-budget-53554">spending</a>. It’s hard to tell what we get.</p>
<h2>Productivity has become harder to measure</h2>
<p>What about hairdressing? A hairdresser who trims twice as many heads per day isn’t necessarily twice as good, even if the quality of each trim remains the same. Part of a good hairdresser’s service is the quality of attention they offer each customer.</p>
<p>It’s the same for health care and education. That’s one of the reasons the Australian Bureau of Statistics doesn’t produce estimates of the productivity of the “health care and social assistance” or “education and training” industries, two of Australia’s biggest industries.</p>
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Read more:
<a href="https://theconversation.com/why-productivity-growth-stalled-in-2005-and-isnt-about-to-improve-159706">Why productivity growth stalled in 2005 (and isn't about to improve)</a>
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<p>And many education and health services are provided free or subsidised, making the price charged an unhelpful measure of output.</p>
<p>(The bureau is planning to introduce “<a href="https://www.abs.gov.au/statistics/research/non-market-output-measures-australian-national-accounts-conceptual-framework-enhancements-2020">experimental</a>” estimates of the productivity of the education industry next year, but it is finding it hard. It wants to define the output as the “organised communication of knowledge from teacher to student”, which gives an idea of how murky the whole idea is.)</p>
<h2>Putting quality of work and life on the summit’s agenda</h2>
<p>Economy-wide, the Productivity Commission relies on the bureau’s rough and ready measure: <a href="https://images.theconversation.com/files/481690/original/file-20220830-6748-9a8l0l.JPG">gross domestic product per hour worked</a>, but it’s misleading for the same reason.</p>
<p>Labor came to office promising every Australian living in aged care would receive an average of <a href="https://www.alp.org.au/policies/caring-for-older-australians">215 minutes of care per day</a>. </p>
<p>When that happens, it will be a drag on measured productivity – on GDP per hour worked. Yet it will hugely improve the lives of Australians.</p>
<p>It makes sense for the summit to focus on productivity, given that measured productivity growth has slowed, but it should only be part of the conversation. </p>
<p>Other more personal things matter as well, among them the quality of our lives, the quality of our care, and the quality of our jobs – something those attending would be wise not to forget.</p><img src="https://counter.theconversation.com/content/189548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Martin does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How do you measure the productivity of a hairdresser, or a teacher, or an aged care worker? It’s harder than you might think.Peter Martin, Visiting Fellow, Crawford School of Public Policy, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1891142022-08-24T20:02:23Z2022-08-24T20:02:23ZMany jobs summit ideas for wages don’t make sense – upskilling does<figure><img src="https://images.theconversation.com/files/480751/original/file-20220824-18-qrxy6z.png?ixlib=rb-1.1.0&rect=779%2C311%2C3073%2C1600&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p><em>This article is part of The Conversation’s series looking at Labor’s jobs summit. Read the other articles in the series <a href="https://theconversation.com/au/topics/jobssummit2022-125921">here</a>.</em></p>
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<p>Treasury’s <a href="https://treasury.gov.au/sites/default/files/2022-08/2022-302672-ip_0.pdf">issues paper</a> for the jobs summit says fair pay and job security “strengthen communities, promote attractive careers and contribute to broad-based prosperity”.</p>
<p>But it notes “many Australians have not experienced real wage gains”. </p>
<p>It says real (inflation-adjusted) wages have grown by only 0.1% per year over the past decade and have declined substantially over the past year.</p>
<p>It is important to note Australia is not unique. </p>
<p>In Canada, France, Britain and the United States as well as in Australia, real wage growth has been much lower in the 12 years preceding COVID than it was in the decade before that.</p>
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<p>The critical question is why. Good policy depends on the answers.</p>
<p>For a long time, the authorities (in Australia, the Treasury and the Reserve Bank) assumed that low wage growth was caused by excessive slack in the labour market – too many unemployed workers available to take jobs, pushing down what could be asked for.</p>
<h2>Low unemployment isn’t driving up wages</h2>
<p>Unemployment exceeded their estimate of the non-accelerating inflation rate of unemployment (<a href="https://www.rba.gov.au/education/resources/explainers/nairu.html">NAIRU</a>), which was believed to be about 5%. The theory was that once unemployment fell below that level, workers would feel more confident about asking for bigger wage increases and employers would feel the need to offer them.</p>
<p>The problem was that as unemployment fell, wage growth still did not recover, or did not recover sufficiently. The authorities responded by lowering their estimate of the NAIRU to somewhere between <a href="https://treasury.gov.au/publication/p2021-164397">4.5% and 5%</a> without changing the model.</p>
<p>But with unemployment now down to 3.4%, and wage growth still low at 2.6%, it might be time to reexamine the model.</p>
<h2>Productivity works both ways</h2>
<p>The other thing the authorities consider is the rate of growth in labour productivity (output per hour worked). Australia’s productivity growth averaged 2.1% per year from 1989 to 2004 but has since fallen to about <a href="https://treasury.gov.au/sites/default/files/2022-08/2022-302672-ip_0.pdf">1%</a> per year, the lowest rate in half a century.</p>
<p>The authorities’ model, which assumes perfect competition, constant returns to scale and neutral technological progress implies that real wages can be expected to grow at the same rate as productivity, neither more nor less, making it look as if the collapse in productivity growth explains the collapse in wages growth.</p>
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Read more:
<a href="https://theconversation.com/are-real-wages-falling-heres-the-evidence-182171">Are real wages falling? Here's the evidence</a>
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<p>But there are problems with this explanation. One is that real wage growth has not always kept pace with productivity growth. In many countries the share of national income going to wages fell as productivity growth was climbing.</p>
<p>Another problem is that low wage growth can contribute to low productivity growth.</p>
<p>Productivity growth depends principally on the adoption of and adaptation to new innovations, which require new investment. However, investment depends principally on consumer demand, which is driven by wages growth.</p>
<h2>Wages can drive investment</h2>
<p>Private business investment in plant and machinery averaged 6.7% of gross domestic product between 1989 and 2004 but fell to 5.1% after 2004. </p>
<p>It is entirely possible that if we were able to successfully address the structural causes of low wage growth, we could accelerate wages growth and thus consumer demand, which would accelerate productivity growth, giving us wages growth without a wage-price spiral.</p>
<p>So, what are these structural factors slowing wage growth?</p>
<p>The most-discussed suggestions are changed industrial relations settings (including shrinking trade union membership) and technological change and globalisation.</p>
<h2>Low-skill jobs are hollowing out</h2>
<p>Although there is something in both of these explanations, I put more weight on technological change and globalisation in part because other countries with different industrial relations systems also experienced weak wage growth, and also because the hollowing out of occupations clearly played a role and it is hard to see how the industrial relations system could have contributed to this.</p>
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Read more:
<a href="https://theconversation.com/the-chalmers-graphs-7-75-inflation-plunging-real-wages-weak-growth-187851">The Chalmers graphs: 7.75% inflation, plunging real wages, weak growth</a>
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<p>The argument is that technological change and globalisation have hollowed out routine middle-level jobs, depressing pay in these occupations relative to higher-paid occupations.</p>
<p>This means programs to lift wage growth should focus on improving the capacity of the labour market to adapt to new technologies, which means retraining.</p>
<p>As the workforce upskills, wages will increase as workers shift to higher-paid jobs where workers are in short supply.</p>
<p>Thomas Piketty put it this way in his <a href="https://www.economist.com/the-economist-explains/2014/05/04/thomas-pikettys-capital-summarised-in-four-paragraphs">major study of inequality</a>: </p>
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<p>the best way to increase wages and reduce wage inequalities in the long run is to invest in education and skills</p>
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<p>Although skills, training and migration are listed as key topics for the jobs summit, the treasury’s issues paper focuses almost entirely on industrial relations in its discussion of how best to boost wages.</p>
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<span class="attribution"><a class="source" href="https://treasury.gov.au/publication/2022-302672">Treasury's issues paper</a></span>
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<p>The paper puts a lot of emphasis on restoring and improving enterprise bargaining, which the paper says, “should be a key enabler of both productivity growth and secure and well paid work”. </p>
<p>I am sceptical about this making much difference. </p>
<p>As I noted, other countries with different industrial relations systems have low wage growth.</p>
<p>The changes to the industrial relations system that would most help are those that improve job and pay security for the almost one third of workers who are casuals or independent contractors. </p>
<p>Helping them might flow on to others.</p>
<p>And wages in the public sector and jobs that are largely financed by government – such as those in health, education and caring – <a href="https://theconversation.com/if-the-pm-wants-wage-rises-he-should-start-with-the-1-6-million-people-on-state-payrolls-188904">appear to be inadequate</a>. There is clear evidence of unattractive salaries and work conditions causing labour shortages.</p>
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Read more:
<a href="https://theconversation.com/if-the-pm-wants-wage-rises-he-should-start-with-the-1-6-million-people-on-state-payrolls-188904">If the PM wants wage rises, he should start with the 1.6 million people on state payrolls</a>
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<p>These sectors are dominated by women, meaning improving their pay and conditions would help address the gender pay gap.</p>
<p>The price of improving the pay and conditions of these workers is worth paying, but it will come at a cost to budgets, which will have to be financed by <a href="https://theconversation.com/memo-to-labor-you-need-more-tax-working-out-how-much-more-is-urgent-183638">tax</a>, something participants at the summit should acknowledge.</p><img src="https://counter.theconversation.com/content/189114/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Keating is a former Secretary of the departments of Employment and Industrial Relations, Finance, and Prime Minister and Cabinet.</span></em></p>The best way to increase wages is to invest in education and skills.Michael Keating, Visiting Fellow, College of Business & Economics, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1846332022-06-13T20:02:40Z2022-06-13T20:02:40ZWhat Albanese needs to build a new industrial relations consensus<p>A few weeks before his election victory, Anthony Albanese made <a href="https://anthonyalbanese.com.au/media-centre/a-new-labor-playbook-for-national-productivity-reforms-acci">an important speech</a> to the Australian Chamber of Commerce and Industry. He talked of “socially inclusive growth – the kind of growth that is only possible with economic reform that lifts productivity”. </p>
<p>But how to do it? </p>
<p>Albanese’s answer was a good one: greater co-operation. </p>
<p>He harked back to the consensus approach of the Hawke Labor government, which after its 1983 victory brought together different interest groups to find common ground on how to produce more from the same inputs, enabling higher wages while protecting profits. Albanese said:</p>
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<p>We must rediscover the spirit of consensus that Bob Hawke used to bring together governments, trade unions, businesses and civil society around shared aims of growth and job creation.</p>
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<p>Now he’s prime minister his <a href="https://www.thesaturdaypaper.com.au/news/politics/2022/05/28/week-one-albanese-seeks-build-hawke-consensus#hrd">ambition</a> to revive Hawke’s approach seems to be catching on. </p>
<p>Business Council of Australia chief executive Jennifer Westacott, for one, has spoken of <a href="https://www.theage.com.au/business/the-economy/labor-in-power-big-business-braces-for-the-albanese-era-20220525-p5aokm.html">the need for</a> “co-operation between business, government and workers” to address issues such as labour shortages. </p>
<p>But consensus and co-operation are much easier to talk about than to achieve, especially in a political and industrial relations system as adversarial as Australia’s. </p>
<p>We’ve been researching co-operation at work for many years, including publishing a <a href="https://federationpress.com.au/product/cooperation-at-work/">book about it</a> in 2017. What our research tells us is that achieving co-operation at work requires real and practical goals; time and trust; inclusive structures for decision-making; and strong leadership at national, industry and enterprise levels.</p>
<p>Only by heeding these lessons does the Albanese government have a chance to achieve its ambitions, and secure a legacy to match that of Hawke’s.</p>
<h2>More than a summit</h2>
<p>In terms of national leadership, it is especially important for Albanese to be staunch in his commitment to <a href="https://theconversation.com/grattan-on-friday-stellar-first-week-for-anthony-albanese-but-tough-months-ahead-183920">improving political behaviour</a>.</p>
<p>Bringing together business and union leaders is a good start. But it’s only a start. During Labor’s last period in office, Kevin Rudd brought together 1,000 delegates for his “Australia 2020” convention in 2008. It is best remembered for what didn’t happen afterwards.</p>
<p>For the Hawke government, the National Economic Summit held a month after its election in 1983 was just one element in its consensus-building efforts.</p>
<p>Another element was the <a href="https://insidestory.org.au/are-we-in-accord/">Prices and Incomes Accord</a> formalised between the government and the Australian Council of Trade Unions. Under the Accord, unions tempered industrial action in pursuit of higher wages, in exchange for the government improving the “social wage” (such as through introducing Medicare).</p>
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Read more:
<a href="https://theconversation.com/australian-politics-explainer-the-prices-and-incomes-accord-75622">Australian politics explainer: the Prices and Incomes Accord</a>
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<p>The Hawke government also established three bodies bringing employer, union and government representatives together to advance commitments made at the summit and subsequently. </p>
<p>These were the Economic Planning Advisory Council, the Advisory Committee on Prices and Incomes, and the Australian Manufacturing Council. They were critical in supporting the Accord and the agreements that gave effect to it (the last covering 1993-1996). </p>
<p>The Albanese government can’t just replicate this template – what worked in the 1980s and 1990s will not necessarily suit today. But it will certainly need processes and structures to ensure regular dialogue between stakeholders at the national level, and in ways promoting genuine co-operation.</p>
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<p>
<em>
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Read more:
<a href="https://theconversation.com/what-i-learned-from-bob-hawke-economics-isnt-an-end-itself-there-has-to-be-a-social-benefit-117314">What I learned from Bob Hawke: economics isn't an end itself. There has to be a social benefit</a>
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<h2>Industry plans could drive lasting change</h2>
<p>One area for Albanese to leave a real legacy is to entrench greater co-operation at the industry level through industry councils: tripartite bodies bringing together government, employers and union representatives. </p>
<p>In the 1980s and 1990s, sector-based industry training councils and industry training advisory boards helped to design and implement competency-based vocational education and training.</p>
<p>Industry councils could be helpful now in guiding spending priorities for Labor’s proposed <a href="https://www.alp.org.au/policies/national-reconstruction-fund">National Reconstruction Fund</a>, a $15 billion pool to invest in industries that can provide jobs and prosperity. </p>
<p>Just handing out money will not work. We need industry plans on which government, employers and employees agree. This is important not just for manufacturing but sectors such as aged care and child care.</p>
<h2>Skills for enterprise-level co-operation</h2>
<p>At the level of individual enterprises, especially larger ones, effective co-operation requires good faith and leadership from both managers and union representatives. </p>
<p>It requires training in effective commmunication skills. Neither managers nor worker representatives necessarily know how to co-operate. They need success stories to emulate, and skills to overcome the adversarial attitudes entrenched by experience.</p>
<p>Our research also shows that third-party facilitation, such as that provided by the Fair Work Commission under its <a href="https://www.fwc.gov.au/issues-we-help/cooperative-workplaces-program">Co-operative Workplaces program</a>, is vital for workplace parties who are unfamiliar with co-operative ways.</p>
<h2>A legacy worth leaving</h2>
<p>Fostering the co-operation needed to deliver inclusive growth will require overcoming a history of bad habits and soured relationships at the enterprise, industry and national levels. </p>
<p>This is rarely easy, so getting help from independent third-parties is necessary, especially at the industry and workplace levels.</p>
<p>If Albanese’s government can put in place the structures needed at all three levels, it has a chance of leaving a legacy as significant as its Labor predecessors.</p><img src="https://counter.theconversation.com/content/184633/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Mark Bray has previously received funding from an Australian Research Council Linkage grant, for which the industry partners were the Industrial Relations Society of NSW (Newcastle Branch) and the Fair Work Commission.</span></em></p><p class="fine-print"><em><span>Andrew Stewart has previously received funding from an Australian Research Council Linkage grant, for which the industry partners were the Industrial Relations Society of NSW (Newcastle Branch) and the Fair Work Commission.</span></em></p><p class="fine-print"><em><span>Johanna Macneil has previously received funding from an Australian Research Council Linkage grant, for which the industry partners were the Industrial Relations Society of NSW (Newcastle Branch) and the Fair Work Commission.</span></em></p>We’ve researched co-operation at work for many years – and its much easier to talk about than to achieve, especially in a political system as adversarial as Australia’s.Mark Bray, Emeritus professor, University of NewcastleAndrew Stewart, John Bray Professor of Law, University of AdelaideJohanna Macneil, Professor of People, Organisation and Work, RMIT UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1475482020-12-09T13:19:48Z2020-12-09T13:19:48ZWorkers are looking for direction from management – and any map is better than no map<figure><img src="https://images.theconversation.com/files/373697/original/file-20201208-17-13r1k09.jpg?ixlib=rb-1.1.0&rect=297%2C154%2C7051%2C3371&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Workers need a map to lead them through the crisis.
</span> <span class="attribution"><a class="source" href="https://www.gettyimages.com/detail/photo/battle-tactics-royalty-free-image/478690919">PeopleImages/E+ via Getty Images</a></span></figcaption></figure><p>Over eight months ago, with haste and necessity, workers and organizations across the globe were thrown into “the <a href="https://hbr.org/2020/07/the-implications-of-working-without-an-office">great remote work experiment</a>.” </p>
<p>What was arguably an adequate short-term solution is now showing signs of wear and tear: Remote workers <a href="https://www.cnbc.com/2020/07/28/remote-work-burnout-is-growing-as-coronavirus-pandemic-stretches-on.html">are burning out</a>, organizational cultures are <a href="https://hbr.org/2020/08/dont-let-the-pandemic-sink-your-company-culture">under threat</a>, and leaders are fretting about the loss of <a href="https://www.cio.co.ke/apples-tim-cook-shares-his-companys-wfh-experience/">creativity and collaboration</a>. </p>
<p>While some companies are beginning to forge ahead with longer-term plans – like proclaiming that <a href="https://www.cnbc.com/2020/05/12/twitter-tells-employees-they-can-work-from-home-forever.html">remote work will go on indefinitely</a> or <a href="https://www.nytimes.com/2020/11/10/business/economy/coronavirus-office.html">bringing at least some employees back to the office</a> in a COVID-19-safe way – most organizations remain in a holding pattern: <a href="https://www.nytimes.com/2020/10/13/technology/offices-reopening-delay-coronavirus.html">intent on returning to the physical office in some capacity</a>, but repeatedly kicking the can down the road. </p>
<p>This is understandable, <a href="https://www.bbc.com/news/newsbeat-54253776">given the amount of uncertainty</a> about the pandemic. Although a <a href="https://www.cidrap.umn.edu/news-perspective/2020/12/who-hails-covid-vaccine-progress-urges-nations-double-down-mitigation">vaccine seems to be in sight</a>, <a href="https://www.nbcchicago.com/news/coronavirus/health-officials-warn-americans-not-to-let-their-guard-down/2387692/">health officials are warning</a> of a grim winter. </p>
<p>As <a href="https://www.uml.edu/msb/faculty/latham-scott.aspx">management</a> <a href="https://www.uml.edu/msb/faculty/humberd-beth.aspx">scholars</a> actively researching and advising companies on their responses to COVID-19, we believe the consequences of <a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/as-you-return-from-the-summer-break-can-you-lead-toward-a-covid-exit">just continuing to wing it</a> are piling up. </p>
<p>This doesn’t mean the only solution is an immediate return to the office. Based on research in our field and lessons we’ve learned from our work with companies during the pandemic, we believe there’s a way to make the best of a tough situation. It requires acknowledging the real costs of the remote work experiment – and charting a path forward.</p>
<h2>Employee burnout</h2>
<p>The remote work experiment seemed to offer an <a href="https://hbr.org/2020/08/research-knowledge-workers-are-more-productive-from-home">initial boost</a> in productivity. But sustaining such productivity has been difficult, in part because the <a href="https://news.stanford.edu/2020/03/30/productivity-pitfalls-working-home-age-covid-19/">home wasn’t designed for work</a> and the consequences of <a href="https://www.nationalgeographic.com/science/2020/04/coronavirus-zoom-fatigue-is-taxing-the-brain-here-is-why-that-happens/">“Zoom” fatigue</a> are real. Indeed, emerging evidence suggests <a href="https://www.cnbc.com/2020/07/28/remote-work-burnout-is-growing-as-coronavirus-pandemic-stretches-on.html">burnout is plaguing remote workers</a> across the board.</p>
<p>Yet managing employee burnout is particularly difficult during a pandemic, when people are asked to mostly isolate at home, away from <a href="https://theconversation.com/the-office-is-dead-long-live-the-office-in-a-post-pandemic-world-138499">colleagues whose mere presence can often ease work-related stress</a>. <a href="https://hbr.org/2019/09/what-happens-when-teams-fight-burnout-together">Recent research</a> suggests that even small interactions like going out to lunch together and taking a walk can help reduce worker burnout. </p>
<p>Even if <a href="https://www.wsj.com/articles/enough-of-zoomoffice-happy-hours-return-11601665066">re-creations of after-work rituals help</a> in the short term, poor communication from company leaders is a primary <a href="https://hbr.org/2019/12/burnout-is-about-your-workplace-not-your-people">cause of burnout</a>. Without some sense of direction, burned out employees simply can’t be reengaged via another virtual happy hour. </p>
<h2>Weakened cultures</h2>
<p>Another downside of the lack of interaction with colleagues is the <a href="https://sloanreview.mit.edu/article/how-to-sustain-your-organizations-culture-when-everyone-is-remote/">impact on organizational culture</a>. </p>
<p>We know from research that organizational culture is a key contributor to <a href="https://doi.org/10.1016/j.jbusres.2008.05.021">job satisfaction</a> and <a href="https://www.doi.org/10.1002/job.1985">organizational performance</a>. Initial hopes of <a href="https://www.businessinsider.com/ceo-3-lessons-learned-remote-work-take-back-to-office-2020-5">strengthened cultures</a> as employees navigated the unprecedented shift together are dwindling as time wears on without a physical anchor for <a href="https://hbr.org/2020/08/dont-let-the-pandemic-sink-your-company-culture">sustaining shared cultural beliefs</a>. </p>
<p>What’s worse, <a href="https://covid19.nj.gov/forms/violation">corporate policies</a> meant to <a href="https://www.politico.com/news/2020/06/26/workplace-apps-tracking-coronavirus-could-test-privacy-boundaries-340525">monitor</a> and <a href="https://www.npr.org/2020/05/13/854014403/your-boss-is-watching-you-work-from-home-boom-leads-to-more-surveillance">control</a> employee behavior – whether while they work remotely or as means to make the office safer – risk eroding <a href="https://www.inc.com/marissa-levin/harvard-neuroscience-research-reveals-8-ways-to-build-a-culture-of-trust.html">worker trust</a> and <a href="https://www.doi.org/10.1111/joms.12625">undermining cultural norms</a>.</p>
<p>And the impact of these policies <a href="https://onlinelibrary.wiley.com/doi/epdf/10.1111/joms.12625">will likely endure</a> long after the crisis subsides, making it very important for companies to think carefully about the lasting impact and strategies for dealing with COVID-19.</p>
<h2>Interrupted innovation</h2>
<p>A third major cost of this sustained remote period of work is the lack of collaboration and its <a href="https://news.stanford.edu/2020/03/30/productivity-pitfalls-working-home-age-covid-19">disruptive impact on innovation</a>. </p>
<p>Sure, some collaborations and idea generation can take place via Zoom meetings, but innovation still largely happens in physical spaces: at <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2259257">lab benches</a>, alongside a <a href="https://www.ingentaconnect.com/content/nai/ti/2017/00000019/00000001/art00005">3D printer</a> or in <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/radm.12261">unintended office interactions</a> that spark interdisciplinary collaborations. These initial steps become the source of intellectual property, new startups, future commercialization and ultimately consumer value. </p>
<p>But when workers can’t get into their labs and research centers, they can’t plant the seeds for future innovations. Overall, patents have <a href="https://www.ipwatchdog.com/2020/11/01/technology-specific-patent-filing-trends-pandemic/id=126901/">fallen almost 10% year to date</a>, with patents in the life sciences down 20%. </p>
<h2>A purpose-driven plan</h2>
<p>Though the pandemic is still with us, organizations and workers need a plan now – and can’t wait for a vaccine to allow everyone to come back to the office. </p>
<p>To us, this isn’t simply about logistics, such as deciding whether, when and how to return to the office, but starting to address the downsides of this sustained remote work experiment by reengaging workers around a <a href="https://hbr.org/2018/07/creating-a-purpose-driven-organization">sense of organizational purpose</a>. </p>
<p>And honestly, it really doesn’t matter all that much what goes into the plan. A long history of scholarship on <a href="https://books.google.com/books/about/Making_Sense_of_the_Organization.html?id=ZJpCtAEACAAJ">organizations</a> emphasizes that even the most imperfect plan can have positive effects on morale and team confidence. When <a href="https://www.chicagotribune.com/news/ct-xpm-1995-02-13-9502130021-story.html">conditions are uncertain</a>, a plan provides direction, a sense of purpose and foundation for unity. Moreover, it’s a great way to turn a crisis into an opportunity. </p>
<p>For example, some companies we’ve worked with have crafted plans that focus on addressing pre-pandemic threats such as how automation and AI are changing <a href="https://sloanreview.mit.edu/article/four-ways-jobs-will-respond-to-automation/">the very nature of work</a>. They’ve been conducting a top-to-bottom review of jobs and roles to better understand which ones are providing the most and least value, and adjusting accordingly. Others, such as local health care organizations in the Boston area, are focusing on accelerating <a href="https://www.wsj.com/articles/covid-19-patients-put-remote-care-to-the-test-11602840627">their adoption of technologies</a> to improve the level of care they can provide patients.</p>
<p>[<em>Understand new developments in science, health and technology, each week.</em> <a href="https://theconversation.com/us/newsletters/science-editors-picks-71/?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=science-understand">Subscribe to The Conversation’s science newsletter</a>.]</p>
<p>Making a plan doesn’t require certainty about the path of the virus or committing to a return to the office. Rather, it’s about creating a shared sense of purpose to lead workers through one of the toughest periods in world history. </p>
<p>The value of having a plan reminds us of an anecdote – frequently shared by management scholars – <a href="https://www.tolstoytherapy.com/brief-thoughts-on-maps-miroslav-holub/">involving a Hungarian army platoon</a> briefly thought lost in the Alps during a snowstorm during World War I. Gone for two days, the soldiers suddenly showed up on the third. Asked how they survived, the group leader showed his commander the map that led them back. The punchline: It depicted the Pyrenees, not the Alps.</p>
<p>While it’s not clear if the story is factually based, the message still rings true: In times of uncertainty, often any map will do – even a wrong one.</p><img src="https://counter.theconversation.com/content/147548/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Although the end of the pandemic may be in sight, the costs of working remotely are growing. It’s time companies had a plan – even if they aren’t returning to the office any time soon.Scott F. Latham, Associate Professor of Strategic Management, UMass LowellBeth Humberd, Associate Professor of Management, UMass LowellLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1234762019-09-17T13:28:21Z2019-09-17T13:28:21ZNew technology isn’t the cause of inequality – it’s the solution<figure><img src="https://images.theconversation.com/files/292812/original/file-20190917-19040-1luxv5m.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">
</span> <span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/engineer-hand-using-tablet-machine-real-1140287369?src=xr2OcsWQI-kWpKC3AMvqtg-1-0">MNBB Studio/Shutterstock</a></span></figcaption></figure><p>Technology has been blamed for a lot recently. Automation and artificial intelligence have supposedly led to substantial <a href="https://www.forbes.com/sites/amysterling/2019/06/15/automated-future/#56616982779d">job losses</a>, reduced <a href="https://www.washingtonpost.com/opinions/lawrence-summers-its-time-to-balance-the-power-between-workers-and-employers/2017/09/03/b1c9714e-901e-11e7-8df5-c2e5cf46c1e2_story.html">bargaining</a> power for workers and increased <a href="https://rm.coe.int/discrimination-artificial-intelligence-and-algorithmic-decision-making/1680925d73">discrimination</a>. It is even <a href="https://www.technologyreview.com/s/531726/technology-and-inequality">blamed</a> for growing <a href="https://www.nber.org/reporter/winter03/technologyandinequality.html">income and wealth inequality</a> and, as a result, the presidency of <a href="https://bruegel.org/2016/11/income-inequality-boosted-trump-vote/">Donald Trump</a>, <a href="http://www.dannydorling.org/?p=6940">Brexit</a>, the rise of <a href="https://www.france24.com/en/20181116-income-inequality-financial-crisis-economic-uncertainty-rise-far-right-europe-austerity">far-right</a> populism in Europe and the spectre of <a href="https://www.weforum.org/agenda/2019/01/income-inequality-is-bad-climate-change-action/">climate change</a>.</p>
<p>In response, calls are being made for <a href="https://cpr.unu.edu/ai-global-governance-why-we-need-an-intergovernmental-panel-for-artificial-intelligence.html">global oversight</a> <a href="https://www.wired.co.uk/article/how-to-regulate-technology">and regulation</a> of technology and there are attempts to slow down its spread through <a href="https://www.federalreserve.gov/econres/ifdp/files/ifdp1230.pdf">protectionist</a> trade policies and political <a href="https://www.nber.org/papers/w11022">lobbying</a>.</p>
<p>But perhaps we should be careful about so readily blaming technological innovation for these social problems. In fact, our <a href="https://www.bertelsmann-stiftung.de/en/publications/publication/did/inclusive-growth-for-germany-18-technological-innovation-and-inclusive-growth-for-germany/">recent research</a> into the causes of rising income inequality in Germany suggests a lack of innovation and entrepreneurship is actually at the root of the problem.</p>
<p>We shouldn’t be trying to obstruct technological innovation and diffusion. Rather, we should face up to the challenge of <a href="https://www.merit.unu.edu/publications/working-papers/abstract/?id=8317">bringing back</a> to Western economies the entrepreneurship, innovativeness and business dynamism that characterised the <a href="http://ftp.iza.org/dp11194.pdf">years after World War II</a>, when growth was also more inclusive.</p>
<p>Germany is a particularly useful case to study. In recent decades, inequality has risen fast, and to <a href="https://makronom.de/produktivitaet-deutschland-muss-seinen-innovationsstau-aufloesen-um-die-ungleichheit-zu-verringern-28778">unprecedented</a> levels since unification. But unlike in the US, for example, there has been little <a href="https://www.sciencedirect.com/science/article/abs/pii/S0048733318302488">financialisation</a> of the economy and no significant outsourcing of jobs due to <a href="https://voxeu.org/article/globalisation-and-job-biographies-german-manufacturing-workers">globalisation</a>. Whereas the US runs a huge trade deficit, Germany runs a large trade surplus. Importantly, evidence shows automation has <a href="http://www.eu-nited.net/robotics/upload/pdf/2017-09_Robots_CEPR_Germany.pdf">created more</a> jobs in Germany than it has destroyed. So why is inequality rising so rapidly in the EU’s largest economy?</p>
<p><a href="https://ged-project.de/allgemein-en/how-germanys-weak-innovation-eco-system-is-driving-inequality/?cn-reloaded=1">We argue</a> that this is because consumers, investors and innovators in Germany are effectively “on strike”. Consumption by households, government and corporations could be much higher in Germany, but they are all <a href="https://www.ft.com/content/1f705ce8-543d-11e8-b3ee-41e0209208ec">saving massively</a>. Public and corporate gross fixed <a href="https://bruegel.org/2018/06/understanding-the-lack-of-german-public-investment/">investment spending</a> are dwindling. As a result, the domestic market, which is <a href="https://www.handelsblatt.com/today/politics/demographic-armageddon-aging-population-on-course-to-wipe-out-germanys-finances-within-30-years/23582318.html?ticket=ST-2589375-wnubOeZRbezgzvtYcPSR-ap4">also aging</a> rapidly, is not as attractive a place for entrepreneurs and corporations to stimulate innovation.</p>
<p>Without enough investment, labour productivity growth has significantly declined over the past three decades, falling from 2.5% in 1992 to 0.3% in 2013, eight times <a href="https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en">slower</a>. This has been <a href="https://www.wsj.com/articles/germany-looks-to-curb-trades-union-power-1418300430">used to justify</a> a progressive reduction in real wages, union bargaining power and social security benefits to <a href="https://ideas.repec.org/p/sru/ssewps/2018-02.html">maintain competitiveness</a>. And this is one of the fundamental mechanisms driving German inequality.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/292813/original/file-20190917-19063-h0s4fh.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Germans are saving too much money.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/female-hand-money-cash-department-window-603947780?src=Ja1XHghbsIIbC1QwiQb3EA-1-1">SouthernTraveler/Shutterstock</a></span>
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<p>This conclusion may seem at odds with common perceptions of Germany as a successful, technology-driven developed economy. Despite falling overall investment, the country certainly appears to be spending massively on stimulating innovation. German spending on research and development <a href="https://data.worldbank.org/indicator/GB.XPD.RSDV.GD.ZS?locations=DE">has increased</a> by around 50% in real terms between 2000 and 2016 and is now approaching an excellent 3% of GDP.</p>
<p>The question is: what is all this money buying? Why are productivity and economic growth not accelerating? Put simply, Germany’s innovation is less effective and less likely to be commercialised than in the past. For example, the ratio between the number of patents granted and the number actually applied for has been in <a href="https://makronom.de/produktivitaet-deutschland-muss-seinen-innovationsstau-aufloesen-um-die-ungleichheit-zu-verringern-28778">long-term decline</a> since the late 1980s. The relative quality of patents as measured <a href="https://onlinelibrary.wiley.com/doi/full/10.1111/ecoj.12314">by citations</a> has also declined. There are only four German firms among the world’s <a href="https://www.wipo.int/publications/en/details.jsp?id=4369">top 30</a> innovative corporations in high-tech areas such as 3D-printing, nanotechnology, and robotics. </p>
<p>And while total innovation spending is high, it’s concentrated in larger companies. Most small and medium sized firms in Germany are <a href="https://www.sciencedirect.com/science/article/abs/pii/S0048733317302081">investing nothing</a> or very little in innovation.</p>
<p>The decline in the impact of innovation also reflects the fact that entrepreneurship has been stagnating in Germany. The Mannheim Enterprise Panel <a href="https://www.zew.de/en/forschung/the-mannheim-enterprise-panel/">index of start-up activity</a> (a good measure of entrepreneurial dynamics) fell from 120 to 60 between 1990 and 2013, a 50% decline. This is partly because <a href="https://www.sciencedirect.com/science/article/pii/S0022199612001651">existing companies</a> have adopted conservative or defensive strategies to keep out new entrants to the market rather than use innovation to compete with them.</p>
<p>To reduce inequality, Germany needs innovation that will increase labour productivity. The country needs more firms, particularly small and medium ones, to develop and commercialise new technology and adopt a more robust spirit of entrepreneurship.</p>
<p>Achieving this will require critical changes in the innovation system, in particular to stimulate <a href="https://www.bmwi.de/Redaktion/DE/Downloads/E/einsetzung-der-kommission-wettbewerbsrecht-4-0.pdf?__blob=publicationFile&v=6">competition</a>, invest more in critical public <a href="https://bruegel.org/2018/06/understanding-the-lack-of-german-public-investment/">infrastructure</a>, and improve <a href="https://www.npr.org/2019/01/03/678803790/berlin-is-a-tech-hub-so-why-are-germanys-internet-speeds-so-slow?t=1568543761610">internet</a> connectivity and speed. Urgent measures are also needed to refocus the country’s vital <a href="https://www.economist.com/business/2018/03/01/german-cars-have-the-most-to-lose-from-a-changing-auto-industry">auto industry</a> away from being locked into out-of-date technologies. </p>
<p>Most importantly however the country needs to adopt measures that will spur on the government, consumers and companies to spend more. This will be good for innovation by <a href="https://ideas.repec.org/p/unm/unumer/2018047.html">creating the demand</a> for new products and services. And one way of funding this would be to <a href="https://theconversation.com/if-g7-are-serious-about-tackling-inequality-they-should-implement-our-global-tax-framework-122332">more effectively tax</a> big corporations.</p><img src="https://counter.theconversation.com/content/123476/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Germany’s rising inequality shows what happens when consumers and companies don’t widely embrace innovation.Wim Naudé, Professorial Fellow, Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT), United Nations UniversityPaula Nagler, Affiliated Researcher, Maastricht Economic and Social Research Institute on Innovation and Technology (UNU-MERIT), United Nations UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1063502018-11-12T19:01:16Z2018-11-12T19:01:16ZUnlocking Australia’s productivity paradox. Why things aren’t that super<figure><img src="https://images.theconversation.com/files/244997/original/file-20181112-38373-3448zu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">At least in the movies, Superman is getting less productive. We are scarcely any more productive than we were two years ago, and it is weighing on wages.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>2018 marks the 40 year anniversary of <a href="https://www.imdb.com/title/tt0078346/">the first Superman film</a>. Starring as Superman, Christopher Reeve fought foes and vanquished villains in an action-packed battle between good and evil. </p>
<p>Four decades on, Superman continues to feature in films, but often not alone.</p>
<p>He now stars alongside Batman, Wonder Woman, The Flash, Aquaman and other superheroes. For the fans of DC Comics, it is a delightful coming together of childhood favourites. </p>
<p>But for economists, it symbolises a worrying decline in productivity. </p>
<h2>Superman needs help</h2>
<p>Where once a single superhero was able to save the world, now two or more are required to complete the same task.</p>
<p>As Oscar Wilde once said, life often imitates art. </p>
<p>Back when the first Superman film was released, <a href="https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2017/04/03/Gone-with-the-Headwinds-Global-Productivity-44758">average annual total factor productivity growth</a> among advanced economies was almost 10 times what it fell to in 2016.</p>
<p>In Australia, it was <a href="http://www.abs.gov.au/AUSSTATS/abs@.nsf/Lookup/5260.0.55.002Main+Features12016-17?OpenDocument">three times higher</a> in 1995-96 than in 2016-17. </p>
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Read more:
<a href="https://theconversation.com/australias-productivity-problem-why-it-matters-8584">Australia's productivity problem: why it matters</a>
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<p>Real wage growth has been <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6345.0">close to zero in the past two years</a>, in line with <a href="https://www.pc.gov.au/inquiries/completed/productivity-review/report">close to zero productivity growth</a>.</p>
<p>But what is most striking about what has happened is when it has happened. The past 25 years have seen extraordinary advances in technology. </p>
<h2>We ought to be much more productive</h2>
<p>An extra 3.5 billion people have <a href="https://data.worldbank.org/indicator/IT.NET.USER.ZS">gained access to the internet</a>, the processing power of computers has skyrocketed, and we now have smartphones, with almost everything on them, and factories and warehouses that are automated in ways that would have once only been dreamt of. </p>
<p>The sharing economy promises to unlock the full potential of our idle cars, our unused bicycles and empty rooms and houses. The accumulated history of human knowledge is at our fingertips. </p>
<p>So where’s the resulting increase in productivity? </p>
<p>US economist Robert Solow once <a href="http://www.standupeconomist.com/pdf/misc/solow-computer-productivity.pdf">famously remarked</a> that “you can see the computer age everywhere but in the productivity statistics”.</p>
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Read more:
<a href="https://theconversation.com/the-internet-has-done-a-lot-but-so-far-little-for-economic-growth-105294">The internet has done a lot, but so far little for economic growth</a>
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<p>Economists have since put forward a variety of explanations for this paradox, but with little agreement. </p>
<h2>There’s little agreement about why we’re not</h2>
<p>Some, like 2018 Nobel Laureate William Nordhaus, <a href="https://www.nber.org/papers/w21547.pdf">point to</a> historical data showing long lag-times between technological advances and increases in productivity. </p>
<p>For them, a surge in productivity is just around the corner – 10 years away, <a href="https://ieeexplore.ieee.org/document/7951155">according to some estimates</a>. </p>
<p>Others, like Harvard’s Martin Feldstein, <a href="https://www.nber.org/papers/w23306">argue the</a> paradox is driven by measurement failures. </p>
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Read more:
<a href="https://theconversation.com/budget-explainer-the-problem-with-measuring-productivity-56901">Budget explainer: the problem with measuring productivity</a>
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<p>Others argue that the productivity improvements from technology have been crowded out by other factors, like the aftershocks of the <a href="https://www.imf.org/en/Publications/Staff-Discussion-Notes/Issues/2017/04/03/Gone-with-the-Headwinds-Global-Productivity-44758">global financial crisis</a>, <a href="https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/publication/dsp_policy_11.pdf">weak demand and investment</a>, <a href="https://www.un.org/development/desa/dpad/wp-content/uploads/sites/45/publication/dsp_policy_11.pdf">slowing trade</a>, <a href="https://www.ecb.europa.eu/pub/pdf/other/ebbox201707_01.en.pdf?1e019e8433fa8b79b19327c22c8a9286">stalling growth in global value chains</a>, <a href="https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Impact-of-Workforce-Aging-on-European-Productivity-44450">ageing populations</a>, <a href="https://www.oecd.org/eco/growth/OECD-2015-The-future-of-productivity-book.pdf">reduced investment in education</a>, the <a href="https://www.nber.org/papers/w20941.pdf">impacts of automation</a> on demand and inequality, <a href="https://www.brookings.edu/blog/up-front/2018/04/05/todays-economic-puzzles-a-tale-of-weakening-competition/">weakening competition</a> and reduced <a href="https://www.oecd.org/economy/growth/The-Walking-Dead-Zombie-Firms-and-Productivity-Performance-in-OECD-Countries.pdf">business dynamism</a>.</p>
<p>Harvard’s Marc Melitz <a href="https://web.stanford.edu/%7Eklenow/Melitz.pdf">suggests that</a> an explanation for the paradox may lie at the firm-level. </p>
<h2>Productivity growth might be hidden</h2>
<p>While some firms have been highly productive, their effects have been offset by laggard firms. The OECD <a href="https://www.oecd.org/eco/growth/OECD-2015-The-future-of-productivity-book.pdf">found that</a> “frontier firms” have consistently achieved productivity growth six times that of laggard firms which have dragged down the average. </p>
<p><a href="https://www.oecd.org/economy/growth/The-Walking-Dead-Zombie-Firms-and-Productivity-Performance-in-OECD-Countries.pdf">Some attribute this</a> to the increased prevalence of “<a href="https://www.oecd.org/economy/growth/The-Walking-Dead-Zombie-Firms-and-Productivity-Performance-in-OECD-Countries.pdf">zombie firms</a>” – unproductive firms kept alive by cheap money, low interest rates and nervous investors. </p>
<p>It’s possible to see this at the industry level. John Fernald, from the Federal Reserve Bank of San Francisco, <a href="https://www.nber.org/papers/w20248">finds that</a> productivity gains from information and communications technology have been concentrated in specific industries, the benefits from which have been netted-out by industries that have failed to adopt new technologies. </p>
<p>Northwestern University’s Robert Gordon, however, <a href="https://www.nber.org/papers/w18315">sees no paradox at all</a>.</p>
<h2>Or technology might be holding it back</h2>
<p>He says, as much as we might like them, the technological advances in recent decades have been no match for the really big advances between 1870 and 1970, such as electricity and the automobile.</p>
<p>Harvard’s Jeff Frankel goes further. </p>
<p>He <a href="https://www.project-syndicate.org/commentary/technological-innovation-hurting-productivity-by-jeffrey-frankel-2018-03?barrier=accesspaylog">points to evidence</a> suggesting the latest advances in technology might be actually cutting productivity by <a href="https://bankunderground.co.uk/2017/11/24/is-the-economy-suffering-from-the-crisis-of-attention/">distracting us and reducing our attention spans</a>. </p>
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<a href="https://theconversation.com/why-we-should-approach-claims-of-a-productivity-crisis-with-caution-26000">Why we should approach claims of a productivity crisis with caution </a>
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<p>Others are less pessimistic, <a href="https://papers.ssrn.com/sol3/papers.cfm?abstract_id=942310">but still conclude</a> that as firms adopt more and more new technology, the extra returns from those extra investments shrink.</p>
<p>With all this uncertainty, what’s the best approach for an incoming or reelected government? </p>
<h2>So what should we do?</h2>
<p>It sounds trite, but the best approach is “flexibility”.</p>
<p>More precisely it is well functioning mechanisms that allow us to adjust things such as exchange rates, interest rates, government spending and industry settings.</p>
<p>On the whole we have these mechanisms. We will also need strong laws that encourage competition; that will enable new or suddenly productive firms to displace old ones that have grown used to large market shares.</p>
<p>If we do turn out to be on the cusp of a new productivity surge, a flexible, competitive economy will enable us to spread the benefits quickly.</p>
<h2>Allow good firms to grow, bad ones to die</h2>
<p>If instead we turn out to be on track for a low productivity future, or if the productivity gains from new technology are crowded out by other effects, then flexibility can also help, redirecting resources away from inefficient firms to more efficient ones. </p>
<p>If it turns out the productivity paradox is no paradox at all but merely a measurement failure, then it is yet another reason to properly fund organisations such as the Australian Bureau of Statistics.</p>
<p>The new government will need to watch, and to some extent it will need to wait. But it will need to be ready.</p>
<p>As American economist <a href="https://www.oecd.org/sdd/productivity-stats/40526851.pdf">Paul Krugman observed</a> a generation ago when productivity growth was much higher than it is today, “productivity isn’t everything, but in the long run it is almost everything”.</p><img src="https://counter.theconversation.com/content/106350/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Adam Triggs is a former advisor to the Hon. Andrew Leigh MP, the Shadow Assistant Treasurer and Shadow Minister for Competition and Productivity.</span></em></p>In the midst of the information technology revolution, Australia’s productivity growth has been slowing. It ought to have been the other way around.Adam Triggs, Research fellow, Australian National UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/928072018-03-06T11:38:52Z2018-03-06T11:38:52ZItaly’s economy has ‘cronyism disease,’ but will its next government treat it?<figure><img src="https://images.theconversation.com/files/209049/original/file-20180306-146645-1h7ms38.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">The Five Star Movement's Luigi Di Maio and founder Beppe Grillo won big in the March 4 elections.
</span> <span class="attribution"><span class="source">AP Photo/Andrew Medichini</span></span></figcaption></figure><p>On March 4, Italy went to the polls in one of the most chaotic and unpredictable elections in recent memory. <a href="https://theconversation.com/in-italy-fake-news-helps-populists-and-far-right-triumph-92271">The result</a> was in line with expectations: None of the three competing coalitions attained an outright majority. </p>
<p>Under the mediation of the country’s president, Italy’s political parties will now try to form a coalition government with an agreed framework of policies. I believe a top priority should be addressing how to revive Italy’s economy, <a href="https://tradingeconomics.com/italy/gdp-growth">which has been stagnant</a> for more than two decades. </p>
<p>Unfortunately, it probably won’t be on the top of the agenda. That’s because the issue was largely absent from the campaign, <a href="https://www.cnn.com/2018/03/05/europe/italy-elections-intl/index.html">overshadowed by concerns</a> about immigration and anti-European sentiment. So it’s hard to know if the soon-to-be-formed government has a solution or even understands the problem. With <a href="https://www.bloomberg.com/news/articles/2017-11-09/italian-debt-load-up-this-year-above-130-in-2018-eu-says">Italy’s debt at over 130 percent of GDP</a> and a <a href="https://www.thelocal.it/20170718/italy-european-union-most-highest-percentage-neet-unemployed-young-people-millennials">third of 20- to 34-year-olds</a> unemployed, it’s vital that the country solve this issue. </p>
<p>University of Chicago’s <a href="https://scholar.google.com/citations?user=dd-5oP4AAAAJ&hl=en&oi=ao">Luigi Zingales</a> and <a href="https://scholar.google.com/citations?user=02AMk1kAAAAJ&hl=en&oi=ao">I</a> have sought to pinpoint the source of Italy’s woes in <a href="https://research.chicagobooth.edu/-/media/research/stigler/pdfs/workingpapers/14diagnosingtheitaliandisease.pdf?la=en&hash=FB3054008103B1E0E24E3F7E1D307523B0B2AD5F">new research we published</a> in October as a <a href="http://www.nber.org">National Bureau of Economic Research</a> <a href="http://www.nber.org/papers/w23964">working paper</a>. If we had to sum up our findings in one word, it would be “cronyism.” But that isn’t the end of the story. </p>
<h2>Italy’s ‘productivity disease’</h2>
<p>Italy’s economic malaise can be traced to the lack of gains in business productivity, which, as <a href="https://voxeu.org/article/what-determines-productivity">economic research shows</a>, is the most important determinant of an economy’s long-term performance. Simply put, it means more is being accomplished with less. </p>
<p>As Italian – and some <a href="https://krugman.blogs.nytimes.com/2012/11/26/whats-the-matter-with-italy/">non-Italian</a> – economists know far too well, productivity as measured by GDP per hour worked stopped growing in the country around 1995.</p>
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<p>Identifying the cause of this “productivity disease” is a <a href="https://www.wsj.com/articles/the-real-italian-job-make-the-economy-more-productive-1519756469">puzzle</a> that has <a href="https://voxeu.org/article/diagnosing-italian-disease">intrigued economists for years</a>. Zingales and I tried a fresh way to find an answer to this conundrum by systematically exploring two different, massive data sets. </p>
<p>The first data set combined corporate financial information with a <a href="http://bruegel.org/publications/datasets/efige/">survey of manufacturing companies</a> in seven European countries, including Germany, Spain and Italy. The <a href="http://www.euklems.net">second contained detailed sector-level economic data</a> on 29 countries, including those seven. Our analysis focused on data from the mid-1990s, when Italy’s growth began to stagnate, until 2006, a few years before the Great Recession hit.</p>
<p>What emerged from our data dissection was a strong link between country growth patterns and companies’ adoption of <a href="https://en.wikipedia.org/wiki/Information_and_communications_technology#ICT_sector_in_the_OECD">information and communication technology</a>, such as computers, which became cheap and widespread in the 1990s. That is, countries in which businesses were quick to adopt these groundbreaking new technologies grew at a faster pace. </p>
<p>What might drive the difference in rates of technology adoption? <a href="https://voxeu.org/epubs/cepr-reports/why-some-do-it-better">Research</a> has found that it comes down to having managers that are focused on performance and workplaces agile enough to reorganize when needed. </p>
<p>This is precisely where Italian companies fell short, according to our investigation. </p>
<h2>Corporate cronyism</h2>
<p>In particular, using several measures of corporate cronyism, we found that Italian businesses were dramatically more likely than their peers in other countries to hire friends or others to managerial positions rather than merit-based applicants. </p>
<p>In fact, on a 0-5 point scale, with the high score signaling a strong meritocracy that rewards performance, almost half of the Italian companies in the manufacturing survey got a zero.</p>
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<p>We then compared these results with the data that measured adoption of information technologies and found a correlation: Companies and countries where cronyism was high and management failed to reward merit, such as Italy, were also much slower to adopt the new technologies, leading to stagnant productivity growth. </p>
<p>In contrast, countries with more meritocratic companies, such as Finland and Sweden, were quick to adopt the technologies, leading to stronger growth. The differences were largest in industries that use computers and other information technologies more intensely, such as financial and communication services.</p>
<h2>Unaware of the problem</h2>
<p>So if cronyism was the root cause of Italy’s lack of productivity growth, what can policymakers do to reverse this trend?</p>
<p>Unfortunately, only two of Italy’s parties – both members of the center-left coalition that governed Italy before suffering major defeats in the elections – even <a href="https://www.cnbc.com/2018/01/17/italy-election-whos-leading-with-taxes-debt-and-more-on-the-line.html">acknowledged</a> this problem in their political platforms. Perhaps this is because the Italian public itself is barely aware it exists.</p>
<p>Even more discouraging is that no party has offered a concrete proposal to address it. </p>
<p>This is bad news for Italy. Its debt load is the <a href="https://www.reuters.com/article/us-italy-election-markets/italian-banks-bonds-bear-brunt-of-election-fallout-idUSKBN1GH28R">third-largest in the world</a> at US$2.3 trillion and will eventually become unsustainable if the country is unable to revive economic growth. At the same time, more than a third of Italians aged 20-34 are unemployed. </p>
<p>Boosting productivity is essential to resolving both problems. If the new government fails to address it, Italy risks another two decades of stagnant growth and more “<a href="https://www.thedailybeast.com/italys-lost-generation-youth-unemployment-hits-nearly-50-percent">lost generations</a>.”</p><img src="https://counter.theconversation.com/content/92807/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Bruno Pellegrino acknowledges funding from the Price Center for Entrepreneurship and the Center for Global Management at UCLA Anderson.</span></em></p>Italy has stagnated for more than two decades, yet its politicians seem hardly aware of the source of the problem, let alone how to fix it.Bruno Pellegrino, PhD Candidate in Business Economics, University of California, Los AngelesLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/862092017-10-24T01:57:08Z2017-10-24T01:57:08ZWhy reforming health care is integral for our economy<figure><img src="https://images.theconversation.com/files/191508/original/file-20171024-1722-1be3haa.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Healthcare is becoming increasingly important in a services-led economy.</span> <span class="attribution"><span class="source">Shutterstock</span></span></figcaption></figure><p>Australia’s productivity growth has been stagnant for over a decade and, according to <a href="http://www.pc.gov.au/inquiries/completed/productivity-review/report">a new report</a>, our health policies and programs could be partly to blame. Released today, the Productivity Commission report also highlights how the health-care sector (among others) could play a starring role in improving productivity. </p>
<p>The commission has offered a short list of thematic directions for reform. In health these include eliminating low-value services that have uncertain clinical impacts, changing the way services are delivered to focus more on the patient, and moving away from a community pharmacy model to more automatic dispensing in a greater range of more convenient locations.</p>
<p>The underlying message is that productivity growth is essential if Australia is to expand its economy, generate opportunities for real income growth and raise community living standards. </p>
<p>But as a Productivity Commission <a href="http://www.pc.gov.au/inquiries/completed/productivity-review/discussion">discussion paper</a> released last November noted, there is a justified global anxiety that growth in productivity — and in income and well-being, which are inextricably linked to it over the longer term — has slowed or stopped. Across the OECD, growth in GDP per hour worked was lower in the decade to 2016 than in any decade from 1950.</p>
<p>The commission notes that labour productivity has been rising, but that has more to do with greater capital investment than more efficient workforce practices.</p>
<p>The report also highlights a change in thought about productivity. The emphasis has shifted from the need to produce goods more cheaply to improving our human capital – the knowledge, skills and work practices of our community – and delivering more efficient and effective health, education and related services. </p>
<p>The change recognises that Australia is now predominantly a service economy, that health care is a significant economic service, and that the productivity of our workforce, including its health, needs to underpin our economic growth. </p>
<h2>The health sector is big and still growing</h2>
<p>The health sector is a big part of our economy and still growing as a proportion of our overall economy. By 2016, according to the OECD, it <a href="https://data.oecd.org/healthres/health-spending.htm">accounted for 9.6% of our total gross domestic product</a>.</p>
<p>This is similar to that of New Zealand and the United Kingdom, less than Canada and far less than the United States – which is an international outlier at over 17% of its total domestic output. Add aged care and disability services, and the commission puts the figure at 13% of Australia’s GDP.</p>
<p><a href="https://www.aihw.gov.au/getmedia/9844cefb-7745-4dd8-9ee2-f4d1c3d6a727/19787-AH16.pdf.aspx?inline=true">We continue to spend ever more on health</a>, in real (inflation-adjusted) terms, both as taxpayers and as consumers. But are we getting good value for our money? An inefficient health system, wrongly priced services and poorly designed system incentives all drag on the cost of health care and on the productivity of a very large sector of the economy.</p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6291.0.55.003">A decade ago</a>, the health-care and social-assistance sector employed nearly 1.07 million people. This was a little less than retailing (1.21 million) and a little more than manufacturing (1.03 million). The health sector employed 10.3% of the Australian workforce. </p>
<p><a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/6291.0.55.003">Fast forward to 2017</a> and retail employment has stayed relatively stable at 1.26 million and manufacturing has declined to 0.9 million. In contrast, health care and social assistance has risen to 1.64 million – 13.3% of total employment. </p>
<p>Any opportunity to increase the efficiency of the health workforce will translate directly to greater labour productivity for the economy as a whole. And its effectiveness can be improved, in part by education and training, which improves the skills of our doctors, nurses, allied health workers and others to work collaboratively to deliver patient-centred care. This is the subject of an <a href="https://www.coaghealthcouncil.gov.au/Projects/Accreditation-Systems-Review">independent review</a> for the COAG Health Council by this article’s author.</p>
<p>The actual productivity of the health workforce, unfortunately, is notoriously hard to measure. This is due in no small part to the lack of market forces and to wage costs that are often negotiated between unions and their employers – the governments.</p>
<p>The Productivity Commission’s <a href="http://www.pc.gov.au/inquiries/current/human-services">forthcoming report</a> on improving markets and competition in health and other human services will hopefully offer useful guidance on what reforms are needed in some of these sectors.</p>
<h2>Workforce health is an important part of our human capital</h2>
<p>A third role for a more efficient and effective health sector is to contribute to improving the health of the workforce overall. Education and health are recognised as the two most significant building blocks of human capital. Making the most of our human capital is a central message of <a href="http://www.oecd.org/eco/growth/OECD-2015-The-future-of-productivity-book.pdf">the OECD’s research on productivity</a>.</p>
<p>There is also ample evidence, including in the new Productivity Commission report, that poor health leads to poor labour market outcomes. A <a href="http://www.pc.gov.au/research/supporting/deep-persistent-disadvantage">2013 study into disadvantage in Australia</a> concluded that people with long-term health conditions are likely to experience deep and persistent disadvantage, but, equally, disadvantage can lead to poor health.</p>
<h2>Back to the future</h2>
<p>The challenge remains to reform the health system, and its workforce in particular, so that practitioners, administrators and others have the skills, knowledge and professional attributes to meet the emerging health-care needs of our community. </p>
<p>As the Australian Institute of Health and Welfare points out in its <a href="https://www.aihw.gov.au/getmedia/9844cefb-7745-4dd8-9ee2-f4d1c3d6a727/19787-AH16.pdf.aspx?inline=true">latest review</a> of Australia’s health, the community’s burden of disease is changing. There is now a greater need for longer-term integrated care to deliver services for those with chronic diseases, the elderly, those with dementia, disability and poor mental health, and to provide services to those in rural areas and remote communities. </p>
<p>The message in this latest report is welcome, but unfortunately it is not entirely new. <a href="http://www.pc.gov.au/inquiries/completed/national-competition-policy/report/ncp.pdf">A Productivity Commission report</a> over a decade ago made the point that Australia’s growth potential will depend increasingly on making the best use of our human capital.</p>
<p>One of the aspirations at that time was for an agreed agenda of integrated health services reform within a national framework. It was seen as a way of adding much-needed impetus to overcoming long-standing structural problems that prevented the health-care system from performing to its potential. </p>
<p>Little progress has been made since then. Hence this report is important in reinforcing the message that the next big gains in productivity will need to come from reforming the delivery of health and education. Let’s hope the call for a shared agenda of reforms is taken up more actively than experience to date might suggest.</p><img src="https://counter.theconversation.com/content/86209/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Michael Woods is the Independent Reviewer of the Accreditation Systems for Health Education, for the COAG Health Council.</span></em></p>Australia is increasingly a services-led economy. The health sector is not only a big employer, but health care is an important factor in worker productivity.Michael Woods, Professor of Health Economics, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/835052017-09-07T08:24:42Z2017-09-07T08:24:42ZWhat would it take to raise Australian productivity growth?<p>While productivity is once again <a href="http://www.abs.gov.au/ausstats/abs@.nsf/mf/5260.0.55.002">growing</a> in Australia, we face a big challenge in getting it to a level that would restore the rate of improvement in our living standards of the last few decades. </p>
<p>Yet the measures required to meet this challenge may not be the ones usually promoted by economists and editorial writers. We need innovation not just in the technologies we use but in our business models and management practices as well.</p>
<p>The problem, according to new <a href="https://static.treasury.gov.au/uploads/sites/1/2017/08/p2017-t213722-Roundup_Productivity_trends_and_structural_change.pdf">Treasury research</a>, is that national income growth can no longer be propped up by the favourable terms of trade associated with our once-in-a-generation mining boom. </p>
<p>Does this mean we are back to the hard grind of productivity-enhancing reform? There are (at least) two opposing schools of thought on this. <a href="http://www.afr.com/opinion/editorials/productivity-is-still-the-main-game-20170905-gybd3s">Some believe</a> reform is needed, but mainly corporate tax cuts and labour market deregulation. <a href="http://www.rossgittins.com/2017/09/turns-out-productivitys-been-fine-all.html">Others</a> deny any such reform is even necessary. </p>
<h2>What has happened to productivity?</h2>
<p>Productivity is a complex issue, but may be simply defined as output produced per worker, measured by the number of hours worked. On this basis we have seen a modest spike in productivity growth over the last five years to <a href="https://static.treasury.gov.au/uploads/sites/1/2017/08/p2017-t213722-Roundup_Productivity_trends_and_structural_change.pdf">1.8% per year</a>.</p>
<p>This is primarily due to “capital deepening”, an increase in the ratio of capital to labour. Contemporary examples include driverless trucks in iron ore mines, advanced robotics in manufacturing and ATMs in banking. </p>
<p>Before this five-year period, productivity growth was much lower, even negative. This was especially the case during the mining boom itself when capital investment was taking place but had not yet translated into increased output. </p>
<p>The <a href="https://static.treasury.gov.au/uploads/sites/1/2017/08/p2017-t213722-Roundup_Productivity_trends_and_structural_change.pdf">Treasury paper</a> argues that to achieve our long-run trend rate of growth in living standards of 2% a year, measured as per capita income, we now need to increase average annual productivity growth to around 2.5%. </p>
<p>This will require not just capital deepening, but also improvements in the efficiency with which labour and capital inputs are used, otherwise known as “multifactor productivity”. </p>
<h2>The hype cycle</h2>
<p>Australia is not alone in facing this productivity challenge. Globally, amidst what would appear to be an unprecedented wave of technological change and innovation, developed economies are experiencing a <a href="https://theconversation.com/three-theories-for-whats-causing-the-global-productivity-slowdown-68900">productivity slowdown</a>. </p>
<p>Again, explanations for this vary. Some economists question whether the current wave of innovation is really as transformative as earlier ones involving urban sanitation, telecommunications and commercial flight. </p>
<p>Others have wondered whether it is still feasible to measure productivity at all when innovation comprises such intangible factors as cloud computing, artificial intelligence and machine learning, let alone widespread application of the “internet of things”. </p>
<p>However, there is an <a href="http://www.csls.ca/ipm/31/vanark.pdf">emerging consensus</a> that we are merely in the “installation” phase of these innovations, and the “deployment” phase will be played out over coming decades.</p>
<p>This has also been called the “<a href="https://www.gartner.com/doc/3768572/hype-cycle-emerging-technologies-">hype cycle</a>”. New technologies move from a “peak of inflated expectations” to a “trough of disillusionment” and then only after much prototyping and experimentation to the “plateau of productivity”. Think blockchain in financial transactions and augmented reality for consumer products. </p>
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Read more:
<a href="https://theconversation.com/a-guide-to-deconstructing-the-battery-hype-cycle-79180">A guide to deconstructing the battery hype cycle</a>
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<p>The world is bifurcating between “<a href="http://www.oecd.org/eco/growth/Frontier-Firms-Technology-Diffusion-and-Public-Policy-Micro-Evidence-from-OECD-Countries.pdf">frontier firms</a>”, whose ready adoption of digital technologies and skills is reflected in superior productivity, and the “laggards”, which are seemingly unable to benefit from technology diffusion. </p>
<p>These latter firms drag down average productivity growth and, lacking competitiveness, they inevitably find it more difficult to access global markets and value chains.</p>
<p>The increasing gap between high- and low-productivity firms is less a matter of technology as such than the capacity for <a href="http://www.manmonthly.com.au/features/means-mid-market-manufacturer/">non-technology innovation</a>. In particular, this encompasses the development of new business models, systems integration and high-performance work and management practices. </p>
<p>Many of the world’s most successful companies, such as Apple, gained market leadership not by inventing new technologies but by embedding them in new products, whose value is driven by service design and customer experience. </p>
<h2>Engaging our creativity</h2>
<p>Recent international studies have shown that a major explanatory variable for productivity differences between firms, and between countries, is management capability. </p>
<p>It is noteworthy that <a href="http://worldmanagementsurvey.org/wp-content/images/2010/07/Report_Management-Matters-in-Australia-just-how-productive-are-we.pdf">Australian managers</a> lag most behind world-best practice in a survey category titled “instilling a talent mindset”. In other words, how well they engage talent and creativity in the workplace.</p>
<p>Most organisations today would claim that “people are our greatest asset”, but much fewer provide genuine opportunities for participation in the decisions that affect them and the future of the business. Those that do are generally better positioned to outperform competitors and demonstrate greater capacity for change. </p>
<p>More <a href="https://www.uts.edu.au/about/uts-business-school/news/major-study-paints-picture-whos-managing-our-businesses">survey work</a> on this issue is under way. </p>
<h2>A more inclusive approach</h2>
<p>Wages are also related to productivity but not always in the way that is commonly assumed. It is said that productivity performance determines the wages a company can afford to pay, with gains shared among stakeholders, including the workforce. </p>
<p>But <a href="http://rooseveltinstitute.org/what-recovery/">evidence is emerging</a> that causation might equally run in the reverse direction, with wage increases driving capital investment and efficiency. </p>
<p>This casts the current debate on productivity-enhancing reform in a very different light. It may now be a stretch to argue that corporate tax cuts will be much of a game-changer in the absence of any incentive to invest in new technologies and skills. The same may be said about the ideological insistence on labour market deregulation, if all that results is a <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech984.pdf">low-wage, low-productivity economy</a>. </p>
<p>The populist revolt against technological change and globalisation has its roots not just in the failure to distribute fairly the gains from productivity growth, but in a <a href="https://www.ft.com/content/6965239a-6e30-11e7-bfeb-33fe0c5b7eaa">longstanding effort in some countries</a> to fragment the structures of wage bargaining and to exclude workers from any strategic role in business transformation. This has assigned the costs of change to those least able to resist, let alone benefit from it. </p>
<p>The next wave of productivity improvement, if it is to succeed, must be based on a <a href="https://www.allenandunwin.com/browse/books/academic-professional/sociology/Inclusive-Growth-in-Australia-Edited-by-Paul-Smyth-and-John-Buchanan-9781743311301">more “inclusive” approach</a> to innovation policy and management. </p>
<p>As jobs change or disappear altogether, Australia’s workforce can make a positive contribution. But workers will only be able to do so if they have the skills and confidence to take advantage of <a href="http://www.alphabeta.com/the-automation-advantage">new jobs and new opportunities</a> in a high-wage, high-productivity economy.</p><img src="https://counter.theconversation.com/content/83505/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roy Green has received research funding from the Department of Industry, Innovation and Science</span></em></p>Spurring productivity growth requires innovation. Not just in products, but in our business models and management practices.Roy Green, Dean of UTS Business School, University of Technology SydneyLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/283112014-06-23T17:49:20Z2014-06-23T17:49:20ZLook at the data to understand the risks for the Australian economy<p>What are the risks in the economic outlook for Australia? </p>
<p>Typically, prognosticators take a scenario-based (aka “story-telling”) approach to answering this sort of question. And usually these scenarios end up as a litany of woes about what the future holds (such as weak productivity growth, unfunded fiscal liabilities, and highly unfavourable demographic trends). </p>
<p>But for most economists gathering at the Joint Econometric Society Australasian and Australian Conference of Economists Meeting in Hobart next week, the more natural approach to answering this question is to consider formal econometric analysis of the macroeconomic data.</p>
<p>Without going into the gory details of how to do this, I want to provide a sense of what such analysis says about the short-run and long-run risks in the economic outlook for Australia.</p>
<p>I consider two key indicators of economic activity: output growth and inflation. The short-run risks are captured by statistical distributions for these indicators, while the long-run risks relate to possible changes in these distributions.</p>
<h2>Short-Run Risks for Australian Output Growth</h2>
<p>The graph below plots output growth for Australia and the United States.</p>
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<a href="https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/51838/original/xrcxbypn-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>It’s clear from the graph that output growth for both countries has been much less volatile since the mid-1980s. Economists, who like to label everything as “Great” (e.g., the “Great Depression” and the “Great Recession”), refer to this stabilization as the “Great Moderation”.</p>
<p>Even a casual glance at the graph makes it clear that the Great Moderation was not a myth, as has been asserted by some commentators, but is very real. Yes, the US economy had large negative growth rates in 2008. But since then, output growth has been stable, if lacklustre. Australian output growth also remained stable throughout this period.</p>
<p>The reasons behind the Great Moderation are highly contested. But at least a couple of leading explanations suggest it should persist in the future.
The most compelling explanation is that the economy now faces “smaller shocks” due, in part, to a changing structure towards services and away from manufacturing (although the reduced volatility occurs within services and manufacturing, not just due to their shifting importance). </p>
<p>Also, monetary policy likely played some role by stabilising inflation, leading to fewer movements along the “Phillips curve” (i.e., the short-run link between inflation and output). Note, however, that US output growth remained stable after the global financial crisis, despite the US Federal Reserve facing a “zero lower bound” constraint on interest rates. So a paramount role for monetary policy in stabilising output growth is doubtful. </p>
<p>Consistent with the visual impression in the graph above, formal tests suggest the statistical distribution for Australian output growth has remained fixed since the mid-1980s. Based on this distribution, the short-run outlook has real GDP growing at a 3% annualised rate, with a standard deviation of 1.5 percentage points for year-on-year growth summarising the risk in this prediction. In words, output growth could well be 1.5% or 4.5%, but there is a low probability that it will be less than 0% or greater than 6%. </p>
<p>Notably, a major recession along the lines of what happened to the United States in
the global crisis is extremely unlikely based on this distribution, although other statistical modelling suggests the probability of some sort of recession for Australia is less remote, but still small, at close to 15% over the next two years.</p>
<h2>Short-Run Risks for Australian Inflation</h2>
<p>The graph below plots inflation for Australia and the United States.</p>
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<a href="https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=392&fit=crop&dpr=1 600w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=392&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=392&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=493&fit=crop&dpr=1 754w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=493&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/51839/original/kc5x29v5-1403487244.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=493&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<p>This graph shows that Australian inflation has been lower and less volatile since the early 1990s, especially in comparison to the 1970s. This pattern of stabilisation roughly mirrors that of US inflation, also plotted in the graph, although the timing is a bit later in Australia. </p>
<p>The stabilisation of US inflation in the early 1980s coincides with major changes in the Federal Reserve’s monetary policy at the time, while a link to monetary policy for Australia is strongly supported by the anchoring of inflation expectations (such as the measure also reported in the inflation graph based on the difference between yields for 10-year nominal and real Australian government bonds) at the start of the inflation-targeting era in the early 1990s.</p>
<p>Consistent with the visual impression in the inflation graph and similar to output growth, formal tests suggest a fixed statistical distribution for Australian inflation in recent years, albeit since the early 1990s only when inflation targeting was put in place. </p>
<p>Based on this distribution, the short-run outlook has inflation at a 2.5% annualised rate (exactly the midpoint of the RBA’s target range), with a standard deviation of 1.3 percentage points for year-on-year inflation summarising the risk in this prediction. In words, the headline inflation rate could well be 1% or 4%, but it is unlikely that it will be much more extreme than that.</p>
<p>A major recession might push Australian interest rates to the zero lower bound, along the lines of what has happened in Japan, the United States, and Europe. However, if the RBA were to follow similar unconventional policies to those conducted by the Federal Reserve in recent years, the US experience suggests that inflation volatility should remain contained.</p>
<h2>Long-Run Risks for the Australian Economy</h2>
<p>The main long-run risks for the Australian economy are that the statistical distributions of output growth and inflation could change in some fundamental way, as they have in the past. </p>
<p>Given the reasons for the past changes discussed above, it seems unlikely that output growth and inflation will return to their pre-Great Moderation patterns. A downside of this is that long-run output growth now appears to be lower than it was in the 1960s and 1970s. Furthermore, there is always a risk that long-run output growth could fall further. </p>
<p>It is notable that the average growth rate for the Australian economy was as high as 5% in the 1960s when worldwide productivity growth was high, but has only been 2.8% over the last decade. At the same time, average growth has been reasonably steady since the mid-1980s. So an imminent end to economic growth, as might be suggested by the most dire scenario-based analysis, is quite unlikely.</p>
<p>The key point is that to really understand the risks in the economic outlook, it is important to step back from a story-telling approach, no matter how compelling, and take an an objective look at the data. Doing so provides some encouraging bounds on the likely risks for the Australian economy. </p>
<p><em>Professor James Morley will present an assessment of risks in the outlook for the Australian economy for the “Chief Economists Session” at the Joint Econometric Society Australasian and Australian Conference of Economists Meeting in Hobart on 1-4 July.</em></p><img src="https://counter.theconversation.com/content/28311/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>James Morley receives funding from the Australian Research Council.</span></em></p>What are the risks in the economic outlook for Australia? Typically, prognosticators take a scenario-based (aka “story-telling”) approach to answering this sort of question. And usually these scenarios…James Morley, Professor of Economics and Associate Dean (Research), UNSW SydneyLicensed as Creative Commons – attribution, no derivatives.