## Wednesday, 19 November 2008

### More unproductive comment

Steve Pierson on the Labour Part site The Standard has been talking about productivity again. He writes
It’s exam season for high school students. So, for 10 points explain how the following statement (in the ACT-National agreement and repeated uncritically by the media) can be true,
closing the income gap with Australia by 2025… will require a sustained lift in New Zealand’s productivity growth to 3 per cent a year.
given:
- productivity is just one factor in GDP (production = inputs x productivity, basically the amount produced depends on how much you put in times how much you get out per unit of what you put in)
I'm guessing what he means is something along these lines. Let Y=AF(L,K) where L is labour, K is capital, F() is the production function and A is total factor productivity (TFP). Then think of Y as GDP.
-productivity growth tends to move in the opposite direction to the amount of labour and capital input growth
But growth in total factor productivity is a residual term (often called the Solow residual). TFP is the change in output that cannot be explained by changes in inputs. That is, it is the amount of output growth that remains after we have accounted for the determinants of growth we can measure, ie growth in labour and capital. So I'm really not sure what Peirson means by his statement. A can increase while L and K remain constant. L and K can increase while A remains constant. A could go down when L and K goes up or when K and L go down. Depending on what happens to Y. His statement would be true if Y remains constant. Then if L and K increase, A would have to fall. But why would you increase L and K if Y does also increase? This could not be profit maximising. You get the same output at a higher cost of production because of the increase in inputs.
- ie. productivity actually usually increases faster when GDP growth is slack or after a recession and productivity growth slows when GDP goes through a sustained period of rapid growth
I would love to see his data on this.
- incomes (ie. wages and salaries, the price of labour) is a result of supply and demand for labour, not the productivity of labour.
He is right, incomes are determined by supply and demand but the demand for labour depends on the productivity of labour. A profit maximising firm's demand for labour is determined by P*MPL=W/P where W/P is the real wage and MPL is the marginal product of labour. The MPL schedule is the firm's demand for labour. The MPL will depend on the productivity of labour.
Indeed, wages usually increase fastest when there is a shortage of labour and rising demand while productivity increases fastest when there is an abundance of labour and falling demand (because only the ‘highest quality’ labour is used).
The first part of this statement is true but I don't understand the second part. Why does productivity (and what form of productivity is he talking about) increase fastest when labour is abundant? From what I said above TFP is the residual after accounting for changes in output due to changes in inputs. So I'm not sure what he thinks he is saying.

Or have I missed something?

Matt Nolan said...

My impression from talking in the comments is that he thinks National-Act is targeting labour productivity growth rather than multi-factor productivity growth.

However, I didn't see any evidence of this myself - and I don't understand why a productivity target for the macro-economy should be based solely on one input in the first place.

Paul Walker said...

Thanks for that. Even if it is labour productivity it still doesn't make any more sense to me. And I agree, it doesn't make sense why you would target the productivity of just one factor.

Matt Nolan said...

The way I think the argument rolls is like follows:

If we target average labour productivity, then since there is diminishing marginal product in labour we can increase average productivity by reducing employment.

Effectively he is looking at a movement up the labour demand curve instead of an outward shift of the labour demand curve (which is what we are thinking of).

Of course, then you would say that the increase in wages was obvious - as such a movement could only occur with a inward shift of the labour supply curve, and I would agree ...

Paul Walker said...

That makes more sense than most of the stuff I've been reading today.

matt b said...

I think Matt's nailed it. Reading Steve's comments I wonder if has been inspired by France's high productivity, a product of its unemployment.

As Matt says, Steve is thinking of productivity via movements along the demand curve rather than movements in demand itself.

As an aside, one thing that struck me while in Europe was retail coffee queuing. I would frequently wait in longish lines (say 10 mins) for a coffee from a kiosk with two coffee machines manned by only a single person.

Now, judging from the stressed out look on the single barista's face it had been a busy i.e. productive day.

But understaffing is not the only source of productivity. There are others - such as better placement of the kiosk or training or investment in a more efficient pay system, or hiring an extra person to handle payments, etc. It's the difference between a nutcracker and a sledgehammer, a distinction Steve misses.

Paul Walker said...

Matt b: I take your point. Having done a quick read of the comments at the Standard I agree. Matt N did a great job there. What I don't get is how Pierson thinks GDP=inputs x productivity, if productivity is labour productivity only.

One thing I agree with Matt N over is

"The fact is that higher “productivity” in the general (total factor productivity) sense is invariably good - but is also not likely to something that can be magically provided by policy."

Which is why I would like to see just how the government plans on increasing productivity. I don't really see the point in a Productivity Commission.

matt b said...

What I don't get is how Pierson thinks GDP=inputs x productivity, if productivity is labour productivity only.

He is subscribing to the labour theory of value, no?

Anonymous said...

"He is subscribing to the labour theory of value, no?"

That would fit his character.

God damn it, I am sick of Marxism's unwillingness to die in the face of over a century of empirical proof and theoretical anihilation.

If it isnt dead by now, it never will be. I agree with many who now say that Marxism isnt an economic theory, it is a pschological dysfunction and the outward manifestation of humanities ultimately self destructive nature.

Kimble