Below is a recent clip from Paul Solman of PBS who interviewed Behavioural Economist Dan Ariely. Ariely states that behaviour is driven by emotion not rewards like money; the ability to help other people, feel that we’re useful, feel that we’re getting better or living up to our potential are much stronger motivators than cash. The interview discusses an experiment that he at a computer chip production line in Israel. Workers who made their chip quota got either
- Voucher for pizza to take home to the family
- A“well-done” text from the boss.
In the actual experiment, workers who made the quota and received the $30 and those that got a pizza voucher and the group that got a compliment were all more productive than workers who received nothing.
But, on the second day, when the workers who got the $30 were not paid a bonus, regardless of how many chips they turned out, their productivity actually dropped below those who got nothing.
In total, by giving people $30 bonus, Intel lost almost 5 percent of productivity. That’s a lot. Now, think about it. You give money because you think this would increase motivation. It actually decreases motivation.
The Economist ‘Free exchange’ had a piece on productivity and how it has been rather stagnant in the rich countries. Since the 1960’s rates have dropped (except for Japan in 1970’s) and economist are suggesting that this has contributed to such low wage increases. Explanations for this problem fall into three categories:
1. Robert Gordon (Northwestern University) suggest that humanity has run out of big ideas. Inventions of the early19th and 20th centuries (electricity, indoor plumbing etc) have had a much greater impact on productivity than those of recent technological advances. However it was software and computing power that was the driver behind the productivity boom of the late 1990’s. Productivity growth has also slowed in developing countries (Mexico and Turkey) which should be able to achieve greater output per worker with using technology.
2. Some have suggested that the problem lies in the way productivity is measured as statistical agencies sometime fail to include things like the massive reduction in the cost of digital media (free in most cases) subtracts from measured GDP – smartphones greatly improve productivity but are not captured by the statisticians. But the loss of productivity is far more than the estimates of the unmeasured gains from information technology. A ball park figure (Chad Syverson – University of Chicago) has the US economy losing $2.7 trillion in lost output since 2004 which equates to about $8,400 per person.
3. A further explanation is that inflexible developed economies are not efficient at moving people out of areas where there is no work to areas of growth. Business start-ups have fallen steadily since the late 1980’s. High growth companies have not expanded to other areas and have also preferred to bank profits rather than taking the option of reinvestment. An issue could be that if it was easier and cheaper to locate in depressed areas employment would rise.
Machines or Labour in low paid jobs.
In order to boost productivity companies need more financial support for research and development and a reduction in government regulations – red tape. However low pay does allow companies to employ more people in marginal jobs as in some cases the cost of labour is less than the investment needed to introduce automation – checkouts in supermarkets for instance. But the abundance of cheap labour has led to firms to use that labour in less productive manner which leads to underemployment.
Interesting graphic from the National Australia Bank showing productivity levels in Australia and the US. Labour productivity is a partial measure of overall productivity. The Australian Bureau of Statistics ABS also measures capital productivity and multi-factor productivity.
Labour productivity is calculated by the (ABS) as Gross Domestic Product per hour worked, and can be measured across various industry sectors or over the whole economy. The national Accounts, which show GDP per hour worked increased by 2.2 per cent in the year to June 2013. That compares to a 2 per cent increase in 2011-12, and a 0.4 per cent decline in 2010-11. The last time GDP per hour worked exceeded 2.2 per cent growth was in 2001-02 when it reached 3.6 per cent.
For both the newly appointed Governor of the Bank of England and the Chairwomen of the US Federal Reserve, Mark Carney and Janet Yellen respectively, the level of unemployment has been targeted as an indicator for increasing interest rates. It is encouraging that the unemployment rates have been dropping in both countries but for different reasons.
The flow chart below show that the US unemployment has dropped mainly because of the fact that people are leaving the workforce. Whilst across the Atlantic the UK’s fall in unemployment is more to do with conventional growth. However the US economy has experienced some significant growth which hasn’t feed through into more positive employment figures. On the contrary the UK economy has had weak growth but it has had little impact on employment figures. The Economist stated the following:
This divergence is commonly explained with nods to Britain’s “productivity puzzle”. America, the thinking goes, suffered a “normal” recession. Its low rate of inflation is symptomatic of weak demand, which can account for its output loss and much of the shortfall in jobs. In Britain, in contrast, tumbling demand has been matched by a strange decline in workers’ productivity. Falling productivity cushioned the economy against large job losses, since more workers were needed to do the same amount of work. But it also reflected a loss of productive capacity, the evidence for which was stubbornly high inflation. Since late 2007 annual inflation in Britain has been almost twice as high as in America, at 3.1% to 1.8%.
Here are some up to date statistics on New Zealand’s productivity from Grant Cleland of the Parliamentary Library in Wellington. He looks at the productivity of Labour, Capital and Multifactor.
Labour – is measured as a ratio of output to labour input. The change in labour productivity can also be broken into its component parts:
– The amount of capital available to be used by the labour force; and
– A change in multi-factor productivity (the change in output that cannot be attributed to a change in either capital or labour inputs).
The recent reduction in capital per worker (or, capital shallowing) could be the result of the recession, in that firms would have been unwilling to upgrade capital plant or invest in new plant when the demand for their goods and services was uncertain.
Capital – is measured as a ratio of output to capital input.
Multifactor – is growth that cannot be contributed to either capital or labour, such as an improvement in knowledge, methods or processes. An increase in multifactor productivity is commonly referred to as a technical change or efficiency growth.
Job creation has been a major concern for the United States economy as it tries to avoid a double-dip recession. US President Barack Obama recently promised to implement new tax incentives for companies that create jobs within the domestic economy – rewarding those that bring jobs into the US and eliminating tax breaks for companies that move jobs overseas. Although the unemployment rate in the US fell to 8.5% in December 2011, the lowest since February 2009, it is the impressive productivity figures which have gone largely unnoticed.
What are the reasons for this:
1. In 2012, with the weak economic conditions workers are concerned about job security so therefore tend to work longer hours and become more innovative in performing their job. This may involve them taking on more responsibility by doing other tasks.
2. When the recession bites, firms really have to think hard at how they can still maintain a revenue stream at the same time as seeing off the competition. This is where they become more innovative and risk further capital investment in order to remain solvent.
3. Panicked by the 2008 financial crisis and deepening recession, U.S. employers cut jobs pitilessly. They slashed an average of 780,000 jobs a month in the January-March quarter of 2009.
“My sense is there was much more weeding out of the weakest workers — the ones they didn’t want,” Kenneth Rogoff – Harvard University
The above is a brief extract from an article published in this month’s econoMAX – click below to subscribe to econoMAX the online magazine of Tutor2u. Each month there are 8 articles of around 600 words on current economic issues.
A hat tip to colleague Richard Wells for this site – Column Five Media – which has some outstanding infographics. I particularly like the following:
* Grenade or Aid – US Military Spending versus Foreign Aid
* America’s Most Bizzare Taxes – Jock Tax, Candy Tax, Crack Tax.
* The CPI Market Basket – How the CPI is calculated and its impact on individuals
* How Coffee Affects the Global Economy – Value of exports and imports of coffee as well as coffee production.
* Europe Trails the US in Productivity – productivity figures for both countries and why Europe is behind. See graphic below.