Business & Economics

Is labour productivity the problem?

In a recent article, Alan Kohler, a financial journalist of some note, concluded that: “The reason labour productivity (GDP per hours worked) has been flatlining is because workers don’t care any more.”

Labour productivity is very much à la mode in all of the Anglo-Saxon economies. Kohler attributes a number of causes: flat wage rises; Covid working from home; jaundiced “team members” who don’t see themselves as such; cost-of-living struggles; small businesses themselves in an existential crisis, and the battle against inflation.

He sees that: “…there is surely nothing more corrosive for productivity than jaded, disengaged staff who have lost hope.”

‘Productivity’ is a word in the same stable as ‘engagement’, ‘culture’ and ‘performance’. Each is plagued by a lack of consensus around what the construct actually is, how it is measured, when it is measured, and what the consequences are of being high or low in each. 

I like to think of it not as GDP per hours worked but value added per dollar of employee or contractor cost. 

However productivity is measured, a constant theme pervading employee survey comments for decades, even when employees may not have been so jaded and disengaged, is the lack of action on what they most complain about.

Always among the common complaints are, for example, those about: patchy training when using new systems; process not working or limping along, with staff having to fight the system or use Band-Aid solutions; unclear roles and responsibilities despite protestations; inadequate staff to do the work; insufficient equipment and supplies to do the work.

These are not just my findings. According to Gartner, 47 per cent of digital workers struggle to find the information needed to effectively complete their work. TinyPulse (now LimeAde) found among their 10 top employee pain points for 2019 were: technical issues with software and other tools; poor communication from management/lack of training and information; disorganised and time-wasting systems and processes; and overworked/under-resourced teams. As a result, in Gallup’s estimate, just 30 per cent of employees, on average, have felt ‘engaged’ at work during the past 18 years.

One could argue that the resources issue has worsened and helped exacerbate decline in employee morale, as Kohler has suggested.

However, the inescapable conclusion is that labour productivity is a misnomer. All of the items above can be rectified by simple, humdrum, competent leadership. 

Of course, it gets more complicated than that. As Genichi Taguchi has stressed endlessly, reducing waste, enhancing customer satisfaction, and promoting efficient use of resources, beyond the producers’ wellbeing, also serve to improve overall societal wellbeing.

Further, management’s main contribution to productivity lies in not just maintaining and explaining systems, resources and equipment, but also investing in replacements – updated and new technology. Yet, even when they do invest, the results are poor.

A broad consensus holds that 70 per cent of all change projects fail. Some would argue that this judgement is a little harsh. To be more precise, 70 per cent of all change projects fail to meet the criteria set out in their initial proposals.

‘Productivity’ is a word in the same stable as ‘engagement’, ‘culture’ and ‘performance’. Each is plagued by a lack of consensus around what the construct actually is…

More specifically, according to the Standish Group, only 31 per cent of software projects are successful. Of these successful projects, only 46 per cent return high value.

So even when a significant proportion of managers choose to invest, they’re not very good at managing it.

On the other hand, CEO compensation, which includes bonuses, has risen by 1322 per cent from 1978 to 2020, while the typical employee’s compensation has increased by only 18 per cent in real terms.

Another way of looking at this skewing of the wealth share is to note that CEO pay in 1965 was 21 times that of the average employee, whereas this number has grown to be 299 times in 2020.

So the kind of leadership necessary to assemble the basic building-blocks of organisational functioning listed above has been consistently lacking since I first started to measure organisational climate in the 1970s.

But this has not stopped an inexorable skewing of the proportion of productivity gains shared between labour and management. Nor has it impeded the rise in share buy-backs, helping investors increase their proportion of the wealth.

US stock buybacks are on track to hit a record $1.26 trillion – a rise of 8 per cent from 2021, according to Birinyi Associates. Instead of using cash for investment in technology, plant and equipment, companies have opted to repurchase shares to increase shareholder value.

To make matters worse, if we move from Taguchi’s narrow definition of the cost to society to a broader one, then, in a sense, society’s share of generated wealth beyond the single employee’s share has hardly even been considered. 

There is a growing argument for the incorporation of environmental and social costs into economic decision-making, challenging the prevailing focus on GDP growth as the primary indicator of progress.

The despoliation of harbours and oceans by the secretive, lightly-regulated, totally foreign-owned salmon industry in Tasmania is a prime example of how these costs are neglected. This industry has been noted by a Legislative Council committee to have been responsible for inhumane control of predatory seals, disease outbreaks, biosecurity concerns and claims of a ‘compromised’ approvals process.

High amounts of dissolved nitrogen and nutrients from fish farms have been attributed to the appearance of green algae in Tasmanian waterways. All this while the true value of the industry seems to have accrued lopsidedly to the companies rather than to Tasmania.

I see two ways – although, there are certainly many more – to arrest the trend of undeserving leaders appropriating more than their share of the wealth produced by organisations and nations. The first is already on the way, although its impact has still to be felt by players in the system. I refer to the erosion of the economic rationalist model begun under the assault on society by Covid. State intervention is no longer unfashionable. Action to regulate against unfair wealth-sharing is plausible if this trend continues.

The second path is more positive. Here, Germany’s codetermination model is seriously considered in Anglo-Saxon economies. There has been some foreplay in this domain, but what has resulted has been patchy, uncoordinated and mainly due to the efforts of true-believer individuals.

Let’s hope that positive action in this regard is embraced more fully by organisations, unions and government. Participative decision-making throughout organisational levels would be even more desirable.

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Photo by Dylan Nolte on Unsplash.


About Paul Carey

Paul Carey works with a number of consultants in Australia and the UK who have a common interest in organisation development and change. He works on projects identifying and measuring cognitive and socio-emotional potential, especially at the board, executive and senior talent-pool level. He is the author of the book ‘Productivity Gain Sharing’. He is writing a new book on the topic.

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