Government plays numbers game with reform

May 20, 2005
Innovation led to the computer, but economists, including those who advise the Prime Minister, are ignorant of it.

Photo: Peter Riches

When governments talk of raising productivity, be suspicious, writes John M. Legge.

The Prime Minister is dead wrong when he claims that his proposed workplace reforms will raise productivity. The major source of rising productivity is innovation, not workplace reform.

Economists, including those who advise the Prime Minister, are ignorant of innovation. To keep their maths simple, economists deal with a model economy with only one product that all producers produce and all consumers consume. Trying to deal with many different products makes the maths difficult. (Remember when at school you thought you almost understood equations when the teacher introduced simultaneous ones?) Trying to deal with changing products makes the maths impossible. Few economists consider the implications of such changes.

When ordinary people compare their lives with those of their parents and grandparents, the changes in the goods they buy and the services they use are far more obvious than the volume of traditional products they consume. Twenty years ago, few people had phones in their cars; no one had pocket-sized mobile phones, and there was no such thing as SMS. Fifty years ago, there was no television in Australia.

Two hundred years ago, most people in the developed world lived, literally, on the breadline; average wages were just enough to afford a loaf of bread for each member of the family each day. "Give us this day our daily bread" was not a symbolic prayer but reflected urgent daily necessity. Today's minimum wage is enough to buy 50 loaves of bread a day at supermarket prices, or more than 900 loaves a day for a family that bought wheat in bulk and baked it themselves.

If a typical Australian family was asked to give up their comfortable home, their television, mobile phones, overseas holidays, cars, access to health care, refrigerators and contents and most of the other things they enjoy, and move into a mud-floored hovel with a guaranteed supply of 1000 loaves of bread each day, they would find the offer unattractive.

When governments talk of raising productivity, citizens should be suspicious: productivity is a measurement, not a process, and much as dodgy used car salesmen rewind odometers, governments like to fiddle with productivity measuring tools. When New Zealand radically reformed its labour market in the early 1990s, productivity growth on the ordinary measure of output per hour worked stalled; and so reform advocates invented the Total Factor Productivity index, which conveniently rose. During the 1990s, when the US Government wanted to distinguish the "strong" US economy from the "weak" European and Japanese ones, it redefined inflation by subtracting 1.2 per cent from the measured figure. The 1.2 per cent cut from the published inflation rate turned up as an equal increase in productivity and added much more than 1.2 per cent to American smugness and complacency.

Economists are only aware of two sources of productivity gains: workers can be persuaded, or forced, to work faster for longer; and output can be increased by providing faster or more powerful machinery. There are three major sources of productivity gains below economists' radar: workers can be trained, and the workplace reorganised so that fewer mistakes are made and less spoilt work produced; existing products can be improved, so that the same amount of work produces higher-value output; and new products can be introduced, commanding premium prices and again raising the value of output for a given amount of effort.

Economist Robert Solow showed that investment in plant and equipment accounted for a maximum of 20 per cent of observed productivity gains, leaving 80 per cent unexplained by economic theory and so ignored by modern economists.

The Government's workplace reform program is focused on an area with little potential for improvement: the assumed slacking at unionised workplaces. Their proposals are intended to make unions irrelevant and give managers complete control. This, they assert without evidence, will raise productivity. When a government makes baseless assertions with such conviction there must be a hidden agenda. For the Government, weakening the union movement means weakening the ALP by cutting a major source of funding and organisational support. Imaginary weapons of mass destruction provided an excuse for invading Iraq; imaginary labour market rigidities are a suitable disguise for an attempt to entrench conservative power in Australia indefinitely.

The Government's program may even reduce productivity. Formal education and training can only go so far: workers need to learn from experienced employees on the job. Under the current system, experienced employees have a measure of job security. In a unionised workplace, the last-on first-off rule protects them. Redundancy and other entitlements make it expensive to fire experienced employees in non-union workplaces. In both cases, experienced employees can help induct and train new ones without putting their own job at undue risk. By eliminating unions and redundancy payments, the Government will encourage experienced workers to keep their experience to themselves: if they help train new employees they may be training themselves out of a job.

One of the great "reforms" of the 1980s and 1990s was the corporatisation and privatisation of public utilities, and measured productivity grew rapidly. Unfortunately, public utilities had been the largest employers of apprentices and were a major source of skilled tradespeople for the economy. Australia now has a shortage of tradespeople, as the last generation trained on the railways and the public utilities approaches retirement with no one to replace them. The productivity of public utilities improved, but at the expense of the productivity of the whole Australian economy.

Labour market reform may ensure the ALP remains an impotent opposition, but it won't raise productivity and it won't help Australia.

John Legge, a teaching fellow of Ballarat and Swinburne universities, specialises in innovation.


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