Unbundling productivity

As 2021 has started, the focus is now on the economic recovery

W ith risks remaining on the upside, the economic recovery will happen gradually however despite of this, focus needs to be on ensuring that economic fundamentals are strengthened now. In terms of national economic performance, the pause in economic activity has definitely scarred economic conditions and resources. In order to prepare for the new economic wave, policymakers need to now focus on productivity and competitiveness. This fact was the focus of the National Competitiveness Report published by the National Productivity Board.

Productivity is commonly defined as a ratio between the output volume and the volume of inputs. In other words, it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. Productivity is considered a key source of economic growth and competitiveness and, as such, is basic statistical information for many international comparisons and country performance assessments. Nobel laurate Paul Krugman states that “productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”.

The report gives a detailed analysis of Malta’s economic performance over the past years with specific focus on areas such as competitiveness and innovation. It is interesting at this juncture to analyse Malta’s sectoral performance on the basis of productivity.

When comparing productivity to employment levels, the analysis shows that leaner sectors like gaming and financial services achieved higher levels of productivity relative to larger sectors like education and manufacturing. In fact, certain labour-intensive sectors with large workforces have struggled to generate higher levels of value-added. On the other hand, sectors like construction and real estate, gaming, financial services and professional services have successfully managed to generate significant value-added from a comparatively smaller workforce, reflecting the booming nature of economic activity within these sectors.

At this point, it is also worth considering the relationship between employment growth and productivity growth, in order to assess whether those sectors, experiencing higher levels of productivity growth, have also led to greater job creation. Findings presented in the report suggest that low productivity growth and low employment growth went hand-in-hand over the period under review. Several sectors experienced both low job creation and productivity growth, indicating that such sectors focused on consolidating existing operations, particularly in sectors like financial services and construction and real estate. Other sectors, like gaming and professional services, experienced low levels of productivity growth despite high levels of job creation, which in part reflects the fact that productivity in these sectors was already significantly high.

An important question is related to the wages and salaries earned by workers in each sector, and whether these move in line with productivity. In this case, one observes a clear positive correlation between wages and productivity, with the highest wages unsurprisingly concentrated in the highest productivity sectors like gaming, financial services and professional services, with low-productivity sectors like manufacturing and agriculture and fisheries by contrast having low wages.

From this analysis, it is apparent that a number of structural challenges face the Maltese economy in terms of productivity. It is therefore imperative for us as a country to come together and address these structural issues with the aim of building a more resilient and sustainable economy. The process of recovery and reconstruction should therefore include: pursuing the necessary structural changes and connected investment activities, mainly in the area of digital, smart and social innovations as well as the green transition; boosting the human capital potential in the Maltese Islands; creating the conditions to support private sector investment and supporting access to the labour market. This will ensure that Malta remains competitive and attractive and will continue future-proofing the economy and its prosperity.

“Productivity isn’t everything, but in the long run it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

J. P. Fabri is a co-founding

partner at Seed jp@seedconsultancy.com