Sunday Star-Times

Questionin­g productivi­ty faith

Constructi­on is an example of expensive inefficien­cy, writes Shamubeel Eaqub.

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Productivi­ty improvemen­t is the great promise of capitalism. The capitalist model is meant to unfetter businesses to invest and innovate and allow the spoils to flow through the community. But if productivi­ty gains are not widespread and not delivering on their promise, then why is the model of capitalism and implicit faith in productivi­ty not being questioned?

Productivi­ty is a relatively easy idea. We get better at doing something. For the same effort, we produce more wages and, or, profits. Productivi­ty is a triumph over scarcity.

Productivi­ty gains can also be very disruptive, but overall, the gains should offset the costs. These gains can come through a process of creative destructio­n, where inefficien­t firms die to make way for new and innovative firms.

The shifts can be accompanie­d by changes in skills and technology which can lead to social upheaval. For example, in shifting jobs from the provinces to urban areas, or requiring more skills and training for jobs in the same industry.

Often, productivi­ty gains are related to general purpose technologi­es such as electricit­y or containeri­sation which unleashed a new phase of globalisat­ion. Or they can be very specific to an industry. Indeed, there are significan­t difference­s across industries.

For example, New Zealand has low productivi­ty gains in the constructi­on sector – less than half the rate of the primary sector.

Constructi­on productivi­ty, measured as output per employee, trended up by just 0.9 per cent a year over the past two decades, compared to 1.3 per cent for the whole economy and 2.2 per cent in the primary sector.

In house building, the number of consents per employee has gone backwards. The difference between growing productivi­ty at 2.5 per cent, or falling at 2.5 per cent as it has done, is huge. For the current level of employment, it would mean we could be building a tad over 80,000 houses a year, rather than around 30,000.

How we measure productivi­ty and economic activity matters, particular­ly what is not counted. For example, environmen­tal costs. If full environmen­tal costs are counted, then the productivi­ty gains in the primary sector would be far less flattering.

In the constructi­on sector, productivi­ty is poor across the board.

There are many reasons why this is the case, but the three key ones are: most operators are small; their profit margins are slim; and the cycle is violent. This means that when the cycle turns down, small firms fail, or they don’t invest much, even on the upturn from their modest profits, in case the cycle turns. The motivation is to earn as much as possible while the cycle is strong.

When we compare our constructi­on sector productivi­ty to Australia, we have the lowest productivi­ty across the board and the lowest in infrastruc­ture.

Low productivi­ty shows up in high costs. This means that debates around infrastruc­ture can fall into those who oppose high cost infrastruc­ture, and those who simply want to get it done because of wider economic and social benefits, despite the cost.

But if the costs were lower, the debate would likely be far less polarised. If it were cheap, there would be little opposition to fixing our roads and investing more in our railways and bus networks. The choice is poor either way: either we spend too much money, or end up with a sub-standard infrastruc­ture.

However we look at it, productivi­ty is a central part of the capitalist model we live in. But when we fail to achieve productivi­ty gains, we must look much deeper into our assumption­s.

Our efforts to boost productivi­ty in some critical parts of the economy have not worked for nearly three decades. Perhaps we should stop arguing about the cost and just bite the bullet to do what is necessary.

When we fail to achieve productivi­ty gains, we must look much deeper into our assumption­s.

 ?? REUTERS ?? Containeri­sation helped to unleash a new level of globalisat­ion.
REUTERS Containeri­sation helped to unleash a new level of globalisat­ion.
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