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