Productivity - who is the winner?

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We are now advised that we are definitely recovering from the financial crash and growth has returned to the economy. We are told that pay rises are just possibly this year going to be ahead of inflation giving people more money to spend in real terms. However in reality the only way a country can really expand economically is if the output per person actually increases.

We are always told that the productive efficiency of people in other countries is much better than the UK. We are constantly told how much better German workers are than us and recent statistics have suggested that the average French worker is producing 30% more than the average UK worker. With the engrained Anglo-French rivalry this statistic must be something to change.

At the beginning part of the financial crisis many employers chose to retain good staff rather than make them redundant which meant that productivity per employee dropped. But now at last we are seeing employers recruiting but they haven't necessarily recovered in real terms to the point where they were before the slow down so why? The initial thought would be that the existing workforce has become lazy and we have become a nation of couch potatoes.

The problem may lie in how we measure productivity. We don't measure physical output but the monetary value of what is produced. To this end in the low wage economies frequently their productivity would be measured as low because they are the producers of cheap goods but often on a large scale. So they produce huge amounts of product at little monetary value. This means that at a micro level the person who actually makes an item can be considered less productive than the wholesaler who just sells it on at a profit. Productivity at a national scale is national sales (GDP) divided by the number of people in work. So to a degree unemployment can increase productivity- a bit of a nonsense. It also means that companies which invest in machinery to manufacture rather than people will be measured as more productive. So in the future world where robotics takeover doing everything and we the humans are purely at leisure we could be at our most productive.

But I return to the real and current world. When I visit clients and we are talking about their financial performance and future one thing seems to be the forerunner, namely, margins. What has happened is that in order to survive when businesses were chasing decreasing demands in the financial crisis price became the main driver. We are a commodity driven market now where quality and delivery are taken as a given and therefore only price matters. Is this part of the success of the 'low cost' supermarkets? Do away with the frivolous aesthetics and customer service and concentrate of just delivering what the customer ultimately was looking for - a place to buy food?

This driver on price continues even now recovery is here because for prices to rise we need to be at a level of demand that exceeds supply but businesses by recruiting are able to increase their supply to more than match the levels of demand. In simple, terms businesses are recruiting so they can maintain cheaper prices (lower margins) in order to keep sales, rather than letting supply slow down and hence prices rise.

The end result is that we are producing more but at lower prices and therefore our productivity, as measured, remains static or increases slower than we would expect based on increased employment. When we look at the more efficient countries in Europe the other thing they have in common compared with UK is higher unemployment.

As they say there are lies, lies and statistics but I would suggest that we need to worry about being told that our productivity is increasing because it might be that in reality prices are rising or businesses are laying of staff!

Jonathan Russell




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