Productivity is pretty much everything

As Paul Krugman has been known to remark, productivity isn’t everything but in the long run it’s pretty much everything. The average productivity of labour in an economy is the determinant of average wages in that economy:

“Wages are determined in a national labor market”…(…)…”Finally, and most importantly, it is not obvious to non-economists that wages are endogenous. Someone like Goldsmith looks at Vietnam and asks, "what would happen if people who work for such low wages manage to achieve Western productivity?" The economist's answer is, "if they achieve Western productivity, they will be paid Western wages" -- as has in fact happened in Japan.”

The importance of all of this on two stories in the newspapers yesterday:

Tens of billions of pounds in additional funding will be required to keep public services running this year because of a collapse in productivity that experts blamed on weak management and working from home.

Public sector productivity fell 1.3pc in the three months to September compared with the previous quarter, according to the Office for National Statistics (ONS). This compares with a 0.1pc increase in output per hour across the economy over the same period.

It means productivity in the public sector is 7.4pc below pre-pandemic levels, compared with a 1.6pc increase in the equivalent economy-wide measure.

Leave aside those costs required to gain a static level of public services in the face of such a fall in productivity. That is - also - a fall in average productivity across the entire economy. Thus that lowers wages across the entire economy. For wages are determined in a national labour market, the determining being done by the average level of productivity in that national market.

This is also true at the other end of the global economy:

People focused on Davos may not have heard about the success of organisations like Fundación Paraguaya, which is working with families to help end poverty, or Maono Africa, which has been educating women and girls in Kenya. These innovative and critical perspectives, which hold the key to progress, weren’t present because localisation wasn’t on the agenda at Davos.

Grassroots leaders like myself know that the world’s “big problems” are only fixable when we tackle them from a local perspective – yet community-based organisations are vastly underfunded, and need support. If the WEF wants to see real change, it must put the work of community leaders at its centre, and those in attendance must be willing to shift funds and decision-making power directly to the people leading this critical work.

Ending poverty works the same way. Increasing the productivity within that Kenyan economy is what will reduce poverty in that Kenyan economy. For it is that average labour productivity within Kenya which determines the average wage rate in Kenya.

So, yes, it’s not people blathering at Davos which matters, it’s that micro-scale activity within the Kenyan economy which does. Every installation of a sewing machine instead of the hand wielded needle and thread, every replacement of a shovel with a JCB, every killing off of unproductive bureaucracy, each and every single such action works to raise wages in Kenya.

Just as every movement to a more productive state workforce in Britain will raise British wages. Simply because that’s how the world works.

Productivity indeed isn’t everything but in the long run of determining the average standard of living it’s pretty much everything.

Which does leave us with the question of how do we increase the productivity of the state workforce here in Britain? We’d open the bidding with fire half of them and see what happens - but that is just us being somewhere between jocular and provocative. We’re entirely open to other solutions but we do insist that the problem is as described. British wages are low because too much of British labour is employed in low productivity endeavours. That’s just a truth and the one to be grappled with.