Labor productivity can be misleading

We are frequently bombarded with labor productivity statistics such as output per hour worked and unit labor costs — normally accompanied by political hand-wringing exhorting us to improve productivity — but how accurate are these statistics and what do they mean?

First let’s look at GDP per capita. This should tell us how well we are doing compared to our neighbors. Norway and Singapore lead the pack, ahead of the US, while Australia is comfortably in the middle.

Measuring in Purchasing Power Parity (PPP) adjusts for comparative price levels in different countries. Australia and Norway are most expensive, with relative price indices (PPP/exchange rate) of 1.61 and 1.58 respectively; while Singapore (0.83), Czech Republic (0.80) and South Korea (0.74) are cheapest.

Demographics such as an aging population or high birth rates, however, may distort per capita figures.

Index

Norway also leads when it comes to GDP per hour worked — which should alert us that productivity of resource-rich economies such as Norway and Australia may be inflated by profits earned from extraction (mining, oil and gas). Ireland surprisingly beats the US, while Singapore slips to near bottom of the table when measured by hours worked.

Index

Workers in Singapore and South Korea work far longer hours than most other OECD countries, while those in powerhouse Germany work even less than their counterparts in France.

Index

But hours worked can also give a distorted view of employee welfare. Compare the 3 or 4 hours that workers in Sydney, London or New York may spend commuting to and from work each day to a Korean assembly worker who lives in a housing estate adjacent to the assembly plant. If we compare GDP (adjusted for PPP) to employed persons, rather than hours worked, we get a slightly different picture. The real surprise is again Ireland, ranking third behind Norway and the US — and well ahead of Australia, Germany and the UK.

Index

What do we learn from this? It pays to live in a resource-rich country such as Norway (or Australia). It also pays to work clever — high-tech manufacturing like Germany and Ireland — rather than hard. Combine this with a low-tax jurisdiction — such as Singapore or Ireland — and you can become a world-beater.

Read more at BLS: International Comparisons of GDP per Capita and per Hour

Labor productivity

Labor productivity is measured as Output / Input

Where Output is the total of goods and services produced, normally measured by GDP.

And Input is the time, effort and skills of the workforce, measured either as:

  • total hours worked by the workforce; or
  • total number of employees.

Via OECD: Labour Productivity Indicators | Rebecca Freeman

7 thoughts on “Labor productivity can be misleading

  1. chris quirk says:

    The figures for Ireland MUST be wrong-you just dont know what treasury bureaucrats do to massage the figures

    • ColinTwiggs says:

      GDP or hours worked? Both are hard numbers to manipulate. But there is a certain amount of transfer pricing by multinational corporations — shifting profits to the lowest tax regime — that could be inflating GDP. Not that the Irish are complaining.

  2. Joseph Hughey says:

    Hi Colin,

    Really enjoyed today’s Trading Diary. Anyone who has more than an hour’s commute to work can really appreciate the missing work-related statistics. I think I shall move to Norway … unless sunny Australia also offers a sovereign wealth fund.

    Thanks!

    Joe

    • ColinTwiggs says:

      Thanks Joe,
      Unfortunately Australia does not have a sovereign wealth fund. They spent the money on unsustainable welfare payments.
      All the US has to do to overtake Ireland & Norway is to lower the corporate tax rate (to around 15%) — while closing any loopholes to ensure all pay the same rate. But don’t hold your breath.

  3. […] scores highly on international productivity rankings, which compare GDP (converted to USD after adjusting for purchasing power parity) to hours worked […]

  4. […] now leads the United States in productivity as measured by GDP (converted to USD after adjusting for purchasing power parity) to hours worked […]

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