Ignore the propaganda: cutting wages will not fix productivity
Managers are to blame.
''The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly - it must confine itself to a few points and repeat them over and over.''
SO SAID Joseph Goebbels, master manipulator of the truth in Adolf Hitler's evil Third Reich. Although not as well-known as his more famous ''if you tell a big enough lie and keep repeating it, people will eventually come to believe it'', it more succinctly encapsulates the spin and hyperbole that is the hallmark of the debate over our economy.
For the past few years, we've been bombarded by a constant theme from the business lobby groups: Australian productivity is slipping and unless we have a more flexible labour market and governments reduce regulation, we'll all be ruined.
There's a sliver of truth to the argument. Productivity indeed has plunged. And labour productivity has slipped in recent years. But the real culprit in the great Australian productivity decline is capital, not labour. It is our managers who have let us down, rather than our workforce. And in any case, all the statistics have been thrown completely out of whack by the massive investment boom in our resources sector.
Those are some of the findings of a report this week by global management consultancy McKinsey & Co, which goes a long way to clearing some of the smoke around an issue that has become a lightning rod for the business community and is shaping as a serious election issue. Unfortunately, most who argue so passionately on the topic seem blissfully ignorant of even the fundamental meaning of the term.
For when they raise labour market inflexibility as a problem, they really mean wages or the price of labour, which has very little to do with productivity. Most business people figure, if you reduce the cost of labour, the firm will make a bigger profit and that must be a lift in productivity.
Sorry to disappoint. But cutting wages is more likely to reduce labour productivity, which, simply put, is the amount of goods or services a worker produces. If a worker produces more, his or her productivity has risen. If the same worker's output falls, productivity is down. Nothing to do with cost.
Apart from appearing to be a diversionary tactic from where the blame truly lies for our productivity slump, the unending campaign to drastically reshape our industrial relations system could come back to bite the business sector. It overlooks the potential damage of such action on the long-term profitability of our corporations, particularly those with a domestic focus.
What is often ignored in this heated debate is that, outside of work hours, labour usually is referred to as consumers. Your workers are also your customers.
Reduce their income and eliminate their job security and you may well end up selling less product. On the other side of the ledger, productivity is also likely to suffer. Let's face it, cutting wages and conditions is hardly an incentive to work harder.
In survey after survey, we are told of the dire state of consumer confidence and the impact this is having on sales and company profits. It may be indefinite if a radical industrial relations shake-up is thrown into the mix.
During the past 20 years, our industrial relations system has been constantly evolving and an increasing proportion of our workforce has become part time, casual or short-term contract workers. That has increased labour market flexibility, allowing companies to adjust employee numbers as conditions dictate.
But those workers, most of them younger new entrants into the labour force, are a greater credit risk for banks simply because their income is less secure. They are less likely to buy real estate as they are less willing to commit to long-term finance.
Those that do take the plunge often do so with financial assistance from their baby boomer parents, the ones who had a steady income and a secure job.
That aside, the evidence is now clear. Labour market productivity is nowhere near as dire as our business leaders suggest.
According to McKinsey's Beyond the Boom: Australia's Productivity Imperative labour productivity rose at an annual 0.3 per cent during the past six years. That's a snail's pace when compared with the experiences of the 1990s when productivity grew at an annual 3.1 per cent. At least it is positive. Capital productivity on the other hand, has turned negative, wiping $43 billion from national income. Why? Well, a couple of reasons. One is that much of the enormous recent investment in new machines and building new mines has yet to generate an income. And so as that new plant and equipment starts churning out exports, a great deal of our productivity ''problem'' - both for labour and capital - will be solved.
But the report also highlights what must be an uncomfortable truth for Australian managers, particularly in our resources sector. It reckons a large portion of the cost increases in our mining sector is down to poor management. With a resources boom of unprecedented proportions, the scale and magnitude of the projects under construction has stretched management capabilities, many of whom have little experience with these mega projects.
The McKinsey criticism was not confined to the resources sector. It seems management in our manufacturing industries underperforms most advanced economies. We're ninth on the list after America, Japan and European nations such as Germany, Sweden, Britain, France and Italy with Canada in fifth place.
America's productivity has soared in recent years, although there is evidence it has begun to taper off. In part, that is because of its high unemployment. The most productive workers were the ones more likely to keep their jobs when the recession hit. But there is more to it than that.
Innovative management techniques - working out how to produce more with the same inputs including workers - has been a driving force behind the resurgence of US manufacturing, along with a weak dollar that has boosted exports.
Our productivity ''problem'' will best be solved through investment - in new and more efficient machines and in education to produce more skilled workers and better managers - not with a slash-and-burn approach to wages and conditions. That's something you're unlikely to hear in the coming propaganda war.