Competitiveness, productivity and wages
The recent contrasting views expressed by some politicians on the connection among competitiveness, productivity and wages unfortunately failed to gain momentum and did not inspire the public's interest in this important subject. Yet these economic...
The recent contrasting views expressed by some politicians on the connection among competitiveness, productivity and wages unfortunately failed to gain momentum and did not inspire the public's interest in this important subject. Yet these economic forces are the very core of the prospects for our future prosperity.
One view that was put forward was that, if wages increase, we become uncompetitive and risk losing jobs. Not quite, retorted another much-respected politician. Competitiveness is more about productivity than wages. But how can we improve productivity, and is wage inflation really that marginal in the determination of productivity levels?
First let us look at some facts. According to Eurostat, labour costs in Malta rose at the second lowest rate in the eurozone area in the last year ending in June 2008. In fact, our wages increased by an annual 1.8 per cent, as contrasted to the 2.7 per cent in the rest of the euro area. If wage inflation is the most determining force behind competitiveness, then surely we should be showing some progress in the competitiveness league.
The World Economic Forum publishes an annual report on global competitiveness which includes the ranking of about 130 countries that are monitored on a regular basis. The latest report published late last year shows that Malta has improved its ranking from the 56th place registered in 2007 to the 52nd place registered in 2008. But is this the final word on a country's competitiveness?
The World Economic Forum basis its assessment on what it calls "pillars". There are 12 pillars with the most important ones being institutions, infrastructure, macroeconomic stability, and health and primary education. But I argue that while such indexes and criteria are useful, the acid test of improving competitiveness is our ability to sell more of our goods and services.
To unravel this conundrum we perhaps need to define what "productivity" really is. The best definition I found was in the respected The Economist Guide to Economic Indicators. Let me quote: "Labour productivity reflects capital investment and offers a guide to capital productivity. Other factors that affect labour productivity include social attitudes, work ethics, unionisation and, perhaps most important, training. These are not measured directly by economic statistics."
Now we have really opened a Pandora's box. But at least this definition explains why politicians' views on productivity are not as congruent as one might expect. If there are elements that affect productivity, but these elements cannot be measured, then we tend to concentrate on those elements that can be measured, like the cost of labour.
This definition should help us concentrate our attention on the issues that really matter when we lay out our plans for improving our productivity and consequently our competitiveness. The World Economic Forum may use an academic approach on how to measure productivity. This is useful, but far more useful is our business leaders' ability to judge our performance and monitor whether our industries are managing to win more business from the competition on a regular basis.
We need to list the key performance indicators mentioned in the definition given above and score our performance on each one. This scoring has to be validated by evidence from the market we are serving, if it is to be objective and useful in guiding us to better performance.
We also need to look hard for factual evidence that indicates whether we are really investing more in capital products, whether our workers are being trained to become more multi-skilled and flexible, whether government bureaucracy (which the World Economic Forum identified as our worst competitive disadvantage) is really being tamed, and whether our work ethics and social attitudes are really helping us to excel.
Of course, wage inflation is important, if for no other reason because it affects the morale of workers who ultimately are the catalysts that bring results when all the other elements come together. But to achieve economic success we need to think outside the box and scrutinise our real commitment to the other very important elements that will ultimately decide whether we excel in the marketplace or just fall back.
One view that was put forward was that, if wages increase, we become uncompetitive and risk losing jobs. Not quite, retorted another much-respected politician. Competitiveness is more about productivity than wages. But how can we improve productivity, and is wage inflation really that marginal in the determination of productivity levels?
First let us look at some facts. According to Eurostat, labour costs in Malta rose at the second lowest rate in the eurozone area in the last year ending in June 2008. In fact, our wages increased by an annual 1.8 per cent, as contrasted to the 2.7 per cent in the rest of the euro area. If wage inflation is the most determining force behind competitiveness, then surely we should be showing some progress in the competitiveness league.
The World Economic Forum publishes an annual report on global competitiveness which includes the ranking of about 130 countries that are monitored on a regular basis. The latest report published late last year shows that Malta has improved its ranking from the 56th place registered in 2007 to the 52nd place registered in 2008. But is this the final word on a country's competitiveness?
The World Economic Forum basis its assessment on what it calls "pillars". There are 12 pillars with the most important ones being institutions, infrastructure, macroeconomic stability, and health and primary education. But I argue that while such indexes and criteria are useful, the acid test of improving competitiveness is our ability to sell more of our goods and services.
To unravel this conundrum we perhaps need to define what "productivity" really is. The best definition I found was in the respected The Economist Guide to Economic Indicators. Let me quote: "Labour productivity reflects capital investment and offers a guide to capital productivity. Other factors that affect labour productivity include social attitudes, work ethics, unionisation and, perhaps most important, training. These are not measured directly by economic statistics."
Now we have really opened a Pandora's box. But at least this definition explains why politicians' views on productivity are not as congruent as one might expect. If there are elements that affect productivity, but these elements cannot be measured, then we tend to concentrate on those elements that can be measured, like the cost of labour.
This definition should help us concentrate our attention on the issues that really matter when we lay out our plans for improving our productivity and consequently our competitiveness. The World Economic Forum may use an academic approach on how to measure productivity. This is useful, but far more useful is our business leaders' ability to judge our performance and monitor whether our industries are managing to win more business from the competition on a regular basis.
We need to list the key performance indicators mentioned in the definition given above and score our performance on each one. This scoring has to be validated by evidence from the market we are serving, if it is to be objective and useful in guiding us to better performance.
We also need to look hard for factual evidence that indicates whether we are really investing more in capital products, whether our workers are being trained to become more multi-skilled and flexible, whether government bureaucracy (which the World Economic Forum identified as our worst competitive disadvantage) is really being tamed, and whether our work ethics and social attitudes are really helping us to excel.
Of course, wage inflation is important, if for no other reason because it affects the morale of workers who ultimately are the catalysts that bring results when all the other elements come together. But to achieve economic success we need to think outside the box and scrutinise our real commitment to the other very important elements that will ultimately decide whether we excel in the marketplace or just fall back.