Improving Productivity & Competitiveness: Role of Labour Management Relations and Transitioning to Formality Presented by Charles Douglas, Ph.D. February 24, 2017 1
Theme: Realizing Decent Work under the 2030 Agenda I want to make five points 1. Jamaica s Experience in Promoting Workplace Productivity 2. Main Obstacles to Productivity Improvement 3. JPC s Approach to Management of Productivity 4. Moving from Informality to Formality 5. Making Formalization a National Policy Priority 6. Conclusion 2
General Failure of GDP/capita in LAC to converge after 65 years The economies of LAC suffer from chronic low-growth caused by chronic low-productivity growth (JPC, World Bank, IMF, IDB) Examples: GDP/capita (% of USA) LAC 1960 (33%) vs 2015 (28%) divergence Jamaica 1960 (19%) vs 2015 (15%) divergence Barbados 1960 (31%) vs 2015 (29%) divergence Asian Countries 1960 (11%) vs 2015 (39%) tendency to converge Singapore 1960 (35%) vs 2015 (148%) convergence T&T 1960 (33%) vs 2015 (65%) convergence St. Lucia 1960 (12%) vs 2015 (22%) - convergence 26/01/17 Productivity is everybody s business 3
Jamaica s Experience in Promoting Workplace Productivity JPC launched in 2003 as the National organization responsible for enhancing productivity at all levels (national, industry, firm and individual) The Centre aims to use innovation as the driver of productivity to transform the economy from input-driven to knowledge-driven 4
JPC s Experience in Promoting Workplace Productivity Main focus since 2007: Public Education and Awareness (PEA) aimed at inculcating a productivity consciousness in our citizens and promoting the benefits of productivity Productivity Measurement and International Benchmarking LP, CP, ULC, and TFP - Information used in the PEA programme and public policy recommendations Research with Strong Public Policy Relevance Generation and Distribution of Electricity in Jamaica: A Regional Comparison of Performance Indicators Provision of customized Productivity Improvement Services for public and private sectors (Audits, 5 workshops, training, benchmarking)
JPC s Approach to Managing Productivity Value added output depends on the combined contribution of Labour + Capital + TFP The use of labour and capital are subject to Diminishing Returns to Scale; In contrast, TFP is associated with Increasing Returns to scale The main determinants of TFP include: a) Education, skills training, learning by doing, and lifelong learning b) Health - As health improves so does TFP c) Public infrastructures (roads, ports, communication, etc) is necessary for TFP growth d) Institutions are necessary for the orderly functioning of society e) Openness and competition good for TFP f) Financial service development good for TFP g) Absorptive capacity of knowledge good for TFP h) Technology generation, adoption, adaption and transfer good for TFP i) Innovation ecosystem converts research into products and services good for TFP (Organizational, markets, products, systems, processes) j) FDI and Trade to facilitate technology transfer good for TFP 6 k) Improved Labour management practices = improved TFP
Moving from Informality to Formality Several useful Policy Instruments: The Proposition is advanced that: A Firms decision to go Informal is based on cost/benefit calculations, similarly a Firms decision to go Formal is also based on cost/benefit calculations. 1. Measure and communicate to general public the full cost of informality as there will be winners and losers 2. Strengthen competition policies to make labour, goods and financial markets more efficient 3. Provide public goods (permits, licenses) more efficiently - Reducing transaction cost and rent seeking behavior 4. Increase access to credit and other financial instruments (Junior stock market) 5. Further simplifying the tax regime make it easier for business to pay taxes 6. Fund social security programmes from general tax system instead of tying it to labour cost (separate wage from non-wage costs) 7. Make access to business development services conditional on formality 8. Reserve a % of government procurement to encourage formalization. 7
Making Formalization a National Policy Priority The first step is to quantify the cost of informality and publicize the findings. The following are some justifications: 1. The cost of informality is massive in LAC it is estimated at 40% of GDP and 70% of labour force 2. Other costs include: poor working conditions, avoidance of social security payments, poor labour management practices, poor OSH record, low productivity, low skills, low investment in training, low or non-observance of core labour standards and international best practices 3. As labour management practices improve firm productivity rises 4. Poor working conditions yields low productivity, the converse is true 5. As productivity rises poverty falls; the opposite is true 6. As productivity rises standard of living and many other social indicators rise 7. Informality is a fundamental expression of underdevelopment (World Bank) 8
Conclusion a) Productivity growth is necessary for improved competitiveness, job creation, economic growth and Living standards b) Failure of countries in the region to grow at respectable rates is due to failure to grow productivity c) The true cost of informality is massive, therefore it should not be difficult to sell formalization as a national policy priority d) A strong case can be made for Caribbean Governments to make Productivity Improvement the central plank for Realizing Decent Work Under the 2030 Agenda 9
Thank you very much 10
Recent Productivity Performance: Summary 2006-2010 2011-2015 GDP (Y)=-0.2% GDP (Y)=0.6% Labour Productivity (Y/L) -0.4% Employment (L) 0.2% Labour Productivity (Y/L) -0.3% Employment (L) 0.9% Total Factor Productivity (A) Capital/worker ( K/L) Total Factor Productivity (A) Capital/worker ( K/L) -0.7% 0.3% 0.3% -0.6% Quality of Human Capital Quality of Physical Capital Quality of Human Capital Quality of Physical Capital 11
Recent Productivity Performance: Contributions to Labour Productivity 2.0 1.5 1.6 1.3 1.0 0.9 0.8 0.9 0.7 0.5 0.0-0.5-1.0 0.4 0.4 0.3 0.3 0.3 0.1 0.2 0.1 0.1 0.1 0.1 0.0 2011 2012 2013 20140.0 2015 2011-2015 -0.2-0.3-0.3-0.3-0.5-0.4-0.4-0.4-0.5-0.7-1.0-1.5 ICT Capital IntensityContributions Labour Quality Contributions Labour Productivity Growth Non-ICT Capital Intensity Contributions TFP Growth 12
Recent Productivity Performance: Factor Contribution to GDP (5-year Averages) 2 1.5 Percent Change (%) 1 0.5 0-0.5 2001-2005 2006-2010 2011-2015 2001-2015 -1-1.5 Labour Contribution Capital Contribution TFP GDP 13
Recent Productivity Performance Labour Productivity by Industry: Jamaica Country, Sectors and Industries Avg. Labour Productivity Growth (2001-2005) Avg. Labour Productivity Growth (2006-2010) Jamaican Economy -1.5-0.4-0.3 Goods-Producing Sector -2.4-2.0 3.2 Service Producing Sector -1.1-0.5-1.9 Construction 1.2-0.3 1.4 Hotels & Restaurants -0.1 3.7-1.9 Agriculture, Forestry and Fishing -4.8 2.2 4.1 Transport, Storage and Communication 0.0 1.2-0.1 Manufacturing -5.6 1.4 2.2 Finance and Insurance Services 5.2-8.8-0.5 Electricity, Gas and Water 2.3-2.2-4.2 Wholesale & Retail Trade -2.8-0.3-1.4 Government Services -2.2-1.1-1.7 Mining & Quarrying 5.4-9.1-3.8 Real Estate, Renting and Business Services -0.6-4.1-5.8 Source: Estimated by JPC using Statin s Data Avg. Labour Productivity Growth (2011-2015)
Recent Productivity Performance: International Benchmarking of Labour Productivity Levels Countries Output/Worker 2000 Output/Worker 2015 Jamaica 24,238 21,644-10.7% Trinidad and 49,072 71,581 45.9% Tobago Barbados 31,437 37,086 18.0% St. Lucia 26,444 28,468 7.7% Source: Conference Board Data % Change in Output/Work er between (2000 & 2015) 15
Productivity-Competitiveness Link Increased Employment Higher Standard of Living Increased Labour Demand Greater Demand for Products Higher Real Wages Increased Local & Global Competitiveness Lower Cost of Products Better Quality Products Improved Delivery Time Improved Customer Service Productivity Improvement 16
Productivity-Competitiveness Link Stage of Development based on the Global Competitiveness Index STAGE 1 Factor-driven economies STAGE 1-2 Transition Economies STAGE 2 Efficiency-driven economies STAGE 2-3 Transition Economies STAGE 3 Innovation-led Economies Institutions Infrastructure Macroeconomic Environment Health and Primary Education Bolivia, Honduras, Venezuela Higher education and Training Goods Market Efficiency Labour market efficiency Financial market development Technological readiness Barbados, Argentina Chile, Costa Rica, Mexico, Panama, Uruguay Business sophistication Innovation Trinidad and Tobago Nicaragua Jamaica, Brazil, Colombia, Ecuador, El Salvador, Guatemala, Paraguay, Peru Dominican Republic 17
Jamaica s Global Competitiveness Performance based on WEF GCI 70 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 18 # of countries with a lower global competitiveness level relative to Jamaica
Linking Productivity to Competitiveness Pillars of Competitiveness Rank 2014/15 n=144 Rank 2015/16 n=140 Rank 2016/17 n=138 Overall Global 86 86 75 Competitiveness a) Basic Efficiency 99 94 76 1. Institution 80 80 73 2. Infrastructure 80 79 77 3. Macroeconomic Environ 136 131 112 4. Health & Primary Education 72 70 47 b)efficiency Enhancers 77 79 78 5.Higher Edu & Training 76 84 90 6. Goods Market Efficiency 76 74 61 7. Labor Market Efficiency 58 65 60 8. Financial Market Devent 48 32 30 9. Technological Readiness 75 82 77 10. Market Size 107 117 119 c) Innovation & Sophistication 71 63 61 11. Business Sophistication 67 66 57 12. Innovation 75 67 70 19
Global Competitiveness Ranking for Jamaica and Selected Comparator Countries (2016/2017) Business Sophistication Market Size Innovation Institutions 140 120 100 80 60 40 20 0 Infrastructure Macroeconomic Environment Health and Primary Education Technological Readiness Higher Education and Training Financial Market Development Labour Market Efficiency Goods Market Efficiency Jamaica Barbados Trinidad and Tobago Costa Rica Dominican Republic 20
Concluding Remarks Over the past 3 years (2014, 2015 and 2016) Jamaica recorded improvements in: Overall Global Competitive Index (GCI) ranking jumping 11 places (86 to 75) The Basic Efficiency Sub-index jumped 23 places (99 t0 760) The Efficiency Enhancer Sub-index declined 1 place (77 to 78) The Innovation and Business Sophistication Subindex advanced 10 places (71-61) 21
Concluding Remarks The Basic Efficiency Sub-index was impacted positively by the 4 pillars: 1. Health and Primary Education jumping 25 places (72 to 47) 2. Macroeconomic Environment jumping 24 places (136-112) 3. Institutions jumping 3 places (80 to 77) 4. Infrastructure 3 places (80 to 77) These Pillars positively impact productivity, especially TFP and we saw the correspondence in the data 22
Concluding Remarks The marginal decline in the Efficiency Enhancer Subindex impacted TFP negatively and is attributed mainly to: Higher education and training sliding 14 places (76-90) Labour market efficiency sliding 2 places (58 60) Technological Readiness sliding 7 places (75 82) The improvement in Goods Market Efficiency (15 places) and the Financial Market Development (18 places) were not sufficient to offset the slides in the above pillars. 23
Concluding Remarks This suggests that SMEs could benefit from investments in: 1. Higher education and training to enhance innovation and productivity 2. Higher education and training is also important for SMEs to access and adapt new technology 3. Despite improvements in goods market and financial markets they are not competitive. In particular, customer service is very poor SMEs must pay attention to this, as they could be punished by customers 4. More gains are possible in financial markets as most of its income are fees as opposed to financial intermediation 24
Concluding Remarks Innovation and Business Sophistication factors could be enhanced even more and positively impact productivity if: SME pay more attention to innovation (new products, organizational styles, management systems, new marketing strategies and process improvement) Example hardware stores. Consumers must demand better services from businesses (push them to become more sophisticated). Example: Bundling in insurance; after care service at car dealership; overall customer service 25
Concluding Remarks SMEs must see productivity as a way of countering exchange rate depreciation Especially since combination of falling labour productivity and exchange rate depreciation is negatively affecting purchasing power of workers with spillover negative impact on productivity SMEs must find ways to improve output while holding inputs constant (eg Technology upgrading) 26
Concluding Remarks Capital productivity in the economy has been rising (slide10) since 2010, therefore, SMEs must ensure full utilization of fixed capital. They could consider leasing instead of owing some fixed assets such as transport TFP has been improving and positive since 2014, could be attributed improvements in the GCI pillars as well as sub-pillars LP has been consistently negatively impacted by labour quality (education and training) low contribution of ICT and non-ict capital Therefore, SMEs need to invest in these factors to boost labour productivity (Slide 13) 27
Question to Ponder What must Jamaica do to move from Stage 2 to Stage 3 Thanks 28