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A conscious acknowledgement of our common purpose as fulfilment without harm so we may organise ourselves, our justice systems, our economies, our organisations, and our societies to enable our pursuit of it. The organising principle of fulfilment without harm must override the pursuit of money and/or power. Specifically: (more...)

Sunday, July 3, 2011

Labour & Productivity: What Is Under Our Control?

According to standard economic formula, if participation rates are falling, and economic growth is constant, then this growth must come from increases in labour productivity. This is due to labour productivity being calculated as the value of Gross Domestic Product (GDP)[1] over employment.[2]

GDP/Employment↓ = LP↑

When employment is decreasing, due to less participation in the labour force, and GDP growth is constant, then the other factor in the equation – labour productivity – must be increasing.

Labour productivity increases indicate that it requires less labour to generate a higher value of Gross Domestic Product. The emphasis is on the total ‘value’ of Gross Domestic Product produced.[3]

The value of GDP (beyond the formal calculation) is due to a number of different factors, but these essentially come down to which products are produced, how they are produced, how they are delivered and how they are marketed.

The forms of products produced has a base dependence on the raw resources and geography of the country, which act as a constraint on the choice of which products a nation produces. Post this dependency, the forms of products produced are dependent on the skills and knowledge of the population, and the application of these attributes to develop and add value to products.[4]

Skills and knowledge are applied through the development of technology to develop products, through the development of better techniques for developing products, through the development of new forms of products, through the development of new methods to deliver products, and through the development of new ways to market products.[5] This application of skills and knowledge to development is commonly known as innovation. The skills and knowledge people have acquired, in addition to their base labour capacity, can be called human capital.

All of these factors require financial investment in the development of skills and knowledge and the financially-backed directive to apply this human capital to decisions on what products are produced, how they are produced, how they are delivered and how they are marketed.

All these factors are also largely under the control of human labour. However, the constraints of a nation’s natural resources and geography, and many vital elements determining international demand for these resources, are not. In other words, there are factors that can increase, decrease or constrain GDP over which a nation has little internal control. Despite this, they will give rise to an increase or decrease in labour productivity according to their effect on GDP (less any change in employment). This is because labour productivity measures (LP = GDP / Employment) do not distinguish between rises in GDP due to factors under the control of labour, and factors not under the control of labour.

Vital external factors not under a nation’s control include the supply of natural resources from other nations and the demand for a nation’s natural resources from other nations.[6] Both these factors will dictate (along with other variables) the value of a nation’s resources. The value of a nation’s resources will feed into the value of its Gross Domestic Product, and an increase in its GDP due to external factors will increase the measure of its labour productivity, even though it has made no change to factors under the control of its labour (i.e. even though it has not innovated, or invested in human capital).

The point here is that labour productivity is a misleading term. It does not relate strongly to how much product labour produces, but in fact to what is the sum total value of the product produced, a value that is not wholly determined by the labour input into the product (and so should hardly be called ‘labour productivity’).

In fact, the best way to increase labour productivity is to reduce the labour input (replacing it with technology and more efficient techniques), and raise the value of the product produced through the means we have under our control (design and marketing), realising at the same that a large component of value is down to internal supply factors outside of the control of labour, such as the natural resources and geography of the nation, and external demand factors outside of the control of labour, such as natural resource demand from other nations.[7]

And the best way to necessitate the reduction of labour input, with concurrent increases in technology and more efficient techniques, is to focus incentives on contribution and understanding, followed by finance (rather than the reverse). This can be rightly done by the introduction of a Shared Base Income (among other things), which leads everyone to profit from the work they decide to do (according to what they see needs doing).

Ben Wallace
Author The Common Purpose Manifesto
LinkedIn - http://nz.linkedin.com/in/benwallace13
Twitter - http://twitter.com/BenDWallace

FOOTNOTES
1. GDP is the measure of the value added from all economic activity in a nation, and the standard measure of economic growth.
2. Employment being a measure of total hours worked or numbers in employment, both of which are typically diminished by less labour force participation.
3. Volume matters when increasing volume adds to the total value of product produced, but as less labour is available to produce greater volumes, further increases in volume must come from better production techniques or greater use of production technology, which rely on the application of skills and knowledge (innovation).
4. This also requires the finance to invest in developing and applying skills and knowledge.
5. Including the development of the forms of market (local, international, open, incorporating derivatives, auctions and so on) and the development of new markets in other regions that haven’t previously taken, or restrict, the products in question.
6. To a significant extent it also includes the subsidies, quotas, and tariffs of other nations; however, a nation can fight for and against these trade restrictions.
7. Which at the moment are high-growth/high-population nations such as China and India.

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