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Improving Productivity & Competitiveness: Role of LabourManagement Relations and Transitioning to Formality

Presented by Charles Douglas, Ph.D.

February 24, 2017

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

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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

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General Failure of GDP/capita in LAC to converge after 65 years

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

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JPC’s Experience in Promoting Workplace Productivity

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Main focus since 2007: Public Education and Awareness (PEA) – aimed at

inculcating a productivity consciousness in our citizens andpromoting the benefits of productivity

Productivity Measurement and InternationalBenchmarking –LP, CP, ULC, and TFP - Information usedin the PEA programme and public policy recommendations

Research with Strong Public Policy Relevance –“Generation and Distribution of Electricity in Jamaica: ARegional Comparison of Performance Indicators”

Provision of customized Productivity ImprovementServices – for public and private sectors (Audits,workshops, training, benchmarking)

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JPC’s Approach to Managing ProductivityValue added output depends on the combined contribution of Labour +Capital + TFP

The use of labour and capital are subject to Diminishing Returns toScale; 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 learningb) Health - As health improves so does TFPc) Public infrastructures (roads, ports, communication, etc) is

necessary for TFP growthd) Institutions are necessary for the orderly functioning of societye) Openness and competition – good for TFPf) Financial service development – good for TFPg) Absorptive capacity of knowledge – good for TFPh) Technology – generation, adoption, adaption and transfer – good

for TFPi) 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 TFPk) Improved Labour management practices = improved TFP

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Moving from Informality to Formality

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/benefitcalculations.

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 formality8. Reserve a % of government procurement to encourage formalization.

Several useful Policy Instruments:

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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

true5. As productivity rises poverty falls; the opposite is true6. As productivity rises standard of living and many other social

indicators rise7. Informality is a fundamental expression of underdevelopment

(World Bank)

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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”

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Thank you very much

Recent Productivity Performance: Summary

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GDP (Y)=-0.2% Labour Productivity (Y/L)-0.4%

Total Factor Productivity (A) -0.7%Quality of Human Capital Quality of Physical Capital

Capital/worker (∝K/L) 0.3%

Employment (L)0.2%GDP (Y)=0.6%

Labour Productivity (Y/L)-0.3%Total Factor Productivity (A) 0.3%

Quality of Human Capital Quality of Physical Capital Capital/worker (∝K/L) -0.6%

Employment (L)0.9%

2006-2010 2011-2015

Recent Productivity Performance: Contributions to Labour Productivity

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0.1 0.2 0.1 0.1 0.0 0.1

-0.3

0.40.3

-0.3

-1.0

-0.2

-0.5 -0.4

0.1

-0.4 -0.4-0.3

1.6

0.3

0.8

0.0

0.9

0.7

0.9

0.4

1.3

-0.7

-0.5

0.3

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2011 2012 2013 2014 2015 2011-2015

ICT Capital IntensityContributions Non-ICT Capital Intensity ContributionsLabour Quality Contributions TFP GrowthLabour Productivity Growth

Recent Productivity Performance: Factor Contribution to GDP

(5-year Averages)

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-1.5

-1

-0.5

0

0.5

1

1.5

2

2001-2005 2006-2010 2011-2015 2001-2015

Perc

ent C

hang

e (%

)

Labour Contribution Capital Contribution TFP GDP

Country, Sectors and Industries Avg. Labour Productivity Growth (2001-2005)

Avg. Labour Productivity Growth(2006-2010)

Avg. LabourProductivity Growth (2011-2015)

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

Recent Productivity PerformanceLabour Productivity by Industry: Jamaica

Source: Estimated by JPC using Statin’s Data

Recent Productivity Performance: International Benchmarking of Labour

Productivity Levels

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Countries Output/Worker 2000 Output/Worker 2015

% Change in Output/Worker between (2000 & 2015)

Jamaica 24,238 21,644 -10.7%

Trinidad and Tobago

49,072 71,581 45.9%

Barbados 31,437 37,086 18.0%

St. Lucia 26,444 28,468 7.7%

Source: Conference Board Data

Productivity-Competitiveness Link

16Productivity Improvement

Increased Local & Global Competitiveness

Lower Cost of

Products

Greater Demand for

Products

Increased Labour Demand Higher Real Wages

Increased Employment

Higher Standard of Living

Better Quality

Products

Improved Delivery

Time

Improved Customer Service

Productivity-Competitiveness Link

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STAGE 1Factor-driven

economies

InstitutionsInfrastructure

Macroeconomic EnvironmentHealth and Primary Education

STAGE 1-2Transition Economies STAGE 2Efficiency-driven

economiesHigher education and TrainingGoods Market Efficiency

Labour market efficiencyFinancial market development

Technological readiness

STAGE 2-3Transition EconomiesSTAGE 3Innovation-led Economies

Business sophisticationInnovationBolivia,

Honduras,Venezuela

Jamaica, Brazil, Colombia, Ecuador, El Salvador,

Guatemala, Paraguay, PeruDominican Republic

Barbados, Argentina

Chile, Costa Rica,

Mexico, Panama, Uruguay

Trinidad and Tobago

Stage of Development based on the Global Competitiveness Index

Nicaragua

Jamaica’s Global Competitiveness Performance based on WEF GCI

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0

10

20

30

40

50

60

70

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

# of

cou

ntrie

s with

a lo

wer

glo

bal c

ompe

titiv

enes

s le

vel r

elat

ive

to Ja

mai

ca

Linking Productivity to Competitiveness

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Pillars of Competitiveness Rank 2014/15 n=144 Rank 2015/16 n=140 Rank 2016/17 n=138

Overall Global Competitiveness

86 86 75

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

Global Competitiveness Ranking for Jamaica and Selected Comparator

Countries (2016/2017)

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0

20

40

60

80

100

120

140Institutions

Infrastructure

Macroeconomic Environment

Health and Primary Education

Higher Education and Training

Goods Market Efficiency

Labour Market Efficiency

Financial Market Development

Technological Readiness

Market Size

Business Sophistication

Innovation

Jamaica Barbados Trinidad and Tobago Costa Rica Dominican Republic

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 Sub-index advanced 10 places (71-61)

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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

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Concluding Remarks

The marginal decline in the Efficiency Enhancer Sub-index 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.

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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

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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

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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)

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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)

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Question to Ponder

What must Jamaica do to move from Stage 2 to Stage 3

Thanks

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