How it’s measured, and what it tells us, is particularly complex in the construction industry
In the Chancellor’s first and, as it happens, last Autumn Statement he used one word 14 times. It seemed to encapsulate his hope of salvation for the spluttering UK economy. That word was productivity.
‘Mr Speaker,’ he said, ‘The productivity gap is well known, but shocking nonetheless: we lag the US and Germany by some 30 percentage points. But we also lag France by over 20 and Italy by eight…
‘…Raising productivity is essential for the high-wage, high-skill economy that will deliver higher living standards for working people.’
He is not alone in placing huge faith in the value of raising productivity. Nobel laureate economist Paul Krugman put it this way: ‘Productivity isn’t everything, but in the long run it is almost everything.
‘A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.’
Productivity has risen up the political and economic agenda across the developed world. Slowing, sluggish and negative productivity growth is dogging many of the world’s richest nations and threatening their dreams of a brighter future.
Judging by the performance of the UK economy we have a bigger productivity problem than most, as Chart 1 shows. The dotted lines show the trend before the Great Recession kicked in. It highlights just how far productivity growth has slowed. While the other G7 nations (Canada, France, Germany, Italy, Japan, and the United States) have seen a slowdown in growth, in the UK productivity has pretty much stalled.
But what is productivity, how magical is it to economic performance and where does construction fit into all this?
Answering the last of those questions is simple. Construction is central to raising productivity. As global data show, any emerging or rapidly developing nation ploughs huge amounts into the built environment. It provides a critical framework for all industrial and services development. The wrong kind of construction can do harm, though. Chucking money at building things doesn’t in itself raise productivity. But history suggests that to raise productivity within a developed economy you have to invest in construction.
As to the magical quality of productivity within the economy, it broadly means adding more value by doing and using less. It links to efficiency and sustainability. But you have to be pretty clear what you mean by value.
The concept of productivity is simple: its numerator is output and its denominator is input. In reality it’s much more slippery. You have to define what your input and output are, and that’s not as easy as it seems. It gets even more slippery when it comes to construction.
When the Chancellor talks about productivity he is almost certainly thinking of labour productivity and focusing on labour as the input. But the resources at our disposal are more than just labour. We need to use capital, energy, materials and land productively too. As for output, in economics that’s generally taken as value added, determined and measured within the market context.
Even if we keep things relatively simple and stick with labour productivity, things are not really that straightforward.
In construction what’s happening to productivity can be very tricky to fathom. We can measure the output of a worker for a given task and test productivity and how it changes. Similar tasks can be easily compared. But when we look at the industry as a whole there are multiple and an ever changing mix of tasks being performed. How these aggregate to produce the productivity of an industry is complex.
Chart 2 shows productivity measured in terms of output per hour worked. Output is the value those working produce.
The first thing the chart illustrates is that a big part of the UK productivity problem lies in the reduction in productivity of the financial sector since the recession.
And it shows the construction industry as no more productive now than it was 20 years ago. That seems bonkers. But across the developed world most construction industries are (according to the figures) becoming less productive. The drop in productivity in the US is huge compared with that in the UK. In the 10 years leading up the recession UK construction productivity rose about 4% while it fell 20% in the US.
How can the introduction of better tools, preassembled products, better techniques and a host of other innovations lead to falling productivity?
That question tests the minds of construction experts across the globe. The answer may well lie partly in how we measure value added, partly in the mix of work, partly in improved quality, fewer injuries and deaths and better site conditions. There will be other factors at play too that might us help understand the paradox.
Productivity measured at an industry or economy level is as much if not more about what you do as how you do it. For instance, in the UK we choose to refurbish and improve old buildings rather than knock them down and build afresh. There are good reasons for that.
But repair, maintenance and improvement is far more labour intensive than building new, especially if that new build is civil engineering where huge amounts of the work (value added) is done by plant and machinery.
Much of the drop in productivity seen as construction fell into recession will be down to the shift in the proportions of overall construction work towards repair and maintenance. Individuals may well have been working more productively in the face of recession, but the industry as a whole would have become less productive as the mix shifted to more labour intensive work.
In these circumstances might be argued that the fall in productivity across the industry was a good thing as it spared deeper job cuts and preserved skills for a later date. This illustrates the need for a clear head when considering the productivity figures and looking at the whole picture, not a narrow number.
In much discussion within the industry about how to increase productivity there is an irony lost on many. The way to increase it, we are told, is more off-site manufacturing and more time spent in pre-construction design and management.
This almost certainly would raise the productivity with which we deliver the built environment – a good thing. It may, however, reduce productivity in the construction industry, as it is currently measured. It might also reduce productivity in the manufacturing sector too. How come?
Many of those who see themselves as working in the construction industry – architects, quantity surveyors, engineers and a host of other professionals – are in fact in the services sector, as defined by the statistics. So the hours they work and the value they add does not feed into the construction industry’s productivity.
Those who make building components off-site are also unlikely to be classed as working within the construction industry, and so the more productive approach that would come from manufacturing more elements of structures off-site would not contribute to construction productivity. It would be classed as manufacturing. Indeed, if this work is less productive than the average work done in the sector, the productivity of the manufacturing sector might actually fall.
Then we need to look at what’s left. It is possible that the residual work within construction could result in a deskilled industry. If this were the case it would most probably lead to lower value added per hour worked and so a reduction in productivity.
The complexities in understanding the effects of improving productivity don’t end there. We need to look at what we do, not just the way that we do it. The world is a highly connected place. When we look at statistics we need to understand this, especially when we look at productivity.
There is one further ironic twist in this tale. The introduction of technology and rising productivity has led to the deskilling of a raft of jobs and the shredding of opportunities for many of those who banked on skilled employment for their future. It might be argued that this is one element catalysing the outpouring of political anger across the developed world. In a strange way it might be partly responsible for the current Chancellor getting his job.
For all that, he is right, improving productivity is important. It is a good thing, a very good thing, but we have to be careful what meaning we put on the data and how we handle the social and economic forces unleashed through productivity gains.
Brian Green is the author of the Chartered Institute of Building report Productivity in Construction: Creating a Framework for the Industry to Thrive, published in May 2016