Productivity is much talked about but very little understood. Of course, it can be very simply stated as amount produced per hour worked.
Amount produced is not easy to calculate
The huge problem is that in the modern world most of the “hours worked” are in the service sector where the product produced is hardly ever the same. Even in the old world when manufacturing was a bigger share of employment, products were not very often the same, constantly subject to evolution or customisation.
A proxy for productivity is real wages per hour. However, here again, both the concept of real wages and hours worked is fraught. Most employees are paid by the month these days, based on annual contracts. Many have bonuses. The days of hourly pay rates and overtime are well in the past. Many workers are not even employees, but self-employed or many other varieties of gig economy participants.
What is “Investment”?
Many experts love grandly to pronounce that a country’s productivity is weak because it lacks “investment” without the faintest idea about these tricky measurement issues. Alternatively, how will a new high-speed rail line improve the level of output in the health sector. Grand projects are a good thing anyway, fiscally speaking, especially at ultra-low interest rates, aren’t they? Well, no, if your productivity problem is actually the organisation of health care and issues are around such complex topics as ObamaCare reform or the sacred NHS in the UK.
Therefore, specifying exactly where the productivity problem lies is crucial. And there is the rub. The debates are fraught with measurement difficulties, competing economic theories and (of course) politics.
What matters is obviously the quality of the investment, and that is very hard to judge. The US, the UK and Germany, all show about 17% of GDP in the form of investment. It is the norm. Perhaps the only difference are the economies of scale that the US achieves by virtue of its 321 million population. The EU can (could) only ever dream of such a homogenous market to serve. The smaller the country, the more open you have to be to globalization, aka Americanization, in order to be as wealthy as the US. Autarchy destroys wealth (unless you have a resource the rest of the world prizes, but even then, it does not always work).
Just do the simple things first
What we can observe is that a healthy trend of nominal growth correlates well with productivity growth. In addition, a break in trend nominal growth, in particular a loss of level correlates well with a loss of productivity growth. At NGDP Advisers, we think you should eliminate the obvious causes of low productivity growth before embarking on building bridges to nowhere, or pointless high-speed railways.