It hit me yesterday that we are at risk of brandishing the term “productivity” as if we truly understand what it is and, more importantly, how it is measured. It is a very technical thing, and from what I understand, there are serious difficulties in measuring it. I myself am in no position to explain it to you. But I am given to understand that while methods for determining Total Factor Productivity are reasonably advanced and established at the level of national accounts, they can get devilishly difficult at sectorial or industry levels. Even more so at the level of a company.
And yet, the prime minister’s rejoinder to economist Lim Chong Yah’s idea to raise the wages of low-income workers by 50 percent over three years, was to link the wages of lower-level workers to productivity gains.
But I do not agree with his drastic approach because the only realistic way to lift their wages is step by step, with wages and productivity going up in tandem together as fast as we can but as fast as it is possible.
— Lee Hsien Loong, speech, 1 May 2012
It seems to me to be one of those easy answers that beguile.
Firstly, how many companies measure productivity? Mostly, they are concerned with profitability. Few companies systematically collect the necessary data to track productivity. But since wages are determined at the company level and not with reference to national accounts, how does one expect companies to adjust wages in line with productivity when they have no consistent measure of it?
Secondly, even if a company tracks productivity of each profit centre or cost centre, it makes a poor fit with the issue of the day: the low, low wages of low-skill workers. Typically, a profit centre or cost centre comprises a team of managers, supervisors, technical experts and maybe general labour. There is no separate measurement for the productivity contribution of low-wage workers for the simple reason that it is very hard to tease out their contribution versus that from more senior ranks.
In other words, Lee’s words may seem like a sensible solution, but there is no practical way to operationalise it across the myriad of firms, large and small.
Let’s be honest. Wages are largely determined by three chief factors.
- The first is how profitable the company is. This establishes a pool of available money for paying out. But it doesn’t determine which employee gets what salary, or what annual increase.
- This is where the second factor comes in: demand and supply. When a company hires, it takes note of the market rate for the skills that it is looking for. Periodically, in determining pay adjustments, it looks at the market rate again, to make sure it continues to pay a competitive salary in order to retain talent. Yet, even so, it does leave considerable wiggle room.
- The third factor then comes in. Do you wiggle more in favour of the executive staff? Or the shopfloor staff? Left alone, managements have a tendency to reward themselves preferentially. The opposite may apply when unions are strong and able to claw a bigger share for its members.
One might be tempted to say that if a company neglected its low-wage workers long enough, it would find its salaries uncompetitive and factor #2 would then kick in to counter-balance a bias against low-wage workers in factor #3. Potentially, yes. But if due to a systemic weakness of unions throughout an economy, no company is faced with union pressure, then the aggregate of all companies’ actions would be to stagnate pay for those levels of staff. By corollary, the tendency to disproportionately inflate executive pay also becomes systemic.
And if one adds to that a governmental policy of easy immigration, the demand and supply equation is skewed further.
These factors in determining remuneration are inherent in a market economy. Talking about using productivity improvements (if you can even measure them for different grades of workers) to guide wage adjustments is just so much theory; it cannot overcome these operational realities.
Moreover, a company doesn’t have to pay more to workers even if productivity improves. It can park the gains as profit and distribute it as dividend to share-holders.
Let’s get real. Salaries for the lower grades of staff will go up when they have bargaining power, or, failing that, when the state takes the side of workers. Whistling on and on about productivity improvement as the only yardstick is really quite meaningless. Dreaming, almost.