Productivity is something we should all be worried about.
In large part, productivity determines the living standards we all enjoy through wages for employees and through the taxes it generates which fund our public services.
Ireland’s productivity is impressive, buoyed by the presence of multinational firms; however, there is another story about Ireland’s productivity that is less well known. In certain areas of our domestic economy there are worrying signs of significant economic underperformance.
When trying to understand economic performance there is often a fundamental misunderstanding of what productivity actually is or what it measures. People tend to think that lower productivity means that workers put in less effort or are less efficient.
However, the problem facing Ireland’s domestic sector is not its workforce, but rather a swathe of unproductive firms.
In a study jointly published by the Nevin Economic Research Institute and SIPTU, we show that, when looking specifically at Ireland’s domestic economy, we fall significantly behind our European peers.
We utilise Eurostat data to focus solely on domestically-owned firms and compare them with domestic firms in our European peer group – other small open economies (Austria, Belgium, Denmark, Finland, Luxembourg, Netherlands, Norway and Sweden). We find that Irish domestic productivity lags well behind.
Importantly, Irish workers work more hours than their peers and generate less value per hour; after accounting for inputs, the amount of value generated which is left to be shared between workers and owners (or between wages and profits) is less in Ireland than comparable peers. Although annual productivity may be comparable, Irish workers are working on average just over 200 more hours per year than their peers, and this rises to as high as almost 300 more hours in sectors such as Manufacturing.
This is one of the most visible consequences of our relatively poor productivity performance.
Irish domestic productivity trails all other EU peer group countries in the market economy. This excludes sectors with a strong public sector presence such as health and education. We would need to increase the amount of hourly value-added by 17 per cent to reach the average of our peer group. Put another way, if we had the same productivity as these other countries, Irish wages and profits could be, on average, 17 per cent higher.
Of course, this disparity is not evenly distributed across our domestic economic sectors. For instance, the worst performing sectors in comparison with our peer group are the wholesale and retail sector, followed by manufacturing (especially food manufacturing), transport and hospitality. In construction, our performance is average.
Only in the professional and scientific sector does Irish domestic productivity greatly outstrip other countries, boosted by a strong performance in management consultancy.
There can be a number of explanations for Ireland’s poor domestic productivity. We have not discussed these.
The first step is to measure so as to answer the question: is there a productivity problem in Ireland’s domestic sector? Once we have satisfactorily measured this, we can begin to ask why.
There can be a number of reasons for poor business productivity: low investment, our peripheral location, lack of scale, access to affordable capital, entry barriers which limit market competition, lack of employee voice. Some of these will be sector specific, some can only be addressed at national level while others need to be addressed at firm level.
The National Economic and Social Council recently expressed concern that productivity in the domestically owned sector has slowed down and even fallen. While examining the historical trend of Irish domestic productivity was not the focus of our study, we published a headline view of the trends since 2014 and found the Council’s concern to be warranted. Sectors such as hospitality, wholesale and retail, information and communication, and transport showed a decline leading up to the end of the last decade.
Productivity matters. Over 1.4 million are employed in domestically-owned companies, or more than 60 per cent of all private and public sector workers. Productivity levels will impact on their living standards and the prosperity of businesses they are employed in.
An economy’s ability to improve its standard of living over time depends almost entirely on its ability to raise its value output per worker. It is not surprising, therefore, that recently, the Irish economy’s over-reliance on the multi-national sector and the performance of particular domestic sectors has featured in the public debate.
It is our hope that our study will help inform that debate and encourage further research into the measure and causes of Irish productivity.
Most of all, we hope this will help put productivity at the heart of the economic debate.
As the economist, Paul Krugman, put it: “Productivity isn’t everything, but, in the long run, it is almost everything.”
This Sunday Read was written by SIPTU Researcher Michael Taft and NERI Researcher, Chris Smart.
‘Productivity in Ireland’s Domestically-Owned Market Economy: a Comparative Survey’, by the Nevin Economic Research Institute (NERI) and SIPTU is available here.