The Productivity Challenge, With or Without Robots

​Economist are still struggling to explain the UK’s poor productivity performance.
Paul Lewis
Oct 24, 2017

‘Productivity is no higher now than it was just before the 2008 financial crisis,’  writes the FT’s Gemma Tetlow, ‘in stark contrast to the average annual growth of 2.1 per cent recorded during the decade before the crash.’ With the Office for Budget Responsibility, the UK fiscal watchdog, no longer forecasting a return to pre-crisis productivity growth, the UK chancellor (Finance Minister) is now prioritising the issue.

Ms. Tetlow gives four possible reasons for the post-crisis productivity stagnation which afflicts many sectors but is particular weak in finance, telecoms, energy and management consulting. The first explanation is low investment in productivity-enhancing machinery—running at a mere 5% above its pre-crisis peak—and not always in areas that improve worker efficiency. Economic uncertainty may be a big reason for this reluctance to invest. A second explanation might be the way productivity is measured—previously under-playing the longer term costs of investment in, for example, the oil and financial services sectors, while understating the returns on investment in digital technologies. But the FT reckons that this would explain only one quarter of the assumed shortfall. A third reason could be that historic low interest rates have sustained ‘zombie’ companies, with fewer bankruptcies following this recession compared with previous downturns. This, however, would only explain 15% of the assumed productivity gap. Finally, business has not laid off its unproductive workers. With more people now willing to work, labour has become less expensive, resulting in ‘labour hoarding,’ while deterring investment in labour-saving technology.

This latter explanation appears not to apply to sports shoe manufacturer Nike. According to the FT’s Long Read on how Nike’s focus on robotics threatens Asia’s low-cost workforce, Nike has been introducing automated gluing and laser cutting at its Mexico plant that is helping to slash costs and increase flexibility in what is normally a fickle, fashion-conscious market. Long a symbol of outsourcing–with almost half a million employees in 15 countries–Nike looks set to reverse that process through automation. As wages rise, automation looks ever more attractive; and Nike’s own labour costs could fall 50%. ‘The apparel industry is likely to watch this closely,’ say analysts.

There are also huge implications for developing markets more generally. As the article notes, the ILO estimates that ‘about 56 per cent of employment in Cambodia, Indonesia, the Philippines, Thailand and Vietnam is at a high risk of being automated over the next decade or two, with clothing and footwear manufacturing jobs among the hardest hit.’ However, for a brand-sensitive company such as Nike, which was once attacked for poor labour practises in its supply chain, closing a factory is likely to be controversial. Nike could be the litmus test for one of the great industrial dilemmas of our era.

Paul Lewis

Editorial Director at Headspring