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Human Capital: measuring the unmeasurable

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Human Capital:
measuring the unmeasurable

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Human Capital: measuring the unmeasurable

  1. 1. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Human Capital: measuring the unmeasurable Productivity like love - a many splendoured thing! Conjurors calculating: spurious quantification obscures important productivity influences Lessons for organisations Outline Some views on economists An economist is a man who states the obvious in terms of the incomprehensible. (Alfred Knopf (b. 1892) American Publisher) “An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen to today.’ (Laurence J. Peter, Peter’s Quotations) “"Economic doctrine ... is not a body of concrete truth, but an engine for the discovery of concrete truth ..." (Alfred Marshall, Cambridge economist at turn of the century).
  2. 2. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Quotes for today! "All statistics are biased and when economists use them you should not take them seriously" (First Class Honours graduate in Sociology, UNSW). "Who put the con into econometrics - and into much spurious quantification in all the social sciences?" ( Harry Anonymous) Productivity: definitions A bit like love - a many splendoured thing. - ie. can be a product of a variety of factors A simple definition: the relationship between and economy's output and the inputs required to produce that output. Causes of productivity rise complex Increased investment in plant and equipment can boost it But can also be a product of simply more bangs out of existing investment bucks. Merely improving work force skills or extra R&D expenditure not enough. They have to be applied productively and profitably.
  3. 3. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Three main measures of productivity: Productivity Labour productivity Capital productivity Multi-factor productivity Labour productivity is defined as output (Y) per worker or per worker-hour (L). It is calculated as (Y/L). Growth in labour productivity is calculated as the percentage change in (Y/L) over time. Labour productivity Capital productivity is defined as output (Y) per unit of capital (K). It is calculated as (Y/K). Growth in capital productivity is calculated as the percentage change in (Y/K) over time. Capital productivity
  4. 4. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurableReason? By focusing on a single input to the production process they ignore the possibility of substitution of this input for others in response to relative price changes. For example, one problem with labour productivity is that it does not account for the fact that an increase in (Y/L) could result from a move towards a more capital intensive production process or increased use of energy - However, as measures of technological progress they are far from optimal Hence multi-factor productivity (MFP) Attempts to divide output by a combination of all the relevant inputs into the production process. It includes technical progress, improvements in the work force, improvements in management practices, economies of scale, etc." " (MFP) is largely a measure of the effect of improvements in the quality of inputs and how they are used. ( ABS, 5234.0) But big measurement problems Measurement of capital stock especially very difficult. eg. value of buildings & plant continually changing and is not independent of the rate of profit - as much of modern microeconomics assumes. And GDP per hour worked figures do not fully capture the effects on productivity of, for example, Net airline booking or training programmes.
  5. 5. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Measurement problems cont.. Quality-adjusted measures of labour and capital are also not generally available We know the quality of both change over time but measurement of quality change very difficult. For example, is an employee B.Comm. or M.Comm. automatically more productive because they have received a B. or M. Comm.? Assuming the answer is yes, by how much has their productivity increased? For example, how do we measure the value of output of an academic? By the number of fee-paying students they attract? Enrolment levels may simply be a product of students' false belief that course will raise their income - or an academic showing lots of movies. If a lecturer doubles the number of students in a class, are they doubly productive? More students = more salary supplementation Services sector productivity very difficult to measure Why greater productivity is important It is the chief source of growth in real income per person - ie. improvements in living standards It improves export competitiveness and an economy's ability to compete against imports 1. 2.
  6. 6. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Australian labour productivity: was poor in comparision with world's best practice Productivity Commission (1997), Assessing Australia’s Productivity Performance, Ch.6. Electricity GWh/employee Telecommunic. Rail freight Waterfront (containers) Waterfront (coal) Gas supply Coastal shipping 0 100 200 300 400 Lowest Australian Highest Australian Best world practice Index: 1994 or 1992 figures Something very important happened in 1990s Annual average growth rates, per cent per year 74-75 to 93-94 64-65 to 97-98 93-94 to 97-98 Output 2.6 3.3 4.6 Inputs 1.3 1.9 2.2 Labour 0.4 1 1.4 Capital 3.8 4.4 3.8 Capital-labour ratio 3.4 3.4 2.4 Labour productivity 2.1 2.3 3.1 Capital productivity -1.2 -1 0.8 Multifactor productivity 1.2 1.4 2.4 NB: the improvement in overall productivity in the 1990s reversed the historical decline in capital productivity. This suggests that, rather than having to accumulate more and more capital with diminishing returns in order to promote growth, the capital stock is being used more productively to generate output. ie further evidence of the positives of microeconomic reform • • • Countries which start out further behind have greater opportunity to grow Productivity Commission estimates based on OECD data * Japan * Belgium * AUSTRALIA * Canada * USA * Germany France * UK * Netherlands * Denmark * Sweden 1970 level of labour productivity ( GDP, PPP, $US/worker) 400003500040000250002000015000 45000 0 1 2 3 Average annual compound growth rate, 1970-94 * Finland Average rate of convergence and catch-up among the OECD countries, allowing for starting position. ie. Australia’s rate of labour productivity growth was low allowing for its 1970 starting position.
  7. 7. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable The key reason why economy healthy Annual % growth in total factor productivity- rolling average* ABS 5206.0, 5231.0 and Treasury estimates. * Rolling average growth rates - six years to the year shown. 2.0 3 1.0 0.0 1970-71 1997-981990-911980-81 NB: The dramatic trend turnaround in the 1990s, suggesting microeconomic reform has had a big impact But will the trend continue? Data gives some clues as to why productivity growth differed 5.5 yr. growth cycles, % annual growth Labour productivity Capital stock Labour hours worked Real wages Multi-factor productivity I. Mar 75-Sep 80 2.3 3.5 0.9 2.8 1.4 II. Mar 83-Sep 88 1 3.1 3.6 -0.3 1.2 III. June 91-Dec 96 1.8 2.2 1.8 0.3 1.6 NB: re 1990s cycle Data: RBA Bulletin, May 97 But real wage growth restrained NB: microeconom ic reform having an impact Changes which raised Australia's productivity over past decade Adoption of more advanced technologies Greater business involvement in innovation & R&D Improvements in employee skills Organisational change and adoption of improved management techniques 1. 2. 3. 4.
  8. 8. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Changes which raised Australia's productivity over past decade New work arrangements implemented through enterprise bargaining Reallocation of resources and greater specialisation Greater openness and competition in the Australian economy and Changes in the policy environment which cut businesses’ ability to rely on government support. 5. 6. 7. 8. Productivity: main economic benefits Over the past thirty years, productivity growth has accounted for around 50% of the expansion in Australia's GDP (growth in capital, the work force and other resources explain the remainder). Productivity growth is estimated to have accounted for around two thirds of the 80 per cent growth in per capita incomes over that period. In the early 1990s the best performing sectors were electricity, gas and water, and transport, storage and communication. Over past few years, financial services and retailing and wholesaling have seen biggest improvements.
  9. 9. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Type of benefit varies greatly (Average, 1984-5 to 1994-95) Industry Commission (1997) Assessing Australia's Productivity Performance 2.2 1 -1.8 -2.2 -1 1.8 -0.1 1.8 -0.2 -0.2 -1.8 -0.3 Transport, Manufacturing Retail trade 0 1 2 3-1-2-3 Productivity Price benefit Wages Profits The bars represent the annual percentage growth rates for each sector compared to the average for the market sector (for multifactor productivity ) or the economy-wide average (for the other variables). For example, the price difference is measured as the percentage growth in Australian prices less the percentage growth in the sector’s price. Thus, where a sector’s growth in prices is less than the Australian average growth in prices, consumers have gained more benefit. Similarly, the bigger the figure for relative wage growth, the greater the wage benefit for employees in that sector storage & communication Messages for organisations: I Labour productivity and capital productivity measures can hide more than they show. The most dramatic effects on productivity in history - from the IT revolution - are simply not captured by such measures. Multi-factor productivity not only impossible to measure it also impossible to predict. In 1995 Bill Gates published his The Way Ahead - and it contained only a passing reference to the Internet! Messages for organisations: II Measurement of inputs relatively easy - measuring the quality of the outputs is a lot more difficult. eg. Can measure hours which go into writing a business plan or requirements document but their quality? Such exercises are like measuring the quality of saying "Good'ay" to someone.
  10. 10. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable Messages for organisations: III What gets measured are only the measurables - while the unmeasurables get ignored. Smart economists are very aware of this - greed, ignorance and stupidity drive all markets but what units of measurement can one use with them? Eg. How do you measure rigour of a document or business plan? 150 sub-headings does not guarantee quality. Messages for organisations: IV The longer the CV, the poorer the applicant. The gaudier the gown, the lower the Uni. quality. Decline in Uni standards, particularly for postgraduate degrees. Result: employers are increasingly doing their own testing and assessment. Beware business and similar degrees which have usually been awarded by persons with either no business experience or who have been failures in the real world. Employers know very well that paper qualifications are no guide to actual productivity on the job. Nor do good interview skills guarantee the best candidate. Messages for organisations: V Productivity needs good rising - not falling - morale. But most organisations suffering falling morale among troops as more and more generals pay themselves bigger and bigger salary & package differentials. Armies of consultants, purportedly measuring productivity and using gobbley-gook terms from a Uni textbook will do nothing to reverse this growing problem, Morale surveys are also a poor measure of morale, if staff are suspicious of the survey's anonymity.
  11. 11. National Humans Relations Conference Menzies Hotel, Dec. 1-2, 2003 Day 2, 9;50-10:30am Dr David Clark, Ecs., UNSW Human Capital: Measuring the unmeasurable The "bullshit baffles brains" productivity measures mean everything and the organisation cheeses are maggot-ridden. Who moved my cheese management philosophies fool only the dopiest staff. Keep you hands off my cheese will be the next best seller! (Interestingly, his cheese book on teenagers sold far fewer copies) In sum: Finally a maxim worth remembering to help you deal with other, less worldly social scientists The difference between theory and practice is that: in theory there is no difference between theory and practice. Some recent useful publications on Australian productivity change Most useful net site: www.pc.gov.au Two recent PC studies of particular interest to Conference attendees: Australia's Service Sector: A study in Diversity, Productivity Commission Staff Research Paper, March 2002 Productivity and the Structure of Employment, Productivity Commission Staff Research Paper, July 1999

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