The workplace productivity challenge
- Workplace Productivity Challenge report summary [PDF, 1.2 MB]
- Workplace Productivity Challenge report full length [PDF, 98 Pages, 1.39MB]
List of figures and tables
Figures and tables can be found in The Workplace Productivity Challenge [PDF, 98 Pages, 1.39MB].
Our places of work and the people who work in them are two key assets in making sure New Zealanders have a great quality of life for the future.
It is our people in workplaces around the country who collectively drive our economy with their ideas, innovations, skills, capital and strong work ethic. If our firms are doing well, our economy does well, and that helps to create an environment where we, as a nation, have choices about what we spend and how. It is a mutually reinforcing cycle.
The Workplace Productivity Working Group (WPWG) was established in February 2004 to undertake a stocktake of how New Zealand is doing in terms of workplace productivity and to identify some practical options for how we can lift our workplace productivity.
The challenge for the future is to build on where our workplaces are performing well, while also achieving improvements that move New Zealand to a sustainable, high value, high skill and high wage economy.
To achieve this will require engaging New Zealanders and lifting national awareness about what improved productivity can contribute to our lives.
The WPWG looked at the range of issues that contribute to how well a workplace performs, particularly how innovation, good culture and leadership help to create an environment of high performance at firm level.
Many workplaces already have in place business practices that are delivering highly productive, profitable and high quality outcomes. We need to acknowledge the achievements of these leading firms and learn from them, as well as identifying the new opportunities. There are also many firms that are doing some things well who could benefit from lifting their performance in other areas.
This report reflects the WPWG's perspective on some of the tangible actions to improve New Zealand's economic growth by lifting everyone's game at a firm level.
There is no silver bullet. Building sustainable economic growth and lifting living standards demand a focused effort and strategic approaches across industry, firms and government. This report articulates how all firms are capable of raising workplace productivity and how doing even a few things right can contribute to greater gains for everyone, such as recognising the importance of innovation, training and new technology as drivers of productivity.
The findings and recommendations highlighted in the following pages have been reached after wide-ranging discussions through informal and formal forums, including reviewing key research, a series of employee and employer focus groups around the country; an intensive workshop involving government, business, unions, workers, academics and productivity experts; and discussions with the Small Business Advisory Group and the Growth and Innovation Advisory Board.
We have great pleasure in presenting this report to the Ministerial Reference Group of the Ministers of Labour, Finance and Economic Development as a catalyst for further engaging government, industry, firms, unions and employees in a conversation about how we can lift workplace productivity.
Workplace Productivity Working Group
Productivity isn't everything, but in the long run it is almost everything. A country's ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.
New Zealand has recently enjoyed a resurgence in economic growth after a long period of decline. The two main drivers of economic growth are labour utilisation, where New Zealand is high compared with the Organisation for Economic Co-operation and Development (OECD) standards, and labour productivity, where New Zealand is much lower than many OECD countries. Given already high rates of labour utilisation, increases in New Zealand's living standards are thus likely to come from increased labour productivity.
Productivity increases occur through three different channels in an economy. OECD research suggests that, typically, the expansion of more productive firms and the contraction of unproductive firms account for small increases in overall productivity. The entry of new, productive firms and the exit of unsuccessful firms accounts for around one-third of overall productivity. The third channel - productivity gains in existing firms - accounts for the most productivity growth in the economy.
This report focuses on the specific challenge of how improvements in workplace productivity can contribute to economic growth and lift New Zealand's living standards.
Workplace productivity refers to how efficiently and effectively a firm of any shape or size can turn its inputs, such as labour and capital, into outputs, such as products and services.
Improving workplace productivity is not about working harder and harder, but about working smarter. It involves continuous innovation and improvement in all aspects of the firm's management and operations in order to deliver sustainable competitive advantage. The main ways that workplace productivity can be increased are through investing in capital, achieving economies of scale; investing in innovation and technology; and adopting better business practices.
The Workplace Productivity Working Group (WPWG) was established to determine ways that improved workplace productivity can deliver a high wage, high value economy for the benefit of all New Zealanders.
This report reflects the Working Group's views about the status of New Zealand's economic performance and its link to quality of life, and the role of workplace productivity in raising this performance, and identifies some practical actions for encouraging greater workplace productivity.
The work conducted to meet the objectives of this project was accomplished within a rather ambitious timeframe. We feel that we have been successful in meeting our goals but acknowledge that, given more time, the breadth and depth of our background research would have been expanded.
This report seeks to identify the challenge that New Zealand faces in raising our quality of life through improved workplace productivity and suggests an ongoing Workplace Productivity Agenda to contribute to meeting that challenge.
Meeting the challenge
Our findings and recommendations set out a Workplace Productivity Agenda for responding to the workplace productivity challenge.
This agenda will contribute to the government's overall economic goals and complements existing work programmes and strategies. A key component of the agenda is also the shared responsibility for action among industry, firms, unions, employees and government.
We recommend the establishment of a successor body to oversee the implementation of the recommendations in this report.
The actions that are proposed are mainly directed at existing firms although they are designed so that all organisations may benefit.
As part of its findings, the WPWG identified seven complementary and reinforcing drivers of productivity, listed below. These drivers form the basis for our recommendations and are grouped around the following four types of actions:
- Raising awareness - of what workplace productivity means and the actions that can lead to improvements.
- Diagnostic tools - to assist firms in identifying how effectively they are performing and to identify where the firm may need to improve its business practices or performance.
- Implementation - assistance and support for firms to decide what specific actions to take and the best way to put these in place.
- Research and evaluation - collecting and developing the knowledge base about workplace productivity and what business practices are successful.
Building leadership and management
Leadership and management capabilities are key drivers of firm capability and performance and cut across all of the other workplace productivity drivers. If there is a lack of strong leadership and/or management in a firm, it will be difficult to successfully develop and implement initiatives around the other main productivity drivers.
The WPWG identified a strong role for leadership in creating a productive workplace. Leadership capability relates to an individual's or team's ability to identify new opportunities and inspire others to pursue those opportunities. Leaders are found at every level of an organisation, and a productive workplace will have leadership depth. Leadership, in particular, leadership by example, is a crucial factor in creating a positive and productive workplace culture.
Managerial capability includes the strategic ability to adapt to a changing environment that creates internal and external threats and opportunities, organisational and management skills, people and communication skills, and information acquisition and learning processes - all critical factors in workplace productivity.
High performing organisations have both effective management and effective leadership and, as a result, excellence in execution.
There are already a number of government initiatives to improve leadership and management capability in New Zealand firms. The Ministry of Economic Development (MED) Management and Business Capability Co-ordinating Project (MBCC Project) has been established to develop and implement well focused management capability initiatives. The WPWG notes this programme and recommends that our successor body be advised of its progress.
A full list of the WPWG recommendations for building leadership and management capability in firms is found in Section 2. The recommendations address such areas as processes to showcase examples of effective leadership, examining how existing government assistance can be improved, appraising best practice and encouraging greater relevance and accessibility to information and programmes for the purposes of improving leadership and management capability in firms.
Creating productive workplace cultures
High performing workplaces are founded on a strong workplace culture in which motivated and engaged employees are willing to "go the extra mile". There is no single prescription for creating a productive organisational culture, but firms can cultivate such an environment by fostering some significant cultural attributes, such as acknowledging the contribution of individuals, rewarding participation and good ideas, developing healthy and respectful relationships in the workplace and promoting a sense of shared goals and values.
More emphasis needs to be placed on good employment relationship management practices as an important factor in boosting employee participation, building stronger workplace culture and, therefore, creating more productive workplaces. Unions can play a constructive role in supporting a positive culture, both as the representatives of their members within particular workplaces and as sources of information about employment practices.
A full list of the WPWG recommendations for creating productive workplace cultures in firms is found in Section 2. The recommendations address such areas as helping people to identify and apply principles that can support positive workplace cultures and employment relationships, the production of productivity tips that introduce common questions about productive workplaces and help people to think through basic issues to identify areas where they could benefit from investment in their employment relationships, and further research about employee participation mechanisms in New Zealand workplaces, including identifying good practice examples.
Encouraging innovation and the use of technology
Innovation is a key part of raising workplace productivity. Creating new products or services or just doing things better are vital ways to achieve firm growth.
Innovation can be incremental, such as doing things slightly differently, or it can be more radical, such as incorporating new technology or introducing entirely new products into a firm's business. The knowledge and skills of employees at all levels provide a platform for further innovation and the ability to adopt and adapt ideas from elsewhere.
The ability of a firm to innovate depends on a variety of internal and external factors, including organisational culture, how work is organised, a shared sense of the vision and strategy within the firm and the impact of such issues as the wider economic and regulatory environment.
A large number of studies support the link between productivity gains and innovation. In particular, the appropriate introduction of advanced technology is linked with higher productivity, greater market share and employment growth. Firms with more sophisticated equipment and machinery employ more skilled workers, and these workers receive higher wages.
The major challenge is for firms to harness the capability to extract value from innovation processes, services and/or technologies. This requires the ability to access, absorb and exploit technology.
A full list of the WPWG recommendations for encouraging innovation and the use of technology in firms is found in Section 2. The recommendations address such areas as increasing awareness of the breadth and benefits of innovation, considering making mentoring support an integral part of delivering technology and innovation assistance, and improving the co-ordination and responsiveness of government services making management and marketing support available alongside research and development (R&D) support.
Investing in people and skills
Our people are our greatest asset. Skills shortages choke off growth potential. New Zealand needs to match up the potential and talents of New Zealanders with the skills needed in the workforce.
A skilled workforce can lead to more innovative behaviour and can enable the use of higher levels of technology, which, in turn, leads to higher productivity and a better quality of life for all New Zealanders.
Priority must therefore be put on making sure that all adults in the workforce have access to appropriate learning mechanisms and work skills training and that employers understand how best to add value to their firms by investing in skills and training.
While there has been an increased emphasis on investment in education and training by employers, employees and the government, more needs to be done to address existing barriers to people obtaining the skills they require.
In particular, a lack of foundation skills, including literacy and numeracy, has been identified as a critical issue in the New Zealand workforce, and this may be limiting productivity levels in firms.
We believe there is a role for government in improving the accessibility and uptake of foundation skills training as a means of building the productivity of the existing workforce and overcoming the current skills shortage. This will involve further government investment in the skills training area. We also believe the balance of government spending between tertiary education and workforce training needs to be reviewed.
A full list of the WPWG recommendations for investing in people and skills in firms is found in Section 2. The recommendations address such areas as changing perceptions of the value of skills development in the workplace and removing barriers that prevent managers and employees from investing in high quality education and training, providing firms with the tools and assistance to undertake skills assessments and determine how to address identified skill shortages, and continuing to build a strong infrastructure, including Industry Training Organisations' (ITO) capability, for the delivery of workplace-based training.
In order to maintain a competitive edge in a highly competitive, global environment, firms need to assess and adapt their structures and business practices on an ongoing basis.
To extract the greatest value out of its investment in new technology and skills, work processes and/or products and services, firms need also to look at their organisational design. In particular, they need to make sure the activities that create value within a firm are aligned with each other and with the overall business strategy and that they are functioning effectively.
A significant factor in ensuring that work organisation contributes to workplace productivity gains is employee participation. It is critical that employees at all levels of a firm have an opportunity to contribute to work organisation and to provide relevant practical advice from their respective positions, and for them to fully understand the potential benefits. Designing good quality jobs is also a critical consideration for effective work organisation.
A full list of the WPWG recommendations for organising work in firms is found in Section 2. The recommendations address such areas as improving firms' access to information about the effect of work organisation on workplace productivity and providing networking and other learning opportunities, as well as mentoring assistance, to undertake redesign assessments and to engage in redesign work.
Networking and collaborating
Firms do not operate in isolation, and there are significant productivity gains to be achieved by improving the exchange of knowledge, information and ideas through both formal and informal networks.
Existing networks are already doing an excellent job in lifting scale, improving the adoption of best practice and assisting with the adoption of strategic approaches specific to particular sectors.
There is also a role for government to act as a catalyst and broker in strengthening network formation. Specifically, government can help to increase firm awareness about the importance and value of both informal and formal networks as a key business tool. Government also has an important role to play in providing information to existing networks and widening networking activities to include key stakeholders, such as co-operation between science and industry.
A full list of the WPWG recommendations for networking and collaborating in firms is found in Section 2. The recommendations address such areas as identifying the full range of networking and collaborative mechanisms already available and ensuring that firms are aware of these opportunities, reviewing whether existing tools to diagnose business capability are putting sufficient emphasis on networking and collaboration, and undertaking more detailed research into how good networking design can improve productivity.
Measuring what matters
Workplace productivity measurement is essential in assessing the value to a firm of investing in other workplace productivity drivers.
There is a lack of information about the nature or extent to which New Zealand firms are implementing measurement and reporting practices. The research that has been conducted shows that there is a low level of best practice benchmarking among New Zealand firms. This is despite the proven value that measurement and reporting tools create in terms of realising added value within a firm.
To fully realise workplace productivity improvements within New Zealand firms will require much more widespread adoption of effective measurement and reporting practices.
Good measurement and reporting practices are linked to an assessment of an organisation's strategy and how to better achieve those strategic objectives. There is no one right way to undertake measurement. There needs to be a commitment to measurement throughout the firm and to communicating the results in a transparent way that relates individual and team performance to the overall business performance and helps them to take leadership roles in making appropriate changes to improve productivity.
Measurement and reporting also need to be tailored to the individual firm and to balance both qualitative and quantitative factors, including finance, organisational culture and human capital.
A full list of the WPWG recommendations for measuring what matters in firms is found in Section 2. The recommendations address such areas as raising awareness of the value of measurement and reporting as an integral part of workplace productivity strategies and providing greater access to both public and private resources to assist firms in measurement and reporting activities.
Consolidated workplace productivity working group recommendations
Building leadership and management capability
1. Raise awareness of the importance of good leadership and management to workplace productivity by showcasing effective leaders and celebrating their success and highlighting the need for leaders at all levels of an organisation.
2. Examine how existing government assistance programmes could be improved to raise awareness of the benefits of leadership and management development.
3. Use industry networks to raise awareness of the importance of leadership and management capability in improving performance and to spread best practice through the sharing of management and leadership skills and experiences.
4. Review the availability and effectiveness of existing tools for diagnosing the level of leadership and management capability in individual firms and improve them, as necessary, to ensure they meet the needs and circumstances of all types of New Zealand firms.
5. Make it easier for firms to access government leadership and management development services in a seamless way.
6. Assess the extent to which quality standards exist for leadership and management services and, where necessary, develop such standards.
7. Bring together businesses and organisations delivering and developing courses and information on leadership and management capability to ensure that they are accessible and relevant to firms. This may include bringing together education institutions and third-party training providers and firms.
Research and evaluation
8. Research whether firms have sufficient incentives to invest in building leadership and management capability and, if necessary, take action to strengthen these incentives.
9. It is proposed that the Management and Business Capability Co-ordinating (MBCC) Project advise the Working Group's successor body of its progress in carrying out its planned work programme to check that activities aimed at increasing overall productivity are well aligned, co-ordinated and complementary with the proposed Workplace Productivity Agenda. This co-operation would also provide the successor body with the ability to ensure that our recommendations (as outlined in this report) are delivered.
10. Research the value and potential mechanisms for introducing mentoring for managers in SMEs.
11. Conduct research to gain a clearer understanding of leadership and management capabilities to avoid duplication and add value to existing programmes, such as the MBCC Project.
Creating productive workplace cultures
12. Model and communicate the benefits of good employment relationship practices through industry organisations, networks, clusters and unions.
13. Promote purposeful employee participation, including in change management.
14. Review existing programmes and support to promote productive workplace cultures and develop tools, information and frameworks to address any identified gaps. This would include assessing what tools are available for measuring and addressing employment relations issues and employee participation.
15. Continue to support firms, employees and unions in improving their employment relationships and in developing supportive workplace cultures.
16. We endorse the establishment of a Partnership Resource to promote workplace innovation, productivity growth and improved service delivery through constructive employer/union partnerships.
17. Create greater dialogue between industry, firms, unions and employees on how to develop combined strategies for encouraging productive workplace cultures and building effective employee participation mechanisms.
18. Promote and roll out tools, information and frameworks for building productive workplace cultures.
Research and evaluation
19. Undertake research on employee participation mechanisms in New Zealand workplaces, including identifying good practice examples.
Encouraging innovation and the use of technology
20. Raise awareness of innovation as a broader concept than research and development (R&D) or high-tech investment.
21. Promote an understanding that innovation requires a range of supporting practices within the firm, such as environmental scanning and information management, close customer relationships, a culture that encourages new ideas and teamwork, investment in staff and strong leadership.
22. Use industry networks to raise awareness and spread best practice through sharing innovation management experience.
23. Raise awareness of the importance of continued investment in the right technology for firms facing labour shortages.
24. Encourage the adoption of firm management and commercialisation programmes as part of the engineering/science course syllabus in tertiary organisations and among staff involved in innovation processes in firms (and vice versa).
25. Evaluate the effectiveness of existing tools and programmes, particularly around the issue of firms' ability to adopt and adapt innovations and new technology. Develop tools, information and frameworks to fill identified gaps.
26. Facilitate linkages and collaborative relationships, both between firms and Crown Research Institutes (CRIs)/tertiary institutions and research expertise, and firm to firm, to encourage the exchange of information, skills and technology, improve opportunities for capturing knowledge spillovers and build up the innovation capability of firms.
27. Consider making mentor support an integral part of the delivery of technology and innovation assistance, to provide owner/managers with some space and guidance to work on the firm rather than in the firm.
28. Improve co-ordination and responsiveness of government services making management and marketing support available alongside R&D support and improving the "front end" client advisory services so that the most appropriate support is provided to firms from the first contact, irrespective of the agency first approached.
Research and evaluation
29. Ensure research is undertaken into the issue of firms' access to finance.
30. Identify any barriers to increased capital accumulation and how these can be reduced.
Investing in people and skills
31. Raise awareness of the need for firms to undertake skills needs assessments, so they can identify what skills they need and where they have skill gaps including identification of where improvements in foundation skills are needed. Promote the benefits of undertaking these assessments.
32. Provide information on the best ways of matching skills to the needs of firms and linking to ongoing improvements in managerial capability and work organisation.
33. Provide information on the return on investment in foundation skills for all firms and the return on investment in education and training generally for small and medium-sized enterprises (SMEs). More robust information that has credibility within the business community has the potential to change managers' perceptions, with an increase in the investment in people and skills.
34. Encourage positive perceptions by school leavers of vocational occupations as careers and promote industry training as an option, in order to increase the level of investment in these areas and to reduce the negative impact for business of skill shortages, including targeted information for school career guidance counsellors.
35. Review the availability and effectiveness of existing tools to help employers and employees undertake an assessment of the potential return on investment in skills development generally (with tools targeted at SMEs in particular), and develop new tools to fill any gaps.
36. Provide a tool to assist firms in undertaking an assessment of skills required by a firm, the gap between the required skills and the existing skills within the firm and the steps required to address any identified skill shortages.
37. As part of the assessment of skills needs, these tools need to identify where foundation skills training is necessary and the potential return on investment that can be achieved through workplace-based foundation skills training.
Education and training infrastructure
38. Build a strong infrastructure, including Industry Training Organisation (ITO) capability, for the delivery of workplace-based training and ensure ITOs are involved in workplace-based training for foundation skills and training for SMEs.
39. Continue to build on the improvements in the tertiary education sector to the linkages between government, suppliers and firms so that, over time, workplace training increasingly meets the skill needs of firms.
40. Continue to provide support for the ongoing work of the Skill NZ campaign.
Support for firm-specific training
41. Develop support for firms to identify skill needs, placing those skill needs in a wider productivity and firm improvement context, and a specific brokerage role to support investment by SMEs in skills and training. In developing these forms of assistance, consider the role that ITOs can play as a delivery agency and how this can be encouraged (and identify other appropriate organisations where no ITO exists).
Foundation skills training
42. The government needs to focus on addressing the needs of existing workers with low levels of foundation skills. This will require a substantial increase in foundation skills funding targeted at those already in the workforce. Funding should cover learning delivery, including workplace-based training, co-ordination and capacity/capability building and support for providers, practitioners and learners.
43. Integrate foundation learning with industry training so that those with lower levels of foundation skills can develop those and other skills.
44. Trial (and evaluate) new ways of delivering foundation learning to improve the quality of training in the workplace and the incentives to design improved high quality training, for example, designing programmes that closely match workplace tasks.
Research and evaluation
45. Research the effectiveness of workplace foundation skills programmes through evaluating any new initiatives that are approved as a result of our proposals to provide improved information for employers, employees, unions and the government on the best approaches to adopt.
46. Evaluate whether changes are required to the design of funding and accountability arrangements for government-funded workplace training to help ensure that SME training needs are met (for both foundation skills and wider skills training).
47. Research the effectiveness of steps to enhance education and training in SMEs through the evaluation of trials to provide assurance that the education and training are providing a return on the employer's investment and to identify critical success factors.
48. Research whether the different funding arrangements for workplace training and other tertiary education represent an unnecessary barrier to skill development in the workplace.
49. Explore the level of longer-term skill investment needed to achieve a significant improvement in lifelong learning, in order to support ongoing productivity improvements.
50. Make available and/or produce relevant information about how work organisation affects workplace productivity and the benefits of implementing these strategies, including the benefits of employee involvement.
51. Provide background information on tools used overseas to assess work organisation issues, such as the UK's Department of Trade and Industry Tool Kit and Danish Technology Institute tools.
52. Identify case studies and demonstration workplaces that focus on successful organisational design, processes and practices.
53. Develop and test diagnostic tools, modifying overseas models for the New Zealand business environment, for assessing structural and work reorganisation requirements.
54. Provide diagnostic tools to assist in assessing whether a firm's structure/work design is appropriate and/or effective. This may be especially relevant to organisations in times of change, as well as when developing an ongoing strategy.
55. Facilitate the provision of networking and other learning opportunities as well as mentoring assistance, including facilitators and consultant practitioners, to undertake redesign assessments and to engage in redesign work.
Research and evaluation
56. Assess availability and accessibility of advice for firms, particularly small business services, and potential for intermediaries as service providers.
57. Assess the linkages between the Work-Life Balance Project and workplace productivity improvements.
Networking and collaborating
58. Identify the full range of networking and collaborative opportunities and mechanisms already available and ensure firms are aware of how to use these effectively.
59. Identify and disseminate examples of best practice in networking and collaboration and case studies showing the resultant benefits.
60. Explore the scope for using employer and employee organisations as complementary mechanisms to help spread key awareness messages.
61. Review whether existing tools to diagnose business capability are putting sufficient emphasis on the extent to which firms are utilising networking and collaboration both within New Zealand and internationally and adapt these tools, as necessary, to ensure that they are including this emphasis.
Research and evaluation
62. Review whether the impact and reach of existing firm capability services (in addition to the Enterprise Development Fund and Growth Services Fund) could be increased by adding further networking and/or collaborative elements to spread the benefits beyond the primary beneficiary.
63. Undertake more detailed research into why networks are established and, more particularly, what constitutes best network design and operation, particularly in relation to enhancing productivity.
Measuring what matters
64. Raise awareness of the value of measurement and reporting as an integral part of workplace productivity strategies.
65. Develop greater accessibility to both public and private information and other resources available to assist firms in measurement and reporting activities.
66. Provide diagnostic support to assist firms in getting started on measuring and reporting.
Research and evaluation
67. Undertake further research to better understand:
a. the type of measurement and monitoring that is effective in identifying good performance
b. the nature of measurement and reporting practices in New Zealand and how good measurement practices contribute to increased workplace productivity, such as the Ministry of Economic Development (MED) continuing to include questions relating to measurement practices in its business practice surveys
c. the determinants of firm performance using good microdata and research techniques.
Background And Scope Of The Workplace Productivity Working Group
A number of government initiatives have been established over recent years to address the challenge of raising New Zealanders' overall quality of life by improving productivity.
At the broadest level, the government's Growth and Innovation Framework (GIF) aims to deliver long-term sustainable growth, and issues around productivity have also been subject to informal discussions between such groups as the New Zealand Council of Trade Unions (CTU) and Business New Zealand, facilitated by Treasury, as well as in other forums.
Historically, New Zealand has not put the same emphasis on producing improvements in workplace productivity within the firm as it has on establishing the broad regulatory framework for business to operate within, even though workplace productivity is one of the foundations for driving national growth.
High productivity at a firm level contributes to the overall productivity of the national economy, which, in turn, helps to create higher living standards. Workplace productivity, therefore, benefits everyone.
Put simply, workplace productivity refers to how efficiently and effectively a firm of any shape or size can turn its inputs, such as labour and capital, into outputs, such as products and services. Our emphasis has been on how New Zealand can achieve improvements in this area.
Improving productivity is not primarily about working harder and harder, but about working smarter.
It sounds straightforward, but there is no one answer to achieving it.
Improvements in productivity involve doing a number of complementary things well at a firm level. That could include investing in labour and skills, introducing innovation and new technology or looking at organisational structures. The important factor is "action" at a firm level because this is where productivity is driven.
For the greatest gains, a firm will employ as many of these mutually reinforcing actions as possible, but even one or two actions will help to improve workplace productivity in a firm as long as the approaches "fit" from a business and cultural perspective with the firm that is implementing them.
To help build momentum at firm level is going to take a concerted effort and shared commitment from government, industry, firms, unions and employees.
Workplace Productivity Working Group - scope
The government appointed the Workplace Productivity Working Group (WPWG) in February 2004 to identify the issues affecting New Zealand's workplace productivity and how they might be addressed.
The appointment of our group puts the spotlight on the workplace as a place to discuss the need to improve productivity.
Our strongly practical focus is reflected in the terms of reference:
The Working Group will advise the government on the current situation (including how New Zealand is doing in terms of workplace productivity and practice, what practices have been successful and/or unsuccessful and how New Zealand's policy settings and processes are promoting workplace productivity) and possible future policy options for lifting workplace productivity, by providing advice on:
- ways to improve government policies and policy-making processes (such as the development of policies to promote economic growth) to better take account of workplace productivity issues
- new initiatives to lift workplace productivity and promote high performing practices
- methods of lifting awareness of best practices
- key information and research gaps to be filled.
We undertook an extensive process in order to meet the objective the government set of advising on possible future policy options for lifting workplace productivity.
This process included:
- holding ten meetings of the Working Group and meetings by the supporting officials
- engaging industry, business, unions and employees in formal and informal forums and discussions, including a two-day workshop and a series of focus groups
- reviewing key New Zealand and overseas research
- commissioning case study research into good workplace practice.
Workshop 18-19 May 2004
The workshop was attended by over 70 business leaders, union representatives, academics, officials and other interested parties. The workshop's immediate objectives were to test whether we had identified the important issues, discuss some of the successful methods already used by businesses in New Zealand and build consensus between key decision-makers. Feedback from the workshop was compiled into a Summary of Proceedings that we considered in reaching the recommendations in this report. This summary was also made publicly available and provided to workshop participants in June 2004.
In order to further test the workshop conclusions and to engage more broadly about the Working Group's thinking, a series of seven focus groups were held in five locations around the country from 5-20 July.
This included five groups held with employers in Nelson, Napier, Manukau, Auckland City and Christchurch, and two groups with employee representatives in Manukau and Nelson. Working Group representatives and/or officials attended all meetings.
The aim of the focus groups was to gain a snapshot of how firms and employees viewed workplace productivity, to define workplace productivity and to discuss some of the incentives and barriers to improving it.
The key findings of the focus groups can be summarised as follows:
- There is no "silver bullet". Solutions will be found from a range of good business and staff management practices to suit individual workplaces and industries.
- Recruitment, management and retention of good staff are central to workplace productivity. In assessing success in these areas, views of both employers and employees need to be considered.
- Many employers are dissatisfied with current education and training systems. Many believe they are not practical enough and not tailored to suit the needs of industry. They want more say in course design and structure. Some employees also support this view.
- There is widespread concern about the progression from school and work. Many employers are worried about the lack of "work readiness" in the youth market. They believe basic skills of numeracy, literacy and communication all need to be improved.
- Globalisation is both a threat and a challenge to New Zealand. As a small country, New Zealand industry/business needs to position itself as an incubator and innovator of good ideas, but we need to be flexible and sophisticated enough to see that our ideas will be picked up offshore by countries with more access to capital and labour. Good business will always need to be ready to produce new ideas and move on.
Linkages to existing policies and practices
Our terms of reference also required that existing policies and practices were taken into account, which both created natural links to existing advisory groups and required that we look at existing policy review processes as part of our scope.
Specifically, we set out to look at the following key issues:
- What we think are the most important drivers for achieving improvements in workplace productivity.
- Consideration of available information on how New Zealand businesses are currently performing.
- Possible barriers to improving New Zealand's workplace productivity performance.
The emphasis on the workplace meant we could create clear boundaries around the issues for consideration. In light of our terms of reference, we were not charged with addressing how broader economic and public policy issues impacted on productivity in New Zealand firms but rather accepted them as "givens".
- the issue of low unemployment and the impact of key pieces of legislation, such as the Holidays Act 2003, the Resource Management Act 1991 and the Employment Relations Act 2000 were not considered by the Working Group
- macroeconomic concerns about the need for increased capital investment are not addressed in this report, but we did consider issues about the quality and accessibility of capital
- a wide range of commentators have identified the need to unblock infrastructure bottlenecks in order to create an environment more favourable to business activity. Two areas where bottlenecks are frequently cited are transport and electricity. While we recognise the importance of having a sound infrastructure for overall productivity improvements, this was not an area that we considered fell within our focus at firm level.
We were conscious of the need to ensure our considerations did not duplicate activities already being undertaken by government and non-government processes and other advisory bodies and to ensure that a wide range of perspectives was reflected in our final recommendations. We met with both the Growth and Innovation Advisory Board (GIAB) and the Small Business Advisory Group (SBAG) to discuss their perspectives on workplace productivity and growth. It will be important that these groups, in particular, are engaged with further in the development and implementation of the planned Workplace Productivity Agenda (as outlined in Part 5 of this report).
Our view of what some of the relevant linkages are between our work and other processes or advisory bodies is presented in Figure 1 below.
This diagram is only intended to be indicative of these linkages as there are a large number of complementary initiatives currently underway.
Figure 1: Some linkages between the WPWG and other processes and advisory bodies. Figure 1 is provided in the PDF version
The Workplace Productivity Challenge
New Zealand's recent productivity performance
Over long periods of time, small differences in rates of productivity growth compound, like interest in a bank account, and can make an enormous difference to a society's prosperity. Nothing contributes more to reduction of poverty, to increases in leisure, and to the country's ability to finance education, public health, environment and the arts.
Productivity is about how efficiently and effectively a firm of any shape or size can turn its inputs, such as labour and capital, into outputs, such as products and services.
Productivity improvements are about producing more or better goods and services with the same inputs or producing the same quantity and quality of goods and services for less.
The common thread among all productivity improvements is not to work harder and harder, but to work smarter.
Improvements in workplace productivity take many forms, ranging from introducing a new product to the market using existing plant and staff, and reducing the time it takes to deliver goods to market, to reducing errors and streamlining processes.
The important thing in raising the productivity of an economy is to start from the firm level. High productivity within firms contributes to the overall productivity of the national economy, which, in turn, helps to create high living standards, which benefits everyone.
In this report, we use three notions of productivity:
- Labour productivity - refers to the quantity of output produced by a given quantity of labour input. It is driven by the amount of capital available to workers, such as equipment, as well as multifactor productivity.
- Multifactor productivity (MFP) - refers to the way that labour and capital are combined to produce goods and services (also called total-factor productivity). It is driven by economies of scale, technical progress and the adoption of best practice.
- Workplace productivity - refers to how firms can utilise labour and skills, innovation, technology and workplace organisation to improve the quantity and quality of their output.
This part of our report examines New Zealand's productivity performance in the past few years against these measures and how we stack up against comparable countries.
The basis for measuring the link between productivity and standard of living is Gross Domestic Product (GDP) per capita.
GDP represents a broad measure of economic activity and signals the direction of overall aggregate economic activity. GDP is calculated by the quantity, quality and variety of goods and services available for consumption. While growth in GDP reflects productivity growth, it is also affected by many factors, such as droughts, the terms of trade and external shocks, that are outside the scope of the firm.
While the well-being of individuals and communities encompasses more than just GDP per capita, including, for example, leisure time, family and community associations and the quality of the physical environment, GDP per capita is widely used to compare material living standards between countries.
Figure 2 shows GDP per capita as a proportion of the Organisation for Economic Co-operation and Development (OECD) average for New Zealand, the US, Australia and the European Union.
Figure 2: GDP per capita as a proportion of the OECD mean - selected countries. Figure 2 is provided in the PDF version
Until the mid-1970s, New Zealand enjoyed living standards in excess of the OECD average. There then followed two sustained falls in New Zealand's relative GDP per capita (with a small rebound in the early 1980s).
Since 1992, this decline has been halted, and New Zealand's income has slightly improved relative to the OECD average, but New Zealand is still some 15% below the OECD average.
Another way of looking at New Zealand's relative economic performance and position is the annual rankings put out by the OECD, which show how New Zealand compares with other OECD members (see Figure 3).
Figure 3: New Zealand's GDP per capita - ranking within OECD. Figure 3 is provided in the PDF version
Like the preceding graph of GDP per capita (Figure 2), this graph shows that New Zealand achieved high rankings in the early 1970s, but then underwent a rapid decline before stabilising at a low rank.
The reason for the widening gap between New Zealand and other OECD countries is that our economy grew at a slower rate than the OECD average during the late 1970s and until the early 1990s.
Since the early 1990s, New Zealand's rate of economic growth has generally been higher than many other countries and above the OECD average. This has arrested the decline in New Zealand's relative income as shown in Figure 4.
Nevertheless, to catch up requires a concerted effort in driving growth through as many sectors of the economy as possible, from the firm level up.
Figure 4: Comparison of New Zealand's per capita GDP growth with the OECD mean and OECD total. Figure 4 is provided in the PDF version
What drives living standards?
GDP per capita can be broken down into the sub-components of labour productivity and labour utilisation (see Figure 5).
Figure 5: Contributions of labour utilisation and labour productivity to GDP growth. Figure 5 is provided in the PDF version
Labour productivity can be analysed according to:
- the capital-labour ratio - the amount of capital available per hour worked
- MFP - the way that labour and capital are combined to produce goods and services.
Labour utilisation, on the other hand, is a function of the participation rate (the proportion of the total economy in work or looking for work), the unemployment rate (those looking for work) and average hours worked per person employed.
Growth in labour utilisation was the main source of growth in New Zealand's per capita GDP during the first half of the 1990s (see Figure 6).
Figure 6: Contributors to New Zealand's economic growth. Figure 6 is provided in the PDF version
Most of this growth in utilisation was sourced from reductions in the unemployment rate and increases in labour participation, rather than increases in average hours worked.
New Zealand currently has higher labour force utilisation rates than most of the countries shown in Figure 7.
Growth in labour productivity appeared to be providing greater impetus to growth in per capita GDP in the latter half of the 1990s. This improvement in labour productivity growth has been sustained in the six-year period to 2002 and is growing at about 1.7% per year. Even so, New Zealand's labour force productivity rate lags behind most countries shown in Figure 7.
Figure 7: Differences in income and productivity relative to US, 2002. Figure 7 is provided in the PDF version
By analysing the various factors that go into measuring GDP per capita, it is also possible to determine how much of the difference in the level of GDP per capita between New Zealand and other countries is owing to labour productivity versus labour utilisation.
Figure 7 shows New Zealand's GDP per capita is 39% lower than that of the US and that most of the gap is ascribed to lower labour productivity. New Zealand's labour utilisation rates are high by OECD standards. The labour productivity story, however, is somewhat different. New Zealand's level of labour productivity is much lower than many OECD countries, especially those with higher levels of GDP per capita.
All countries with a lower level of GDP per capita compared with New Zealand have lower labour productivity.
While MFP growth has been markedly improved throughout the 1990s, the growth in capital per worker initially declined, though it, too, has improved recently as shown in Figure 8.
Figure 8: Contributions to New Zealand's labour productivity growth. Figure 8 is provided in the PDF version
New Zealand's slow growth in capital investment, relative to the OECD, and strong growth in employment means it currently has a lower capital-to-labour ratio than many other countries. This capital shallowness may be a reason for New Zealand's lower rate of labour productivity growth. Increasing capital investment may, therefore, be a source of improved labour productivity.
MFP growth was weak in the late 1980s and early 1990s, but its growth has improved since the early 1990s. Where it can be more easily measured, MFP growth has been similar to that experienced in Australia since the early 1990s.
In comparing New Zealand's productivity performance with that of other countries, it is most useful to look at Australia, as there is comparable statistical data.
Analysis shows that Australia has experienced higher labour productivity growth across most sectors of the economy - with the exception of transport and communications, where New Zealand seems to have outperformed Australia. The biggest difference seems to be in the manufacturing sector, where New Zealand had productivity growth of only 0.8% per year from 1988 to 2002 (and -0.1% from 1993 to 2002), compared with 3.5% per year for Australia.
This would indicate that there may be some potential gains from raising productivity in the manufacturing sector to Australian levels, particularly given the large size of New Zealand's manufacturing sector as a proportion of the total economy.
Moving up the OECD ladder
For New Zealand to move back up the OECD rankings, per capita GDP growth would need to exceed the growth rate of richer economies in the OECD by a significant margin. For example, it would need to exceed the UK's per capita GDP growth by 1.9% per year over the next 10 years to rise above the UK's per capita GDP.
As we have seen, the two main drivers of increased living standards are labour utilisation, where New Zealand's performance is already high compared with the OECD, and labour productivity, where there is room for improvement.
The rest of this report addresses the specific challenge of how improvements in workplace productivity can contribute to labour productivity, notably MFP, and therefore to economic growth and New Zealand's living standards.
The link between workplace productivity and national productivity
The productivity of firms contributes to national productivity through three different channels:
- Productivity gains within existing business - OECD work suggests that productivity gains within each business account for the bulk of aggregate labour productivity growth in most OECD countries - between 50% and 80%.
- The expansion (increase in market share) of more productive businesses and contraction of less productive ones - OECD research suggests that the impact on aggregate productivity of this reallocation process varies significantly across countries and times, but it is typically small.
- Business entry and exit - The entry of newer, more productive businesses into the market and the exit of less productive businesses are both important for aggregate productivity growth. Work by the OECD suggests that the contribution of entry and exit varies across countries, but overall, about 20-40% of labour productivity growth is driven by this process. Entry and exit seem to play a particularly important role in MFP growth in newer industries like information and communications technology (ICT).
Of all three channels, improving productivity within existing firms seems to be the most important contributor to aggregate productivity. This report and the remainder of this paper will focus largely on what drivers can be employed to improve workplace productivity within firms.
The contribution of reallocation - particularly firm entry and exit - should not be overlooked.
Firms and productivity
Firms face strong incentives to invest in productivity-enhancing activities that will increase their returns. A firm's search for advantage over its competitors will lead it to try to find better ways of doing business that increase its profitability and market share.
New firms that enter the market with new technologies and techniques also create pressure on existing firms to match the incomer's productivity or go out of business.
The decision to invest in activities that increase productivity is thus central to the management of any firm. The productivity of the firm reflects how it brings together people, skills, technology, capital and other inputs to produce the goods and services that it sells.
Firms operate within the broader macroeconomic, market and regulatory environment in purchasing inputs, such as labour, capital and other resources, and transforming them into goods and services sold to customers in relationships that are themselves influenced by regulation. These relationships are shown in Figure 9.
Figure 9: The framework within which businesses operate. Figure 9 is provided in the PDF version
The business environment
A range of external factors influences the decisions that individual firms make, including direct incentives (profits/returns and the threat of takeover, merger or firm exit) and the broader institutional and regulatory environment. Factors likely to be important to productivity include macroeconomic stability, regulatory frameworks that encourage competition and policies that promote human capital accumulation and an open, connected economy.
Macroeconomic conditions can affect firm productivity, for example, through their influence on interest and exchange rates. Trade policies affect firm productivity, in part, through their direct impact on the prices of inputs. The type and level of public spending and taxation is also important for productivity.
The market environment also has an effect on the productivity of firms.
A competitive market, for example, can spur productivity improvements as firms seek to enhance their performance. Efficient and effective infrastructure investment can reduce costs (for example, in transport or communications) facing firms. Global connectedness (the flow of people, ideas, money and goods between countries) can promote new competition and new ideas and technologies.
The regulatory environment also has a profound influence on firm productivity. The rule of law and well defined and enforced property rights are essential for productive activity. A wide range of laws and regulations directly and indirectly affect firms; social norms also affect how firms do business. For example, sound contract law permits efficient trade, while competition law promotes innovation and productivity in a competitive environment. Corporate law protects shareholders and enhances the incentives for managers to perform, while intellectual property law balances the benefits of R&D with the public interest in disseminating knowledge.
Financial markets and financial regulation encourage efficient resource allocation, such as shifting funds from borrowers to lenders. Labour market regulation can affect the employment decisions of firms.
At the same time, investment in health and education plays a role by ensuring people are fit and able to work and are equipped with productive knowledge and skills.
While the broader economic, market and regulatory environment is undoubtedly important for the productivity of firms, it is beyond the mandate of the Working Group, which focuses only on the workplace itself and the measures that firms can take to improve their productivity, taking the broader environment as given.
Workplace productivity drivers
The objective of any business is to maximise returns within the constraints of the environment it operates in, and in seeking to maximise returns, firms will have incentives to do things that raise productivity, for example, by raising product quality, adding desirable features, improving product technology or boosting production efficiency. Increased productivity enables a firm to produce things for less and/or to produce more or better things at the same cost. Both effects can increase the expected returns to the firm and provide it with an advantage over its competitors.
The main ways that firms can increase their productivity are through investing in capital, achieving economies of scale, investing in innovation and technology and adopting better business practices.
The way firms respond to productivity issues will depend on the costs and benefits of the options available to them. They also need to have adequate information about the bottlenecks they face and the strategies they could use in order to make good decisions.
Capital investment involves putting financial resources into physical resources such as plant and machinery, equipment, buildings and technology that will generate productivity improvements and higher returns for the business over time. Capital complements labour, enabling workers to be more productive. For example, at the simplest level, a lever allows a person to move a greater mass than through human muscle power alone.
The more physical capital available to each worker, the more each worker can produce. Investment in new technology that embodies the latest innovations can boost productivity further - having up-to-date plant and equipment is associated with better firm performance.
Complementary investments, such as training workers and improving the organisation of work, can allow capital to be used even more efficiently.
While the capital-labour ratio across the economy reflects the cumulative investment decisions of individual firms, capital investment can be affected by a number of factors. Relative prices will play a part, for example, if capital is cheap relative to labour due to low interest rates or high wages, a firm might invest in new technology rather than skills and vice versa. Government policies and economic conditions that affect relative prices can, therefore, affect capital accumulation.
Economies of scale improve productivity as the firm engages in mass production. As the firm produces more and more goods, average cost begins to fall because of economies in production, such as using expensive machinery more intensively.
Adopting better practices across the range of business procedures can also lift productivity directly through improvements in efficiency, for example, in production processes, but also through improvements in the management and implementation of productivity-enhancing strategies such as worker training or R&D.
New or improved products and processes, whether developed in the firm, adopted and adapted from elsewhere or purchased off the shelf, allow the firm to make things better, improve efficiency and quality, make better things, improve quality and develop new products.
Continuous innovation and improvement in all aspects of the firm's management and operations are key components of lifting productivity.
We have identified seven key drivers of workplace productivity (listed below) that embody these imperatives.
Productivity improvements can be made using any of these drivers, depending on the priorities facing a particular firm. However, the drivers tend to be complementary, so that changes in one area reinforce changes in another. Research suggests that the highest productivity gains are found when complementary changes are made in the skills, innovation and workplace organisation areas. For example, a firm could upskill its workers, introduce new technology and change how it does business, and thus maximise its productivity gains.
We would note that it is not an "all or nothing" approach, and implementation of all seven drivers is not necessarily imperative to achieving workplace productivity gains. A firm that implements one of the drivers well is likely to see greater productivity gains than if it did nothing. Ideally, firms will identify which strategies will have the greatest impact when combined and will implement these together when it is feasible to do so.
These are not new concepts, and many firms have been incorporating strategies that have had notable impacts on their productivity levels. These success stories need to be shared with other firms as a means of encouraging their adoption of practices that improve workplace productivity.
Implicit within each of the drivers is the understanding that the way people are treated and managed is of fundamental importance to workplace productivity. People tend to be more motivated in the workplace if they feel appreciated and respected. Creating a positive work environment not only boosts morale but also productivity levels.
Building leadership and management capability
Leadership matters. It is the enabler of all strategies that lead to productivity and can occur at all levels of a firm. Leadership is critical for setting the culture and direction of the organisation, which is itself important for productivity. Leadership involves entrepreneurial skills that are used to identify new ideas and opportunities, a vision for the future of the firm, identifying strategies to achieve the vision and the ability to inspire others.
Successful firms enjoy both effective leaders and effective managers. Managerial capability includes the strategic ability to adapt to a changing environment that creates internal and external threats and opportunities, organisational and management skills, people and communication skills, and information acquisition and learning processes. Some of these skills are inherent. Many can be acquired.
The roles of managers include developing and motivating workers to perform at the highest levels, selecting the appropriate level and mix of skills and technology, choosing production processes that are effective and efficient and structuring the organisation to ensure that it operates productively. A key feature of management capability is the ability to deal with information - both internal and external - in a changing environment. In addition, New Zealand managers need particular skills, reflecting New Zealand's values and our reliance on global connectedness.
Creating productive workplace cultures
Workplace culture refers to the formal and informal behaviours that define the way the firm does business and can have a significant impact on productivity. The formal aspect of workplace culture includes written statements of value, such as the firm's mission statement and organisational chart. The informal aspect, which may be more important, is about how work gets done in practice, whether through written procedures or by circumventing those, how employees treat one another, how willing they are to share ideas and information and how the hierarchy allows employees to cross boundaries to get work done.
A productive workplace culture is one that involves healthy and positive relationships between individuals within the workplace, motivating people to work, generating commitment to the firm and each other and releasing their discretionary effort.
A workplace culture that fosters learning from experience encourages creativity, independence and variety, acknowledges diversity and supports staff to volunteer information and ideas. It can improve work processes and harness innovative ideas, making work more efficient and enhancing productivity in the process. On the other hand, a workplace culture that undervalues and frustrates employees can mean that workers are not giving of their best to the firm.
There are strong linkages between managerial capability and leadership, and culture and employment relationships. A productive workplace culture arises from employment relationships, management and leadership all aligned towards common goals.
Encouraging innovation and the use of technology
Most increases in productivity and in living standards come from advances in knowledge and improvements in the application of knowledge. New technology and processes can increase the productivity of labour, enabling tasks to be undertaken more efficiently. New technologies increase the relative demand for skilled labour. At the same time, skilled labour permits the adoption of new processes and technologies. Technical change can affect the demand for skills, as new technology replaces labour-intensive tasks. In turn, the type of technology adopted may be influenced by the availability of skills.
Firms that use new technologies, equipment and processes generally enjoy higher productivity, employ more skilled workers who receive higher wages and increase their market share at the expense of their competitors.
Firms will have an incentive to invest in the development of new technologies and processes when they can capture enough of the benefits of productivity improvements to make the process worthwhile. The existence of spillovers, where other firms can capture the benefits of R&D, can reduce the overall level of private investment. But even where a firm captures enough of the benefits to invest in R&D, there may be spillovers, for example, through knowledge leaks and the movement of skilled labour to other businesses. These spillovers can magnify the impact of new ideas on a wide variety of production processes and products across firms and industries and are an important source of productivity growth.
Research suggests that investment in R&D or new processes and in complementary physical and human capital not only improves current productivity, but also creates a platform from which firms build future success. Productivity increases can also come from the adoption, application and commercial exploitation of new processes and technologies developed elsewhere - this route to productivity is particularly important in small countries such as New Zealand.
Investing in people and skills
People and skills are a key driver of workplace productivity. More skilled workers can improve the output of the firm in a number of ways. They may be able to undertake tasks more quickly and with fewer mistakes; allow more skilled tasks or technologies to be undertaken; require less supervision, perform more complex tasks and carry more responsibility; and process and communicate information more effectively. Improvements in workforce skills can also increase overall productivity by raising the productivity of other firm inputs.
These effects may occur in various ways. A skilled labour force is vital to producing the new ideas, innovation and imitation that sustain growth. Higher workforce skills can support the introduction and effective use of new technologies, improve the implementation of research and development (R&D) findings, allow the firm to implement better organisational structures or assist in the assimilation of knowledge embedded in foreign capital investments. Training can increase workplace productivity, increase wages for the trained workers and lower staff turnover.
Workplace organisation is concerned with ensuring that all the activities of the firm are efficient and effective in adding value. Changes in workplace organisation that increase efficiency and effectiveness can thus contribute to productivity.
Workplace organisation involves the firm's overall strategy, its structure and hierarchy, the processes involved in decision-making and production, its employment relationships and reward structures. Effective workplace organisation occurs when all these components are reinforcing and aligned to the goals of the firm.
Research suggests that innovation and the use of new technology will have a limited impact on increasing workplace productivity if not combined with organisational change. It is, therefore, important for firms to combine strategies for effective results.
New workplace practices can include, for example, flatter management structures, increased employee involvement in decision-making, an emphasis on continuous improvement, more team work, bundling productivity-enhancing practices, the use of external networks and collaboration and a greater emphasis on performance evaluation.
Networking and collaborating
The use of networks and collaboration with other firms can reduce the costs of doing business and enhance workplace productivity. An important source of productivity is "spill-ins" of new knowledge and technology created elsewhere. Firms may rely on each other for technology transfer and learn things from each other such as manufacturing methods, modes of organisation, marketing or product design.
Not all new technology diffuses in the form of technical blueprints or new products. Networks and social capital can play a crucial role in knowledge diffusion. More interactions between firms in New Zealand and overseas could raise productivity. Networks can link individuals, groups, firms, industries, regions and countries. They create the face-to-face and workplace contact that facilitates the learning-by-doing and on-the-job training that increase productivity. Linkages between researchers and industry are also critical for the effective application of new ideas and knowledge.
The effects of training are also enhanced by networks that allow people to learn from one another, raising not just the productivity of the person being trained, but also the skill level and productivity of the group.
People-to-people links can provide access to knowledge about trade opportunities in domestic and export markets, to technological and managerial developments and to a larger pool of skilled labour. Migrants bring with them information and links to opportunities, while New Zealanders overseas and returning to New Zealand can increase knowledge of overseas markets, languages and preferences, and build business contacts that all have the potential to decrease trading costs.
Measuring what matters
An important tool in increasing workplace productivity is the ability to measure productivity and the success of the firm's strategies in enhancing its performance.
Both internal and external measures can be used. Performance measurement generally addresses the efficiency and effectiveness of a firm's actions, the impact of its action on its performance and its performance relative to its plans. Measurement practices need to be tailored to provide effective information for a business to make good productivity decisions.
Research suggests that high performance is associated with a balanced approach to performance measurement, covering finance, cost, market/quality, process, and employee and innovation indicators, with close monitoring of competitors' products through benchmarking. Benchmarking includes the identification of key processes and indicators for comparison, identifying suitable comparator firms and getting access to the comparator information.
At a macroeconomic level, it is also important to understand what matters for firm productivity. For example, is it the size of the business operation, the size of the domestic market, the characteristics of the firm or some other features that matter for business performance? The availability of good microdata across firms and good research procedures can help to identify the determinants of business performance.
Barriers to introducing productivity improving practices
In a competitive market, firms should have strong incentives to engage in practices and strategies that raise their productivity. To be worthwhile, productivity improvements should deliver net benefits to the firm. They should also offer a higher, risk-adjusted rate of return than alternative investment opportunities.
But there may be barriers that impede firms from developing or implementing productivity improvements, typically where firms do not see them as worthwhile due to their costs, risks or the inability to appropriate the benefits.
We believe that the five key barriers are likely to lie in the following areas:
High information costs
To make the best possible decisions on the practices and strategies needed to raise productivity, firms need appropriate information on what these practices might be. However, the perceived costs of obtaining information may be high relative to the potential benefits. Tacit and/or diffuse information may be particularly difficult to acquire. Information about best practice, new ideas or the latest technology may, as a result, not be readily available to firms. The difficulties and costs of obtaining timely and relevant information can mean that firms may be unaware of the productivity bottlenecks they face and/or the appropriate strategies for overcoming them.
We have identified information costs as a major barrier to improving workplace productivity, and our recommendations contain measures to address this issue.
Costs outweighing benefits
Implementing new practices and strategies to lift productivity can involve significant costs, for example, in new machinery, changing processes, training and workplace organisation. There may also be a period of lower productivity while the reorganisation is bedded in. Typically, these costs occur in the short term, while the benefits extend over a longer period. High short-term costs relative to modest long-term costs may mean productivity-enhancing propositions are not perceived to be worthwhile relative to other investment opportunities. Although our terms of reference emphasise that our recommendations should build on the existing regulatory framework, we note that regulation can have a significant effect on the costs facing a firm, with commonly cited examples being the impact of labour market and resource management regulation on investment decisions.
Resistance to change
Implementing a strategy to lift productivity may be difficult if there is a lack of "buy-in" to the strategy. For example, a perception that a productivity strategy would result in job losses could result in opposition to its adoption.
There is likely to be an element of risk involved in implementing many of the practices and strategies that could lead to improved productivity. For example, changing business practices often creates associated costs, and if the new strategy does not deliver the expected benefits, there is a risk that the effort and resources involved will have been wasted. If a firm thinks the risks of a new strategy or practice are too high compared with the potential benefits, they may decide to maintain their current practices, even if these are not delivering the maximum possible level of productivity. Risk is particularly important in R&D and may deter investment, especially in frontier research where the firm bears all the risk.
In making a decision to invest in a productivity-enhancing strategy, the firm will necessarily consider only those gains that it can capture, for example, in the price of the product it sells. However, firms can be reluctant to invest in productivity-enhancing activities if they think their competitors could capture so much of the gains that the investment is not worthwhile.
1 Krugman, P (1992), The Age of Diminished Expectations: US Economic Policy in the 1980s, MIT Press, Cambridge, page 9.
2 In this report the term “firm” refers to all entities and organisations in the economy that produce goods and services and includes businesses, non-governmental organisations, not-for-profit organisations, and government agencies.
 Please see Appendix 1 for the membership of the WPWG.
 Please see Appendix 2 for the complete terms of reference for the Working Group.
5 The Working Group was supported by an officials group, who undertook research on behalf of the Working Group, provided background information and assisted in the preparation of this report.
6 This summary of proceedings is available from http://www.dol.govt.nz/productivity/
7 Blinder , A and Baumol, W (1993), Economics: Principles and Policy, Harcourt Brace Jovanovich, San Diego, page 778.
8 To see the different pictures painted by GDP and GDP per capita, consider the case of China and New Zealand. According to International Monetary Fund (IMF) figures for 2004, China’s GPD was some US$1,761 billion, while New Zealand’s was only US$97 billion, meaning that China’s economy was about 18 times larger than New Zealand’s. But when you divide the former by over one billion people and the latter by only four million, the situation is much different: China’s GDP per capita is only US$1,343, while New Zealand’s is US$24,134, meaning that average income in New Zealand was actually 18 times larger than in China.
9 OECD (2003) “ICT and economic growth: Evidence from OECD countries, industries, and firms.” Paris, Organisation for Economic Co-operation and Development
10 Westpac Economic Overview, July 2004, page 2.
11 Ministry of Economic Development (2004), SMEs in New Zealand: Structure and Dynamics, Wellington.
12 Mills, D and Timmins, J (forthcoming), “Firm Dynamics in New Zealand: Comparative Analysis with OECD Countries”, Working Paper, Wellington, New Zealand Treasury.
13 For example, as a result of the proposed review of the ownership body’s purpose and effectiveness, in the longer term the ownership body may shift to more of a monitoring and supporting body.
14 Possible partners include the New Zealand Institute of Management, the Industry Training Federation, the GIAB, the SBAG, the Equal Employment Opportunities Trust, the Human Resources Institute of New Zealand, the National Advisory Council on the Employment of Women, Economic Development Agencies, Chambers of Commerce, Business in the Community mentors, employers’ organisations, unions, NZTE, Economic Development Association of New Zealand, and Enterprise Training providers.
15 The Project group is in the early stages of developing a strategic plan. Group members currently include: Business New Zealand, CTU, Chambers of Commerce, New Zealand Institute of Management, New Zealand Business Excellence Foundation, Independent Business Foundation, Employers and Manufacturers Association, Centre for Organisational Excellence Research, Business in the Community, Vice-Chancellors’ Committee, institutes of technology and polytechnics, Industry Training Federation, Economic Development Association of New Zealand, MED and NZTE. Other agencies will be involved as the project progresses.
16 For further examples of practices to cultivate a good work environment see Unlimited magazine 2004, “The 20 Best Places to Work Survey”, February.