Rapid tech take-up could kickstart productivity

Frontier firms show it’s not just about working hard, it’s working smart, and making the most of technology.

Saul Eslake believes ‘we will have to wait three or four years to have an accurate picture of productivity during the pandemic’. Picture: Richard Jupe

Economist Dan Andrews has a timely reminder for companies anxious about whether staff working from home are putting in the hours.

“Productivity is about inspiration as opposed to perspiration,” he says. “The typical definition of labour productivity is output per hours worked, so if we can get our tasks done in fewer hours at home that is a productivity boost.”

Andrews, an Australian who has worked as a ­senior economist at the OECD for more than a decade, has researched productivity extensively, looking particularly at why Australia and other OECD member countries have suffered such poor productivity growth since the early 2000s — despite big advances in technology.

For an economist, COVID-19 is the “ultimate ­exogenous shock” to the economy but the upside is that it has hastened technology take-up by companies. The question now is whether that tech explosion will break the poor productivity pattern of recent years — even if workers are away from the office.

Economist Dan Andrews

Andrews says it could go either way and references a recent OECD report, “Productivity gains from teleworking in the post COVID-19 era: How can public policies make it happen?” which argues the impact of teleworking is “ambiguous”.

He tells The Deal: “The bottom line is I don’t know and I don’t think anyone knows. It will depend on whether the shock is temporary or permanent but against that tremendous uncertainty there may be a silver lining (because firms have been forced to invest in more technology).”

Andrews cites Microsoft chief executive Satya Nadella, who said in April that, “we have seen two years’ worth of digital transformation in two months” to make the point that there has been an explosion in the adoption of technology.

Says Andrews: “One of the explanations for the productivity slowdown that we have seen in OECD countries is stalling technology diffusion.

“The diffusion of leading technology developed by the frontier firms such as Google and Facebook has broken down. The growth model in the 1990s was that the frontier firms produced the new ideas and then over time those ideas would spill over to other firms and this would lift all boats.

“That’s essentially the growth story for much of the 20th century (the idea that) the laggard companies catch up. And then around 2003 it broke down and a lot of firms stopped being able to replicate the technology of the frontier firms. Now with COVID a lot of companies have been forced to lift their game and bring forward digital transformation.”

But Andrews warns the ability of firms to use technology to increase productivity depends on the quality of management and appropriate restructuring of a firm’s workforce. Technology does not automatically convert to higher productivity.

There are two reasons why the laggard companies have not had the technology dividend we might have expected in the past 15 years or so.

“One explanation was that frontier firms have such an edge in management and other intangible ­attributes that the laggards can never catch them,” Andrews says.

“The other is that the incentives for laggards to adopt new ideas has declined because, for example, they don’t face competition because there are fewer new entrants. The low productivity incumbents can linger longer without adopting technology.”

Saul Eslake, one of Australia’s leading analysts of productivity, cites Andrews’ OECD work, first published in 2015 with colleagues Chiara Criscuolo and Peter ­N. Gal and updated last year in a discussion paper published by the London School of Economics as “The Best versus the Rest: divergence across firms during the global productivity slowdown”, as central to understanding the causes of the low productivity growth of recent years.

Eslake, who runs his own consultancy and is a vice-chancellor’s fellow at the University of Tasmania, says we will have to wait three or four years to have an accurate picture of productivity during the pandemic. Even then it will be hard to prove why productivity has increased or dropped.

“We have had five years or so of very poor productivity growth leading up to the pandemic and we don’t really have good data on what has happened since,” Eslake says.

He notes the workplace focus on working in teams and collaboration has been disrupted by WFH. The question is whether any loss of productivity will be compensated for by less time wasted in meetings and commutes.

Eslake says some firms will increase productivity by cutting staff.

“It’s pretty clear that big firms in particular are using this period to reimagine how they do jobs and one of the reasons employment won’t return to pre-pandemic levels even in firms that survive is because businesses will just conclude that they never really needed that much staff,” he says.

Eslake warns that government assistance and low interest rates could perpetuate “zombie” firms, holding capital that should be freed up for more productive investment.

He says that in general we should not support policies that inhibit the movement of capital to more efficient firms in the same industry, or that inhibit the movement from unproductive sectors to more productive ones. Protectionist policies that favour more national self-sufficiency can also lead to less productive sectors and firms.

Eslake’s own earnings have been hit in the pandemic: and he says “A bit more than half of my revenues came from the conference circuit and that has completely dried up.

“I suspect it will never go back to what it once was because business has discovered Zoom and Teams. I am doing presentations online but the market won’t pay (as much) even though from my point of view there is no less work involved.”