Are we working smarter?

The saying “Work smarter, not harder” is of particular interest in economics.  Though the typical measure of a country’s wealth is its production divided by its population, or GDP per capita, economists spend a lot of time looking at a slight variation on this, the value of its production divided by the number of hours worked. This number is called labour productivity and if it is high then the country is working smarter than its competitors.

The G7 countries have a labour productivity of about $50-60 per hour (Table 1).  The United States produces a little more, while Japan produces a little less. Most of these countries have seen their productivity increase at around 1% per year over the past two decades, though there has been lots of year-to-year variability.  The United States  and Canada have seen faster growth.  What is at stake is more than bragging rights. The country that can maintain a high labour productivity can guarantee its prosperity and position in the world.

Canada has been concerned about its labour productivity for a long time. In particular, the productivity gap between the US and Canada leads to a wealth gap between the countries. As long as American productivity is increasing faster than Canada’s, this gap will increase. The 2022 federal budget in Canada focused on increasing research and development investment in the nation’s businesses – one of the key solutions offered for lagging productivity and a particular weakness in Canada. The budget proposes a $15 B Canada Growth Fund with the objective of attracting three times that amount in private sector investment, particularly for carbon-neutral innovations. Governments, by themselves, cannot change the risk-taking approach within the country nor the country’s attractiveness to foreign and domestic investors.

The Economist examined a similar growing gap between the United Kingdom and its European Union trading partners. The authors pointed to two other reasons, apart from investment, for not working smarter than one’s competitors: people and the spread of knowledge. The first of these has to do with the proportion of students going on to university but also with the challenge of connecting other students to relevant trades. High school education results do not seem to explain the different work cultures among the G7 countries. Since 2006, only Japan and Canada have consistently done well in mathematics and science and they have relatively poor labour productivity. The second non-investment solution has to do with how productive approaches are spread between companies. Regional inequality can hold a country back from cashing in on the innovation of bright spots in their economy.

Boosting a country’s productivity is a tricky business. Fedotenkov and Gupta found some interesting correlates of lower growth rates for productivity in the European Union. Government spending on environmental protection seemed to slow industrial growth while military spending was related to slower growth in the productivity of the services sector. These results were most noticeable in Eastern Europe where productivity is generally lower. The authors also show that lower corruption was related to greater productivity growth. One particularly worrying aspect of research and development investment is automation – which certainly counts as “working smarter”, even as it limits growth in employment. The U.S. Deptartment of Commerce found a 0.8 % increase in labour productivity in industries that increased the use of robots by 1%. This productivity effect was strongest in industries new to automation, as was the decrease in hours worked. One can only infer that, after the first introduction of robots, new jobs are created to maintain and co-ordinate these productivity investments.

It is perhaps not honest to present increasing labour productivity as a choice for working smarter over working harder. A good portion of the U.S. standard of living is produced by working longer hours than other countries. It is foolish to ignore efficiencies where they are available but perhaps living an efficient life is not the most important thing.