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Related Expertise:Public Sector

How Governments Can Boost Labor Productivity

Productivity growth in advanced economies has slowed dramatically since the global financial crisis. As a result, productivity—often cited as the most important source of long-term economic growth—has become a concern of policymakers. BCG has developed a framework based on real-life examples and actionable advice to support governments in increasing labor productivity.

The economist and New York Times columnist Paul Krugman has observed that “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.” This is why it is so worrisome that, according to the International Monetary Fund, productivity growth in advanced economies has slowed from an annual average of 1.0% in the decade preceding the global crisis to a mere 0.3% a year today.

Policymakers understand the implications of low productivity growth for individual wage growth, corporate competitiveness and ability to invest, and growth in government revenue. An unfortunate consequence of reduced growth in government revenue is fewer funds for productivity-enhancing expenditures in areas such as infrastructure, education, and R&D. In emerging economies, lower revenue growth may even create a vicious cycle, making it extremely difficult to maintain, much less raise, living standards.

Most existing frameworks for tackling the productivity challenge have two shortcomings: First, they tend to be abstract and theoretical, failing to inspire or enable policymakers to take concrete actions. Second, they often consider only one angle, be it key productivity determinants, company-level optimization, or public policy.

By contrast, BCG’s framework is both holistic and actionable. It is holistic in that it encompasses productivity at the individual, company, and national levels. It is actionable because it offers virtually ready-to-use advice based on the experience of governments with which BCG has worked.

The BCG Productivity Framework Outlines 10 Drivers of Labor Productivity

Taking into account the dynamics of the individual, company, and national levels of productivity, BCG identifies ten critical drivers of productivity growth:

Individual Level

Market forces typically provide individuals with incentives to acquire knowledge and skills that allow them to increase their productivity. This is because higher productivity theoretically translates into higher pay. However, market imperfections create a need for governments to intervene to support employees in developing their skill sets.

Company Level

Labor productivity is mainly a function of available capital, the labor force, technical efficiency, and how companies utilize all these in day-to-day operations. BCG’s framework identifies four drivers on which economic development, labor, employment, and social policy should focus to improve corporate productivity: capital, knowledge and know-how, workforce structure, and technology and R&D.

National Level

At the national level, governments pursue policies that influence the productivity of both individuals and companies by using five levers: infrastructure, universal education, labor regulations, economic diversity, and international business and trade relations.

Targeting Individual Drivers in Productivity Initiatives

All ten drivers are intertwined, and interventions focused on them can and should be designed to reinforce one another. In considering each of these ten drivers individually, we note in several instances how they intersect.

Individual Level

Skill sets

The increasing pace of technological change renders many skills obsolete quite quickly while constantly creating demand for new ones. Individuals who have completed their formal educations—particularly experienced workers 40 years old or older—often struggle to improve their skills when demand in the market changes.

Possible policy interventions include providing tertiary education, vocational training and apprenticeship programs, training portals, and certification schemes. SkillsFuture Singapore, a statutory board under the Ministry of Education, is introducing training programs that help reskill workers for significant career shifts. Workforce Singapore, a statutory board under the Ministry of Manpower, offers coaching for workers undertaking such transitions.

Company Level

Capital

Access to capital is key to boosting investment—particularly productivity-enhancing investment. Especially among small and medium-size enterprises (SMEs), lack of access to capital can stymie efforts to raise productivity even when productivity-boosting technologies are available.

Possible policy interventions include measures such as investment grants, specialized funds and subsidized loans, and private-public partnerships. The Singapore Economic Development Board, for example, awards productivity grants to both multinationals and large local enterprises. The grants encourage firm-level efforts to enhance the environmental and operational sustainability of existing industrial operations in the country.

Knowledge and Know-how

Knowledge and know-how are important both for workers—who need to know how to perform tasks better and faster—and for managers, who need to understand how to manage employees more effectively. Raising productivity-enhancing knowledge and know-how among employees involves helping them master existing techniques, learn new ones, and make use of experience accumulated over the years of a company’s existence. For managers, it entails engaging and motivating employees.

Policy interventions in this area can include creating or supporting training programs and centers, supporting organizations and specialized portals for teaching and sharing of best practices, and disseminating information on markets and leading industries. Singapore’s Productivity Management Programme teaches middle managers about implementing, managing, measuring, and sustaining a productivity improvement drive. The program itself covers 90% of the costs for SMEs and 70% for other companies.

Workforce Structure

The productivity of a group of employees will also depend on the mix of personal profiles and skills. There is increasing evidence that diversity of ages, background, and gender leads to broader collective skill sets and increased productivity.

Possible policy interventions include promoting voluntary "diversity charters" for companies. In the late 2000s, Germany and Austria, along with other major European countries, introduced diversity charters drafted by the government in coordination with private sector representatives. By signing the charter, companies commit to upholding values of inclusion and diversity with regard to gender, nationality and ethnic origin, age, and sexual orientation and identity.

Technology and R&D

Increased use of automation technologies, analytics, and artificial intelligence raises the output of enterprises, although its impact on labor input differs from sector to sector.

Possible policy interventions include providing public funds to specialized private research centers that will attract private funds and invest in basic or applied research. Such centers can launch direct incentives to create new research centers, invest in the adoption and implementation of new technologies, or institute tax cuts and tax exemptions. Australia’s R&D Tax Incentive, for example, provides a 45% refundable tax offset for companies that have annual turnover below $20 million, and a 40% nonrefundable tax offset for all other eligible entities.

National Level

Infrastructure

Broad access to high-quality infrastructure optimizes the deployment of both labor and capital and leads to higher productivity. This includes infrastructure such as roads, railways, harbors, and airports but also digital infrastructure such as Internet accessibility and mobile network coverage. To best exploit the latter, employees need high levels of knowledge and know-how.

Government interventions may focus on new infrastructure projects as well as on infrastructure maintenance. In the 1990s and 2000s, China invested heavily in high-speed railways, automotive expressways, bridges, ports, and commercial power supply to accelerate labor mobility and stimulate economic growth. Because infrastructure investments call for large capital outlays, tools such as development banks and private-public partnerships may help optimize the effects of this productivity lever.

Universal Education

Education offers individuals the skills they need to enter the labor market but should also prepare them for lifelong learning, which is key to maintaining individual productivity in the 21st-century economy. For a country’s overall productivity to benefit, education must be universally available.

In developing countries, governments should focus on ensuring the universality and basic quality of education. In developed nations, educational systems should concentrate on keeping curricula up to date and educating students about the need for lifelong learning. This driver is directly connected with the skill sets and workforce structure drivers.

Labor Regulations

Labor regulations should support easy access to the labor market and prohibit discrimination against groups such as women or minorities, since limiting access to the official labor market is detrimental to productivity and fosters the underground economy. Labor regulations should also provide companies a certain degree of flexibility to adjust their workforces and wages in response to cyclical fluctuations and productivity changes.

Saudi Arabia has been lifting some restrictions that, while not technically labor regulations, have been artificially limiting labor productivity. Allowing women to drive cars (beginning June 2018) will likely boost productivity by bringing more Saudi women into the workforce. Although this change will likely eliminate the need for many of the 1.4 million household drivers whose job, essentially, is to drive women to work, these low-productivity jobs drive down labor productivity as a whole.

Labor regulations have a direct impact on other drivers of productivity, specifically skill sets, knowledge and know-how, and diversity in the workforce structure. For example, labor protections that are either too strong or too weak may reduce incentives to improve the quality of the labor force.

Economic Diversity

Economic diversity has two components: diversification of industries and of the positions on the supply chain held by various sectors. An economy that is diversified in both respects will typically be more robust and exhibit higher productivity.

Potential policy interventions may focus on creating incentives for investment in new target sectors, or on the deregulation of subsectors to facilitate the modularization of sectors in need of disruption. For example, Singapore’s Content Development Assistance program aims to improve the global competitiveness of the country’s telecommunications and media industries by providing grants for developing scripts, game designs, manuscripts, or storyboards, and for supporting platforms for the discovery, distribution, and utilization of promising talent and technologies.

International Business and Trade Relations

International business and trade relations determine the potential for productivity growth through the use of foreign expertise. This typically happens through foreign investment, joint ventures or licensing, or the importation of managerial techniques.

Foreign investment brings capital, which is particularly important for developing nations. The less developed the country, the more it stands to benefit from importing productivity-enhancing technologies and managerial techniques.

International business and trade relations also include regulations pertaining to product markets that, through measured use and withdrawal of protectionism, may fuel innovation domestically. This driver is directly related to the availability of capital, technology, and knowledge and know-how: Healthy levels of foreign direct investment can help enable all of these drivers.

Enabling Success: Setting Up the Governance Structure

Given the number and the breadth of the identified drivers, productivity programs require a high level of coordination in order to achieve the desired impact. This means that no matter how thoughtful or well-designed a productivity improvement strategy might be, governance is essential for successful implementation.

This imperative becomes even more apparent if we consider that some measures—in infrastructure and education, for example—will require many years to take effect, which means that ensuring continuity is paramount.

Creating successful governance structures and policies is complicated significantly by the number of stakeholders involved, many of whom will have conflicting goals. Key stakeholders include government institutions, employees’ organizations, the business community, politicians, social activists/NGOs, and the media. The conflicting goals of these stakeholders create challenges that include:

  • Opposition based on short-term social costs associated with the displacement and dismissal of employees
  • Inherent fear of automation among some employees, unions, and segments of the public
  • The short-term costs incurred by private sector companies from the implementation of program measures
  • Short-term political horizons, or political change, threatening momentum or continuity when benefits are not immediately felt.

To tackle these potential challenges, governments often create a national productivity organization (NPO) to govern all productivity-related efforts. An NPO touching upon the purviews of different ministries, however, presents a challenge to traditional governance models in the public sector.

The resulting tensions or even paralysis can be overcome only if productivity is placed high on the government’s agenda—and the associated efforts are monitored closely. Furthermore, in BCG’s experience, productivity programs that have achieved significant success have relied on a governing body at the national level.

How Governments Can Boost Labor Productivity

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