The Prime Minister recently announced that his administration’s economic policy focus will “pivot” from stabilisation to driving economic growth through boosting labour productivity. Productivity is a widely misunderstood concept that warrants clarification, if we are to better understand what policy efforts might improve it.
Productivity neither “drives” nor “causes” economic growth: rising productivity is economic growth. They are two ways of describing the same phenomenon. The average productivity of the labour force is the country’s total productive output divided by the amount of people in the labour force. Increasing the average (i.e, productivity) is, therefore, the same as increasing the total (i.e., GDP).
Nonetheless, determining how to improve an economy’s productivity begins with understanding what determines an individual worker’s productivity. Imagine a scenario that describes the circumstances of the lowest productivity possible: a worker, untrained in any skill, lacking even the simplest tools, standing in a barren field, tasked with growing a crop. Lacking any knowledge of which crop might be appropriate for the soil or climatic conditions in which he finds himself, he will choose one arbitrarily. He will then plant seedlings using his bare hands, wait for them to grow, with the expectation that he might at some point reap the fruit of his labour. No matter how diligently he works, little will come of this effort.
Given this understanding of low productivity—no tools, no knowledge, no technology—how would we then raise productivity?
One way would be to provide this (literally) poor worker with “capital,” in the form of either physical or human capital. The physical type consists of tools and equipment. A machete, a fork, a shovel, clippers, and a water tank and hose to provide irrigation, would all support the worker to do more (plant more, nurture better, and reap more) in a given time.
Human capital comprises the learned skills and knowledge possessed embedded in the worker. In this example that might include knowledge of the crop most suitable for the type of soil and climate, the ideal depth and spacing for the seedlings, the right amount of irrigation, and when to plant and reap. This type of capital may seem to have a similarity to physical tools, but is similar to them in its role in the economy: both are producible—the amount increases according to investment—and both raise the productivity of the worker. As documented in CAPRI’s 2024 report Growthless Jobs, it is the paucity of human capital—the lack of learned skills and knowledge--that has limited Jamaica’s economic growth and potential.
Once our worker is capitalised—he has knowledge, and he has tools—we can further increase his productivity by improving the technology of production. In this context, “technology” refers not to fancy gadgetry but to how production is organised. For example, instead of manually irrigating the crop by pointing a garden hose at each plant sequentially, he can instead puncture holes in the hose and string it along rows of crop. In this way, he can water a larger field in the same amount of time. The “technology” of the irrigation system thereby raises the worker’s productivity.
Productivity can be raised further, even for a well-capitalised and technologically advanced enterprise, by changing the rules and permissible practices within which production takes place, that is, by changing the “institutional” environment. In the case of our simplified example, it makes a difference to our worker’s productivity whether he has the means to dispose of any surplus produce and get something he desires in exchange, i.e., access to a market of consumers, and if his produce is safe from praedial larceny, and his accumulated wealth secure from seizure. If the country’s institutions provide for freedom of commerce, protection from arbitrary loss, and political and economic stability that allows for long term planning, he will be at peak productivity. (A key element of the institutional environment is fiscal management. To review how well Jamaica manages that, see CAPRI’s Budget Breakdown 2024: An Analysis of the Government's Proposed Revenue and Expenditure, May 2024.)
Workers are most productive when their efforts are leveraged by lots of capital—both the physical and human kind—using the most productive technology, and in a free, secure, stable, and predictable environment.
All of this has an implication for public policy efforts to raise productivity and thereby to promote economic growth. The institutional environment is the foundation of investment decisions – the decision to invest in more capital (factories and skills) within the existing state of production technology and the decision to innovate towards acquiring more productive technology.
The larger takeaway is that the way to raise productivity, and thus for a country to grow to a higher standard of living, is not to pay attention to the individual efforts of the labourers at all but rather to focus on the circumstances under which labour operates. Establishing an institutional environment that fosters innovation and capital investment (human and physical) will raise productivity. Therefore, the economic strategy to pursue economic growth is not so much a “pivot”, but to continue to reduce the public debt, continue to build up the country’s foreign exchange reserves, continue to improve the utility and road infrastructure, and to continue efforts to obstruct the operation of criminal gangs.