On the perils of public sector productivity

Another week and the coalition government give me more material to blog about. And I thought this blogging thing would be difficult!

Sunday’s Observer had a piece about Oliver Letwin’s desire to tackle 20 years of falling public sector productivity. A spokesman for the Office for National Statistics (ONS) said he did not know where Letwin had sourced his figures. Despite my best efforts I can’t shed any light on this either, but wherever they are from, I would be doubtful of their veracity because measuring public sector productivity is perilous.

Setting aside the more technical and arcane econometric aspects of productivity measurement most people understand productivity as the amount of output produced from a given set of inputs. The more you can squeeze out of those inputs the higher your productivity.

But consider the case of car manufacturing. What if a firm decides to employ fewer but more skilled workers? They are using fewer inputs but may be able to produce the same output, therefore increasing productivity. And what about Rolls Royce versus Vauxhall where the former produces fewer cars but at a higher price? Who is more productive?

In the private sector where the inputs and outputs are traded in the market we can use the value of inputs and outputs to estimate productivity. In the public sector it’s more difficult. How do you measure the productivity of the fire service? What’s their output? The number of fires they put out or the number of fires they prevent? The first is potentially unresponsive to a change in inputs and the later is unmeasurable. More troublesome is even when we can agree on what the output of the public sector is, how do we value it when the outputs, and usually the inputs, are not traded in the market.

Until 1998, the value of output produced by the public sector was set equal to the value of the inputs. Effectively, productivity was static by construction. Since 2005’s Atkinson review there has been an attempt to measure the outputs directly by calculating a total output measure for a given department or public service, weighting different outputs according to their unit-costs (a proxy of how much administration costs are involved in producing each type of output). This cost-weighted output measure is then divided by the total costs. This is a much better measure of productivity but still suffers from the problem of accurately pricing outputs.

During the Labour government, public sector productivity fell as inputs exceeded outputs. However, this was the result of an investment in public services designed to improve outcomes (e.g. reduced waiting times for NHS treatment). A more appropriate measure of this is the effectiveness – total outcomes divided by total inputs. This is almost impossible to measure, but this is frequently what the public and policy-makers are concerned with over pure economic efficiency.

What’s my point? Economists can’t really measure public sector productivity and the public tend to view “productivity” about effectiveness or value for money. What do they get for the money spent on public services?

So will the government’s plans increase productivity? In the short-term, probably. Freezing pay and recruitment and imposing cuts (to staff and costs) will probably not reduce outputs by much, thereby increasing productivity. Effectiveness will probably fall (e.g. waiting lists increase), however. In the medium to long-term, staff will become overworked and relatively underpaid, and this will lead to the best staff leaving (usually the most productive), which will reduce productivity or halt productivity growth. The government’s strategy is unlikely to improve productivity in the long-run.

How can the government improve public sector productivity in the long-run then? Well that’s a post for another day.

2 comments for “On the perils of public sector productivity

  1. 23 August, 2011 at 08:00

    Try the measure of dividing annual income by the number of employees. If the Dave and George plan is good employeees will reduce and taxes as income will rise. Bingo increased productivity.
    If tax income doesn’t increase and the cost of downsizing the CS in initially high and savings on pensions take the usual 10 years to show effect?
    I can’t go on; its too depressing.

  2. 22 August, 2011 at 13:17

    Wait, I cannot fathom it being so starihgtofrawrd.

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