Labour productivity: Some frequently asked questions

Malte Luebker, senior specialist of the International Labour Organization in Asia and the Pacific

How is labour productivity measured?

Labour productivity is commonly defined as GDP per person employed (or per hour worked). According to the OECD’s manual on measuring productivity, value-added based labour productivity is the single most frequently computed productivity statistic. To calculate aggregate labour productivity, the ILO uses internationally comparable data from the World Bank’s World Development Indicators (for GDP in Purchasing Power Parity, or PPP) and the ILO’s Trends Econometric Model (for total employment).

What does this simple labour productivity measure tell us?

Value-added based labour productivity is a good proxy indicator for the development stage of a country’s economy. When analysing labour markets it is often preferred over GDP per capita, which divides total GDP by the total population (which also includes children and pensioners). Labour productivity is an important reference statistic for wage setting; countries with higher productivity generally also have higher wages, as the recent ILO/ADB report on the ASEAN Community 2015 shows.

So, does calculating labour productivity tell us how hard a country’s labour force works?

No. Somewhat counterintuitively, a country’s level of labour productivity tells us very little about how hard-working and capable that country’s workers are. Aggregate measure also masks differences between sectors, industries and particular enterprises. A country’s level of labour productivity primarily depends on how efficiently labour is combined with other factors of production, such as machinery and technology, and how many of these other inputs are available per worker. So it would be wrong to conclude from the labour productivity statistics that workers from Malaysia or Singapore would make a given product faster than workers from Vietnam.

What explains the large differences in labour productivity between Vietnam and some other ASEAN countries?

To a large degree, the level of labour productivity is a function of a country’s economic structure. The recent ILO/ADB report shows that productivity in manufacturing and high-end services is much higher than in agriculture. So countries such as Cambodia, Laos and Vietnam, which still have a large share of their workforce in agriculture, can be expected to have lower overall labour productivity. By contrast, Singapore can be expected to have higher productivity levels, because its economy is dominated by manufacturing and high level services such as finance and insurance. Likewise, countries with a more workers in the informal economy, where they lack access to the latest or most advanced technology, can be expected to have lower overall labour productivity.

What can be done to increase labour productivity?

There are two main paths to productivity growth that ASEAN countries can take: The first is efficiency gains in established industries through innovation, adopting new technologies, upgrading machinery and investing into skills and vocational training. However, the largest productivity gains can be reaped from the second source, moving into higher-value added activities. So, the solution is out of agriculture and low-end services towards manufacturing and high-end services. To facilitate this, governments need to provide quality infrastructure, education and skill development, and enterprises need to be able to invest and seize opportunities.

How will the AEC affect Vietnam’s labour productivity?

The ASEAN Economic Community has significant potential to spur structural change from low- to higher-productivity sectors, according to the recent ILO/ADB report. Vietnam could be one of the main beneficiaries of this process, drawing on the country’s educated workforce with its strong foundations in literacy and numeracy skills. Continued enhancements in education and training, particularly in upper secondary and vocational institutions, would help Vietnam realise these opportunities. Greater investments in rural infrastructure would also help.

Why is this important for Vietnam?

The recent ILO/ADB report argues that productivity growth is important for long-term growth in real wages and workers’ living standards. When the average value added per worker grows, enterprises can afford to pay higher wages while remaining competitive. So by increasing labour productivity, Vietnam and other ASEAN countries can compete in export markets based on high productivity rather than on low wages. However, the link between greater productivity and higher wages is not automatic. Countries need to build solid wage-setting institutions to ensure productivity gains are passed on. Vietnam has recently taken an important step in this direction with the establishment of the National Wage Council.

* Senior specialist of the International Labour Organization in Asia and the Pacific