Why are we so unproductive – 06/17/2023 – Samuel Pessôa

Last week, the prestigious English magazine The Economist published an article in which it asked “why Latin American workers are so surprisingly unproductive”. As is often the case, they got down to business. Understanding Brazilian underdevelopment involves being able to describe and understand our lack of productivity. An hour worked in Brazil generates a fifth of an hour worked in the United States.

In the last 30 years, the academy has advanced a lot in understanding the reasons for low productivity. In the text headline, the Economist seemed to place much of the responsibility for Latin America’s productivity problems on local workers — an editorial choice that generated unease and protests.

This is in fact the first question to be answered: how much of the low productivity is embedded in the worker? And how much depends on the environment, that is, the quality of management of companies and institutions that regulate the relationships of companies with themselves and with the State, in addition to the rules that establish the functioning of the State?

The study “Human capital and development accounting: new evidence of wage gains with emigration”, published in 2018 in the excellent Quarterly Journal of Economics, tries to identify the weight of the qualities embedded in the worker for the productivity differential of each country. It does so based on the observation of wage gains that workers from other parts of the world have when they migrate to the United States.

The idea is that, when emigrating, the worker carries with him all his skills, knowledge and built-in characteristics, which, however, begin to relate to the environment of the American economy. If the salary gain from migrating is too great, the weight of the surroundings will be greater than the weight of the characteristics built into the worker. And vice versa, if the salary gain from migrating is small.

The innovation of the study was to have access to databases with the observation of many characteristics of the same worker before and after immigration. In particular, his qualification, where he worked and what income he received — all this information in the country of origin, before emigrating. Estimates suggest that worker-embedded factors explain 50% of the productivity gap. The built-in factors are the cognitive skills and socio-emotional skills that affect each person’s productivity. Both depend on quality basic schooling.

If half of low productivity is built into the worker, the other half is caused by the environment. The first item to be highlighted in the “worker environment” list is the companies’ management practices. Stanford professor Nicholas Bloom has documented over the last few decades that management practices vary greatly across different economies and that these practices are strongly correlated with measures of firm productivity. Variations in management correlate with productivity variations of more than 50%.

At first, it would be reasonable to expect that less productive companies would go out of business as a result of competition with more capable competitors, but this is not the case. There is a lot of misallocation of capital and labor that persists, and an incredible array of inefficient companies often survive in the poorest countries.

There is still no consensus on the quantitative effects on productivity of the misallocation of labor and capital in bad productive units, but, after a decade and a half of much research, it seems conservative to consider figures of the order of 25% of lost productivity. That is, if we consider a well-defined sector of industry —for example, the production of tiles for civil construction—, productivity in the US is at least 25% higher simply because capital and labor are generally allocated to more productive companies there.

Evidently, the causes listed here —poor quality of the public basic education network, poor management of companies and poor allocation of investment— result from rules, bad institutions and a bad functioning of the public sector. Themes for other columns.

The attentive reader must have noticed that lack of physical capital and sectorial specialization were not considered as relevant factors. It is because, in fact, they are not. We have also learned this over the last few decades.

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