Who profits from productivity gains?
12/20/2017
Based on an interview with Hervé Leleu and Jean-Philippe Boussemart about their article “Generation and distribution of the total factor productivity gains in US industries” by Boussemart, Leleu and Edward Mensah (Applied Economics¹, October 6, 2016).
When an organization improves its performance, who benefits? Is it shareholders, employees, customers, suppliers, or the state? It is difficult to answer this question with conventional dashboards, so, using a surplus accounting technique, Jean-Philippe Boussemart and Hervé Leleu work out a more precise method.
Biographies
Hervé Leleu is director of research at CNRS, director of LEM (Lille Économie Management, UMR 9221), and professor at the IÉSEG School of Management. His research focuses on the theory of production and productivity, with a particular interest in assessing hospital performance.
Jean-Philippe Boussemart is an economics professor at Université Lille 3, professor at the IÉSEG School of Management and a researcher at LEM. His research centers on the economics of production and productivity analysis and its applications in various fields, including the agricultural sector.
Methodology
Hervé Leleu and Jean-Philippe Boussemart compared the analysis of surplus accounting with the theory of economic production. The two approaches were first applied to 63 sectors in the US economy by scrutinizing data collected from the Bureau of Economic Analysis from 1987 to 2012. Leleu and Boussemart assessed sectors’ profitability using the net operating surplus and factoring in depreciation costs. By comparing the surplus accounting analysis with economic theory, the researchers were able to measure the total factor productivity and obtain a detailed overview of the distribution of productivity gains among the different stakeholders.
Companies typically steer their business activities by using the financial ratios and productivity indicators that correspond to management standards. “But these are, for the most part, partial indicators,” Jean-Phiippe Boussemart and Hervé Leleu note. They might measure a company’s operating income or labor productivity, for example, but fail to take all inputs and outputs into account. There is a method, however, capable of doing just that, called surplus accounting.
Devised by the French Centre d’Études des Revenus et des Coûts (CERC) in the early 1970s, surplus accounting provides a coherent framework for the systematic analysis of a company’s past and future practices, thereby enabling insights into the consequences of those practices: productive performance, business and procurement policies, salary management, investment and financing strategies, and so forth. Surplus accounting is a particularly useful method for guiding decision-makers in their strategic choices during times of fiscal stress and crisis.
Tailor made for measuring value creation and income distribution
4 major French national companies, SNCF, Gaz de France, EDF and Charbonnages de France, were the first to use surplus accounting; however, the method failed to gain traction and soon fell by the wayside. Without a precise enough information system, surplus accounting is complicated to implement. It is also heavily dependent on economics, a domain that over the years is less and less influential in corporate strategy. And yet, these issues around the use of surplus accounting are far from insurmountable, with Leleu and Boussemart’s contribution now rendering the system even more feasible for today’s companies.
How does it work? Surplus accounting breaks down variations in profit between the volume effect (changes in quantities bought and sold) and the price effect (changes in remuneration and prices). The analysis of productivity surplus is based on a common-sense idea: a company can only distribute the productivity gains it is capable of generating in the form of changes in remuneration or price advantages. Boussemart and Leleu built on this method by combining it with their approach to economic production theory, which distinguishes productivity gains linked to a firm’s enhanced technical efficiency (such as processes or management) from those related to technical progress (producing more with the same resources). This technique is of particular interest in non-market sectors where prices are not governed by supply and demand.
Who benefits from the gains in the US automobile industry?
Leleu and Boussemart applied the analysis of surplus accounting to US industries over the last 25 years. They investigated the impact of the 2008 economic crisis on productivity gains, and how these gains were distributed between customers, employees, suppliers and sub-contractors as well as equipment and capital providers (shareholders, lenders, and so on). In the case of the automobile industry, an initial evaluation showed that customers were the main beneficiaries of price advantages, with employees gaining to a much lesser extent (4% of resources compared to 94% for clients). A second analysis compared the distribution of productivity gains with the distribution across all sectors of the US economy.
The conclusions were counter-intuitive for a capitalist country: productivity gains were more beneficial for employees than shareholders and lenders. 49% of gains went to employee remuneration, 39% to profitability, and 12% to suppliers. The researchers suggest that these findings, although apparently categorical, need to be qualified. With more precise data on the distribution of wages by employee category, for example, it would be possible to specify whether the gains benefit all staff or only the best-paid employees. In overall terms, however, the study by Boussemart and Leleu shows that when productivity gains are high, they favor customers (through lower prices) and businesses (via higher profits) in particular. Employee remuneration has little correlation with productivity gains in any particular industry, and is more in line with the macro-economic cycle.
A method that can be replicated across all companies and sectors
It is clear that this kind of analysis could be extended to a range of different industries and businesses, including small and micro companies. In fact, this is exactly what Leleu and Boussemart tried to demonstrate – in collaboration with INRA Clermont Ferrand – in the context of small farms breeding Charolais beef cattle. They drew on 25 years of agricultural data to show that farmers benefit very little from productivity gains captured by downstream industries: the food sector and supermarkets.
This type of study could be used in other businesses and other sectors willing to collaborate with the researchers. In reality, however, it is no simple task, as the data is sensitive and strategic, and the results even more so. It is easy to imagine, for instance, the impact on wage negotiations or shareholder and union relations of an analysis designed to identify who (customers, shareholders or employees) benefits from the productivity gains of mutual banks. The method provides a high degree of transparency, and any company wanting to appropriate it would have an excellent strategic tool for looking at its value creation. But it is possible that the highly delicate and critical nature of the results could be an even greater obstacle to employing the system than the technical difficulties.
Business applications
The surplus accounting method advocated by Leleu and Boussemart can be used to manage a firm’s value creation more effectively than almost any other technique. The process requires careful preliminary methodological thinking together with an information system capable of distinguishing the price effect from the quantity effect (which are difficult to separate, for example, in the case of financial charges or stakeholders’ remuneration). Nevertheless, the approach provides extremely clear insight into the distribution of productivity gains.
[1] Jean-Philippe Boussemart, Hervé Leleu & Edward Mensah (2017) Generation and distribution of the total factor productivity gains in US industries, Applied Economics, 49:24, 2379-2393, DOI: 10.1080/00036846.2016.1240344
“Generation and distribution of the total factor productivity gains in US industries”, de Jean-Philippe Boussemart (CNRS, Univ. Lille, IÉSEG), Hervé Leleu (CNRS, Univ. Lille, IÉSEG), et Edward Mensah (UIC et IÉSEG), Applied Economics, 6 octobre 2016.