Explaining the problem that is UK productivity growth

A regular feature of economic analysis in the credit crunch era has been where has the productivity growth gone? The knee-jerk reaction from establishment economists was as usual to assume that reality was wrong and their models correct and so they assumed that it would rise even faster in the future to make up the gap. For example back in June 2010 the hapless UK Office for Budget Responsibility forecast that UK productivity growth would have recovered such that wage growth would have been  be running at above 4% since 2013/14. Problem solved! Except that only in their Ivory Towers did such a solution work as below the clouds the situation changed little if at all.

To my mind it is the last 3 years or so that have really illustrated the issue as we have seen the official measure of economic growth rise on a sustained basis. On that measure the recovery has become mature and one would therefore have hoped that productivity growth would have picked up and risen noticeably. So it is especially troubling that we find ourselves wondering what happened to it right now. Even worse if this week’s Markit business surveys indicate a new trend of slowing economic growth.

The establishment could not ignore it for ever

Half way through 2014 someone at the Bank of England must have decided that enough was enough and that maybe something had changed.

Since the onset of the 2007–08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend………This shortfall is sometimes referred to as the ‘UK productivity puzzle’,

Indeed the comparison with past recessions was stark.

Even six years after the initial downturn, the level of productivity lies around 4% below its pre-crisis peak, in contrast to the level of output, which has broadly recovered to its pre-crisis level.

However the response of the establishment followed a disappointing theme as another hapless body gave us Forward Guidance on productivity.

A key judgement in the May 2014 Inflation Report is for productivity growth to pick up.

We can skip the cyclical arguments presented back then as we have cycled on so to speak but there were issues raised then partially dismissed which do apply.

Growth rates in output per hour  have been persistently weaker than GDP, reflecting strong employment growth over the past few years.

This reflects two factors in my view. Firstly ( and the Bank of England either forgot or redacted this) is that for years and indeed decades economists in the UK had wanted us to be more like Germany and keep more workers employed when a recession hits. The other has been an increase in supply of labour as more people have moved to the UK to find work. This is a politicaly charged issue and the Bank of England tip-toed around it.

In addition, it may be that the financial crisis led to an increase in labour supply in the United Kingdom.

But they have to face up to some of the consequences.

The crisis is likely to have reduced both current real incomes and expected future labour incomes, which may have encouraged more people to seek work and participate in the labour market.

In other words the labour supply curve shifted downwards as labour became cheaper and more of it was used. On that road there was less pressure to improve productivity as wages were lower. You may also note that right up to now we have been discussing weak wage growth and the establishment continues to expect a turn higher at every turn.

Output per individual

The Bank of England tried to shuffle past this issue but I think it matters a lot because there are strong hints of an issue from the GDP per head numbers.

GDP is now 7.3% above its pre-downturn peak and has been growing for 13 consecutive quarters.

We know that the population has grown however so that GDP per head is lower. If we look at the boom phase since 2013 then this has continued with GDP growth being 8.3% but per head only 5.2%.

Sectoral Issues

The Office for National Statistics has been listening to this debate and offered some views on Wednesday and today.

Administrative and support service activities has grown by the largest amount, with a growth rate of 22.3% for the 4 year period, closely followed by professional, scientific and technical activities at 19.1%.

Okay so they have been the leaders so who are the laggards?

production industries made up 3 of the 5 slowest growing industries. One production industry – electricity, gas, steam and air conditioning supply – was one of only two industries to experience negative growth across the four-year period.

I think that the recent mild winter may be a factor in the energy supply industry as it has high fixed costs but it is revealing that it is another area where production has been struggling. Shakespeare was ahead of the game with his point that troubles like this come in “battalions” rather than “single spies”.

Oh and I wonder if those calculating the numbers have overrepresented their own productivity!

However, administration and support service activities features toward the top end of both distributions,

It has had another go this morning and confined itself to the market-sector of the economy.

These estimates also suggest that lower capital service per hour worked and weaker than normal improvements in labour quality held back productivity growth in 2014.

So 2014 was a bit better but still below past experience. I was pleased that such numbers exclude matters such as imputed rent and see that as a success for my arguments and campaigns.

The Services Problem

This is the issue of how we measure this and it is twofold. Firstly there is the problem that many services are intangible and thus output measures are problematic. The other is that some gains here are from products which are in effect free but GDP measurements need a price (that is not zero). For example it is only anecdotal but a friend told me last week that Linkedin and Facebook were very useful for his business but he only used the free versions. So his productivity was in his opinion higher but our national accounts cannot measure it.

Back in 2014 an effort was made but it was vague. At least Price Waterhouse had a go.

Total revenues for the five most prominent sharing economy sectors – peer-to-peer (P2P) finance, online staffing, P2P accommodation, car sharing and music/video streaming – could rise to around £9 billion in the UK by 2025, up from just £0.5 billion today, according to new analysis by PwC.

Professor Diane Coyle has been looking into this and suggested some numbers to give us an idea of scale.

it is highly likely that more than a million people are providing services via these platforms. This is equivalent to about 3% of the workforce, although many or most of them probably do not regard this as employment in the conventional sense.

We wonder what is employment quite regularly on here of course. But it is missed also by the productivity numbers.

The debate about the UK’s productivity performance should take account of the fact that the sharing economy acts as a kind of technological progress, equivalent to increasing the amount of capital available in the economy. But this effect is not recorded in the measured statistics and productivity.

Actually as she points out it may even reduce it as things which are measured are replaced by things which are not measured.

Comment

At times of large structural change there are always going to be issues for official statistics. We have seen and indeed are seeing three large moves at one. The credit crunch blitzed some sectors and sent the whole economy into reverse. The official response has been to try to pump up sectors such as housing and banking. Meanwhile there has been enormous change in technology and the virtual world which we are often missed by the old ways of measurement.

Thus we need ch-ch-changes but the initial problem is the way that we have become wedded to GDP as a measure. Or to be more precise it would as a beginning be helpful if the UK returned to publishing more openly the three different GDP measures adding Income and Expenditure to Output. Why? Well the income figures from the US have added value but when I tried to get similar data for the UK I was told that Nigel Lawson scrapped much of it as I guess it “frightened the horses” to coin a phrase. Yet as Diane Coyle points out something seems to be happening.

In the past, the statistical discrepancy was of the order of £1bn, and more recently £2-3bn.. In 2014 it reached an extraordinary £9bn.

We can do much more to get data from the online world using so-called big data and web scraping. This will not give us a complete answer but it will be better and I believe there will be more cheer in it than the official data we get now. As the sun is out let’s have a little optimism and hope it will wean our establishment off pumping up the housing market.

Ch-ch-ch-ch-changes
Turn and face the strange
Ch-ch-changes
Oh, look out you rock ‘n’ rollers
Ch-ch-ch-ch-changes
Turn and face the strange (David Bowie)

 

 

 

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28 thoughts on “Explaining the problem that is UK productivity growth

  1. Hi Shaun
    No doubt the internet is having on-going effects. As well as P2P, people increasingly use it to do things they used to pay other people to do.
    However its likely dwarfed by the twin issues of population growth far exceeding offocial numbers and ‘self-employed/part employed’ leading to useless ‘unemployment’ stats and depression of actual wages.
    I hear economists applaud the positive effects of globilisation on raising the wages and living standards of ’emerging economies’ ( China is still included in this category). Little talk of the consequential effects on the mature economies.

    • Hi JW

      I do not necessarily disagree with that as I have also argued that the official data needs to get a lot better grip on what is happening in the growing self-employment sector. It is a travesty that they are excluded from the wages data. One might think that with all the technology available now we should be well on the way to dealing with such issues.

      The modern day equivalent of Sir Humphrey Appleby does not want us to know along the lines of his exchange with Sir Arthur about his new role.

      “How is it going at the freedom of information office?

      I can’t tell you that”

  2. If you read Robert Gordon’s book: “The Rise and Fall of American Growth” you see that the high growth days may well be behind us ( in fact around forty years behind us) and that such things as the internet have been of marginal significance, despite all the hype. Add to this the demographic issues and the possible hysteresis as a result of the recession and the productivity issue perhaps becomes far more understandable.

    I actually think the situation is worse than portrayed because it’s my belief that GDP is overstated. The situation mentioned by Diane Coyle may be valid as a matter of principle but it looks awfully like scraping the bottom of the barrel to me.

    It continually surprises me that people have a view as to how things should be; in this context of what constitutes economic normality but seem to forget the obvious point that growth does not go in straight lines and innovations do not come along at regular and predictable intervals. In the Middle Ages the economy hardly grew at all in 500 years and yet now we expect it to grow regularly at 2.5% a year.

    Perhaps it isn’t productivity that is the puzzle: it’s us.

    • Hi Bob J

      I watched a BBC 4 documentary on the sun the other week and it made me think of economic growth in the past. You see the absence of sun spot activity in the period 1640-1715 led to climate change aka less sun and heat and if we consider how big a deal agriculture was then there must have been little if any GDP. growth. So the period we call the Dark Ages may need some revision…

  3. Do I take from GDP when I shop for & cook my own dinner, rather than eat out/take away?

    Because of the advances in the washability of textiles & much deformalizing of clothing standards, added to the almost-universality of smart, programmable, washing machines, we use dry-cleaners far less often than 30 years ago.
    How should we compensate in GDP?
    The argument has become that stupid solely out of desperation.

    • Hi therrawbuzzin

      You are right and we have got into quite a mess with the way that GDP conflicts with individual welfare. When my washing machine broke down I went to the local launderette to discover it was £6 to use a machine. The new machine was soon delivered and was circa £200. So it would not take long for GDP to be lower but of course I was soon better off. It is quite a mess!

  4. Shaun,
    The old joke about communism “the State pretends to pay the workers and they pretend to work” seems apposite. Zero hour contracts may be effective payroll management but no guarantee of efficiency!

    • Hi Chris

      The bean counters seem to rule the earth these days or at least the economic bit of it. We should not ignore the fact that zero hours contracts suit some but I agree that there seem to be quite a few it does not. You are right to question how motivated they will be?

      • Hi Shaun, Productivity has always been difficult to measure in a Non-manufacturing environment (as I’ve said before – there’s often confusion between ‘efficiency’, ‘utilisation’ and ‘productivity’); but zero-hours contracts and self-employment further complicate things.

        For example. A “zero-hours” employee may be very efficient – during both hours they worked today! But their utilisation – and thus also their productivity would be terrible if they were available to work for (say) 8 hours.

        To my mind measures of national productivity are little better than a guess.

  5. Hi Shaun,

    Administrative and support service activities has grown by the largest amount, with a growth rate of 22.3% for the 4 year period, closely followed by professional, scientific and technical activities at 19.1%.

    Could it be that “March of the Makers” will be finding its way into your lexicon?

  6. Hi Shaun

    If things grew for ever trees would be in the clouds,yet our economic model demands that our economy continually grows.
    Measuring GDP is great for those who need it to be positive because as Captain Picard used to say “Make it so” and they usually do.
    The economy is not growing too many people on low wages zero hours contracts and hugely in debt…..the debt is one of the few growth areas of the economy.
    “March of the makers??”Just another propaganda phrase! Or blatant lie if you prefer.
    Employers see a dip in profits their default response is cut staff….they stupidly think they are making the company more efficient /productive ….they are not they are increasing the workload on those who remain..they then can’t cope and morale falls…if you are running for a bus and you think you can catch it you will keep running when it starts to pull away you stop running it is futile…..this is what happens to overworked disillusioned workers.
    So productivity falls then the managers wash rinse repeat the cycle.
    There is only so much juice in an orange…but our overpaid leaders in politics economics and business are completely blinkered to this fact.

    • Hi Private Fraser

      As other have already replied it was the period where productivity rose at circa 2% per annum which was abnormal. As so many establishment plans are based on it they will cling to that raft until it goes over the waterfall. i hope that they do not take us with them!

      In reality we are likely to see erratic lurches forwards as new ideas come to fruition. The most obvious is nuclear fusion power and the documentary I mentioned in an earlier reply on the sun had scientists who can replicate it but only incredibly briefly. Maybe one day….Or perhaps and maybe more likely something completely different will turn up.

  7. Some of the benefits of the sharing economy can be identified from luddite reactions of established industries. Uber has had regulatory problems caused in part by taxi industry lobbyists. LinkedIn makes money posting jobs, disrupting print media and recruitment agents.

    Both give the paying consumer better value for their money. Both reduce recorded GDP. But a consumer paying more for the same size house is not a real GDP increase, it is merely an inflationary item which has been wrongly recorded.

    • Hi ExpatInBG

      The luddite principle was no doubt around long before it got its name. As to quality issues both consumer inflation and GDP are in quite a mire on that front. A lot of it as you imply comes from ignoring housing inflation and in fact via factors like imputed rent boosting GDP.

      • Luddite usually refers to workers groups conflict with and attempts to suppress disruptive technology.

        Using cars for taxis is disruptive for rickshaw coolies. It will reduce employment opportunities for coolies. Using uber is disruptive for taxi drivers and bidding for pre-agreed fares on uber may reduce taxi revenue.

        So we have consumer interests conflicting with a cartel of workers whose business interests are being technologically disrupted. Consumers free choice of buying the best deal is in conflict workers pay. The luddite cartel workers are losing economically, but other workers are gaining work with the new technology.

        For example, I don’t think travel agency shop workers rights justify a luddite ban the disruptive online travel businesses and hurt the economic interests of the IT staff these businesses employ.

        Hence I see it as “creative destruction” and competition.

        • Well, where do you see worker protection as non-Luddite?

          Are we not slave enough?

          Your simplistic equation vis-à-vis taxi drivers-v-uber, is facile, simplistic and superficial.
          What happens when large numbers of taxi-drivers find themselves unable to make a reasonable living and move to other work?

  8. Hello Shaun,

    Certainly been some GDP growth in politicians jobs recently .

    the consumer society is dying , main stream economists are baffled , frankly they set up shop on the back of the industrial revolution – silly them a one off fossil fuel inheritance blown on a big party – yay!

    Only when that poo hits the politicians jobs exspect some to change .

    On growth – 0.00035 percent per year over 990 thousand year yeilds even then a factor of 32

    32 times bigger – how long before we need to fill a sphere of the entire solar system ?

    I’ve asked before – what will happen if we have a ZERO growth economy – make it up?

    I think thats already happening ! impute !

    62 people have half the wealth – frankly thats never going to be fair but also economically its stifling .

    who will chnage i ? not them , when only 1 or 2 own half the wealth ?

    capitlism is a snake thats eating its own tail now .

    Forbin

    • Hi Forbin

      The establishment always looks after itself. In the end that is how empires mostly collapse. As to capitalism is that what we have? It is hard to see how that goes with all the central planning by the central banks.

      • Markets tend to correct themselves, even rigged markets will eventually signal a problem. Unfortunately they do so with violent harmful market crashes. The historically high economic & debt indicators suggest that when this economic faultline does break that the ensuing economic earthquake will also exceed most historic economic corrections.

  9. The internet has greatly affected many established expenditure patterns. Personally I’ve shifted a lot of my economic activity to P2P, particularly putting most of my savings into various finance sites like Ratesetter & Zopa and tend to use Airb&b instead of hotels. I would suggest further items for the P2P list like shopping (ie ebay) which allows second hand recycling of many types of items that would in former times have led to a new shop based purchase. Its also easier to find free advice/guidance that might otherwise have generated a payment to a “professional” in the past. For example i’ve lost count of how many software packages (including for work) that i’ve learned to use either from free tuition on websites or video tutorials on youtube. Similarly many people will now be able to do their own financial research rather than pay for an advisor. Ditto for a hundred other things. However I would have thought long term the rise of ever smarter Artificial Intelligence and versatile robotics would lead to ever higher productivity in that there will be ever fewer humans needed to generate an ever increasing output?

    • Hi Redshift

      It has certainly led to plenty of changes. In my new role of odd job man for my mother after my father’s demise I found myself having to fix a shower. Way beyond my pay grade as a plumber. But when I looked online there were guides to this and they worked for the cost of a couple of washers.

      Trouble is GDP was barely boosted whereas employing a plumber….

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