The big problem that is little productivity growth in the western world

It was only yesterday that we found ourselves looking at an apparent productivity miracle in China, or perhaps if official statistics are true! Yet in the western world we find ourselves wondering what has happened to it? I recall the Bank of England publishing a paper looking at an 18% productivity gap. Some care ( as ever ) is needed with their work as it assumed that we could carry on as we did before the credit crunch whereas some industries like banking were clearly misleading us. But the truth is that it does look like there has been a change even if we discount the projection of past performance forwards.

In some places it exists

This caught my eye as I was doing some research on the subject.

Welcome to 2017! The future is here. Workers at Fukoku Mutual Life Insurance are being replaced with an artificial intelligence system. ( @izzyroberts )

So we can see changes in service industries as well where 34 employees are to be replaced by an AI ( artificial intelligence) system . This of course will boost productivity especially the labour measure but may end up with us worrying about unemployment. The more conventional view is the use of robots and automation in the manufacturing and industrial sector.

The apparent problem

This has been highlighted by John Fernald of the US Federal Reserve and here is a summary from the Wall Street Journal.

His research found that the information technology boom of the 1990s helped businesses become more efficient until about 2003. But that boost began fading by 2004, and now the benefits of tech innovation flow more to leisure activities, such as social media and smartphone apps……..Total factor productivity grew an average 1.8% a year from the end of 1995 through 2004, but growth has slowed since then to an average 0.5% annually.

This type of view changes things and is a critique of the Bank of England projecting the past forwards work but the immediate impact is to move productivity falls from a consequence of the credit crunch to one of the causes of it. Also as we look forwards it has its own consequence which is something we have discussed many times here.

He puts the new normal for U.S. economic growth at 1.5% to 1.75% a year—roughly half the typical range of 3% to 4% from the end of World War II to 2005.

Again care is needed as a clear challenge here is how we measure productivity. There is clearly a large amount of technical innovation going on right now but it has shifted into areas that do not feature in conventional productivity analysis. These days most of the gains come for leisure rather than business.

Today’s UK data

Firstly let is have some good news which is that we have some productivity growth.

UK labour productivity, as measured by output per hour, is estimated to have grown by 0.4% from Quarter 2 (Apr to June) 2016 to Quarter 3 (July to Sept) 2016;

Although it has been driven not by what might be expected.

Productivity grew in the services industries but not in the manufacturing industries; services productivity is estimated to have grown by 0.3% on the previous quarter, while manufacturing productivity is estimated to have fallen by 0.2% on the previous quarter.

So heartening in itself although an old problem may be resurfacing as you see this from an accompanying release.

Tower Hamlets (79% above the UK average) was the local area with the highest labour productivity in 2015

Welcome back the City of London, let us hope the gains are genuine and not just an illusion this time around.

As to the overall issue the UK ONS seems as keen as the Bank of England to try to assume that the credit crunch was some form of blip.

Productivity in Quarter 3 2016, as measured by output per hour, stood 15.5% below its pre-downturn trend – or, equivalently, productivity would have been 18.4% higher had it followed this pre-downturn trend.

This is what is called the “productivity puzzle” but a bit like the Bitcoin price moves over the past 24 hours or so we can again consider the genius of the simple “It’s Gone” from South Park on the banking crisis. For those who have not followed it the bull market surge in Bitcoin was followed by a plunge in an hour which put it in a bear market, then a rebound then another drop. Of course I need to add so far to that……

Does the type of innovation in these alternative electronic currencies show up anywhere in the productivity data?

Andy Haldane

The Bank of England’s Chief Economist had some thoughts on productivity yesterday. Of course he has his own issues as he confessed to past mistakes – although not yet about his “Sledgehammer” which will hit many people in 2017 – yet again. If we measured his own productivity it would be very negative but let us move onto his analysis.

He blamed decades of education policies – that had left numeracy levels in England only just above Albania – for holding back improvements in productivity. He said the lack of numeracy skills was stark in comparison with other countries, which placed more emphasis on workers having more than a basic level of maths……….He added that the UK’s lack of numeracy skills across more than half the working population was a key reason for its lack of productivity growth since the financial crisis.

This raises a wry smile with me because I feature fairly regularly in the business live section of the Guardian and the original contact point was my pointing out that an article was innumerate. Perhaps it made a change from people pointing our spelling errors! In broad terms I welcome this issue although we need to decide in this technological era what level of numeracy people actually need. I remember reading a report from the 1860s where we were unhappy with our education system though and we did not do too bad back then.

Sadly the Bank of England has not provided a speech but we do have his past views which in their bi-modal, bifurcated day are a sort of tale of two cities. From 2014.

The upper peak of the labour market is clearly thriving in both employment and wage terms. The mid-tier is languishing in both employment and real wage terms. And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole. This has been a jobs-rich, but pay-poor, recovery.

Productivity as well? It is hard to avoid that thought.

A feature of our times

I will simply ask you to look at the time period here and will leave you to draw your own conclusions.

 

Comment

There is much to consider here. But it is clear to me that the problem for us in what we like to call the first world began well before the credit crunch. Secondly as so often we find ourselves with data simply unfit for the task. We can look at that several ways of which the technical one is that if we do not bother to put the earnings of the self-employed into the average earnings numbers then we are likely to be clueless about their productivity. More hopefully we need to include the technological changes in the area of leisure in some form as other wise we are likely in the future to get another “surprise” when a big move happens in the business world as a result.

Meanwhile if we return to Andy Haldane the media have failed to point out that he has been directly responsible for a fall in productivity. I do not mean the reduction in annual Bank of England meetings from 12 to 8 as that was the “improvement” driven by its dedicated follower of fashion Mark Carney. What I mean is the way that zombie companies have been propped up by his Sledgehammer QE and even worse corporate bond QE which also props up foreign companies. This contributes to situations like this having a particular dark side.

Despite having fallen by almost 10% since the crisis, real wages among the top 10% are still over 20% higher than in 1997. But wages for the bottom 20% have fallen by almost 20% since 2007 and are essentially back to where they were in 1997.

What about the 0.1%?

 

 

 

 

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34 thoughts on “The big problem that is little productivity growth in the western world

  1. Hello Shaun

    “This of course will boost productivity especially the labour measure but may end up with us worrying about unemployment.”

    the trend is for some one to have an idea , use robots to make and sell the idea/product and have no staff to pay , except their own wages or shares

    but then who’s going to have the money to by the product ?

    productivity for the single man /woman is poor for services , how else can it be? a better pair of scissors for a hair dresser ? a plumber ? well his job will also eventually be replaced by a robot

    we can see soon we will have mass un employment for lorry drivers

    we all cannot be Uber drivers either – and thats leads onto taxes

    if most of us rely on jobs to pay taxes and we not employed or earn too little to pay taxes

    who does ?

    the rich ? well the top 0.1% cant be touched anymore until we change the laws on tax havens and shares, etc, etc . they will not like that at all

    all the money then goes to the top and then the system collapses ……

    Like the Roman empire* did – be quite a few good parties to goto in the meantime 🙂

    Forbin

    * theres a number of reasons for the collapse , one was trade and the rich not paying any taxes , another was posited as being an energy shortage – they ran out of wood (!) ( didn’t conquer the Germanic tribes )

    • Hi Forbin

      Wasn’t it the original Mr.Ford of Model T fame who said something like pay the workers well so they can afford to buy our cars? With so much of the current “pie” going to the top 0.1% there are genuine questions as to where demand is going to come from going forwards. Let us hope we can find a better way forwards.

  2. Hi Shaun

    Great article as always.

    As always the boe is behind the curve:

    http://uk.reuters.com/article/uk-britain-boe-haldane-idUKKCN0T20HD20151113

    They won’t see the problem until it happens and then it will be unexpected 😉

    Automation and AI’s do make me fearful for future employment. Again the government won’t see it until its too late, We need to get a citizens income setup to counter the job losses, and its interesting to see more countries doing trials. I’d love to hear your views on CI. Maybe a future article 🙂

  3. Hi Shaun,

    There are 3 trends that are now entrenched. Firstly, as you point out wage growth has for the majority stagnated. Job security for most workers is now very poor. I’m not exaggerating to say don’t think there is anyone in my family who hasn’t been made redundant or had to re-apply for the job they are already doing in the last 5 years. This has become a normal part of working life. The other trend is the huge cost and transient nature of housing which impacts on community cohesion.
    The life we had become used to has finished in many ways and whilst you could argue the boomers had it too good at the cost of future generations, it’s still a bitter pill to swallow, and the political ramifications are now evident as people react to life getting tougher.
    To stop ourselves being too gloomy we can always content ourselves with cheap consumer electronics and prestige new cars – on finance of course.

    • Hi Zummerzetman

      Yes working life has changed for the many but of course not for those in the establishment who continue in their Westminster and City bubbles.The other way in which working life is changed is that some find that they get no pay rises for a sustained period which will be difficult in 2017 as inflation rises. Official numbers for 2% wage growth could of course be some on 4% and some on 0%.

      The gig economy can be nice but not for those who need security.

  4. On Andy Haldane, did you hear the BBC interview snippets this morning. When he was asked why he had completely screwed up his post-Brexit forecasts for the economy, he basically said “well, so did everyone else”.
    This means one of two things:
    1. He thinks it all right to be part of a general incompetence; and
    2. We can make him redundant, as we can get the same (rubbish) elsewhere.

    • Didn’t the ratings agencies use the same excuse for failing to predict the credit crunch, essentially “no one else spotted it either”? This seems to be acceptable in the financial and business world these days.

  5. Hi Shaun
    Personally I think its very important that young people have as high a level of numeracy as possible. The day we become dependant on our ‘machines’ is the day the human race is lost. I still have a good recall of Forster’s ‘When the machine Stops’, an amazingly predictive short novel from 1909, a little before the invention of the internet and instant messaging. Of course it also gives all power to the elite who retain the ability to ‘do sums’. Time was that being able to do arithmetic was a valued skill, in those days mathematics was for the more brainy types. Now ‘doing the math’ means being able to add up, and a lot reach for their ‘computers’ to do this.
    What better way to control the masses than dumb down and reassign meanings to words. Sure someone wrote about this…
    As well as self-employed productivity not being measured neither is the ability of ordinary people to ‘do’ themselves what they used to pay to have others do, especially in the services areas. This is where the western world’s missing measurement of productivity growth has gone. We are increasingly a DIY society and the ONS can’t measure it.

    • I am not sure you are correct in asserting that, ” the ability of ordinary people to ‘do’ themselves what they used to pay to have others do, especially in the services areas”.
      I remember rewiring my house with the aid of a DIY electrics book from W H Smiths. Also I had no need of a plumber to fit a bathroom, central heating etc. (When I bought the house, in the 80’s, it had an outside toilet and a cold water tap in the kitchen).
      The Health & Safety industry would , of course, have a fit nowadays at such an ability. Especially, as I had no pieces of paper to “prove” my ability.

      Preaps the H & S industry explains some or the productivity gap, with all their “risk assessments” and notices!

      I particularly like the H & S notice in the office warning about the dangers of the perfectly ordinary stairs.

      P.S. I lived in the house for several years afterwards and had no problems with my improvements.

      Regard
      Nick

      • H&S has indeed morphed from something which (absolutely rightly) tried to reduce accidents at work (mainly manual workers in mining, construction and farming, where the accident records were terrible) to a sort of infantilism. When my company passed some magic number of staff, everyone had to have an assessment of their sitting position. The microwaves have a sign saying “do not put hands in while on” (I am not sure how this is even possible). The rules are administered by a group of people who
        1. Chose H&S as a profession and
        2. Simply argue that it is a health and safety requirement to do whatever they feel is right.
        I now insist on seeing the exact clause in the regulations before I accept any increase in H&S rules.

        • “I now insist on seeing the exact clause in the regulations before I accept any increase in H&S rules.”

          I am in the same position but find when I am referred to the “relevant” legislation it is so wide and vague as to allow any interpretation one wishes to impose and H & S attitude is “we’re the experts so we decide what the legislation is really saying”.

          I do regularly win on the alleged “further training” my staff apparently require though.

      • Hi Nick
        I certainly didn’t mean to minimise your practical DIY activities. I was widening the ‘old fashioned’ use of the term to include all those activities we now do with our computers/phones etc. From banking , insurance to flights/holidays to tax declarations, accounts, etc etc etc.

  6. I’m reading this blog because someone who is good with numbers suggested it as interesting to me (as someone who is NOT good with numbers). I’m good at other things, such as words. I’ve found it enjoyable and sometimes confusing but mostly illuminating. And humorous. Thank you. Melandra

  7. I think Haldane’s view on numeracy is misplaced.

    He is talking about a world which is being replaced. “Numeracy” in the context in which he uses it utilises a finite set as its basis and it is precisely activities based on this that are being replaced by AI/robotics. Numeracy may be desirable in itself and it may be helpful at the margins as far as productivity is concerned but I would doubt it is that important in the context in which he uses it.

    The key to productivity is innovation and this implies creative thinking in a fundamental way and this is just the aspect that is not covered in our educational system and it may be that it cannot be covered in principle. It is also precisely that part of human activity that cannot be replaced by machines.

    • the phase space for “innovation” is not as large as some would like to think – physical laws are not mutable ( except perhaps in a black hole ) for example.

      As for “creative thinking ” one is reminded that the Banks ran into the limitations on that one…. which is why we’re in the mess we’re in .

      And I’ll bet someone mentions imagination – again its phase space is limited by its inputs , admittedly that space is quite large and apparently from what I’ve seen, filled with nonsense ( albeit sometimes entertaining)

      and as for “It is also precisely that part of human activity that cannot be replaced by machines.”

      My industry is working on that one ……

      the “matrix” is coming and people will voluntary join it as they can be who ever ,what ever, when ever , they want to be -regardless of reality outside it .

      Forbin

      • Forbin

        “and as for “It is also precisely that part of human activity that cannot be replaced by machines.”

        My industry is working on that one ……”

        Ever heard of Godel’s Law (look it up)? Many mathematicians (Roger Scruton comes to mind) believe that Godel’s Law means that computers cannot ultimately replace humans as a matter of principle ( principle not capacity). How smart they (the computers) are is irrelevant. Is this right? I don’t know but many believe it is.

        • yes I heard of the law, many believe that once AI gets going we will not be able to keep up and that to a point the theorem maybe be true .

          However the AI systems may not need be perfect in that there comes a point in which we cannot tell AI from human by responses.

          many sci-fi novels and movies have been written/made about the possibility that AI becomes good enough – or in many cases not good enough as we always find a weak spot (!) .

          however flawed the computer/AI / robots are it will probably not matter much to the majority of us , say , have to be Steve Hawkins to out think one ( or for that matter get a job – automation may replace all but the MENSA members – and the top ones at that) .

          then what ? we become “pets” ? ( arthur c clark once wrote a sci-fi novel about that I believe)

          interesting times if we can get there

          Forbin

  8. It is the supreme irony that a man who gets his numbers wrong extols the virtues of numeracy. While not disagreeing with BobJ that numeracy (at least, the basic type that Haldane is talking about) may not affect productivity, it does seem a shame that a large part of the population cannot do basic maths. It wasn’t very hard to learn times tables/percentages/fractions etc at school and it does enable you in later life to distinguish between, say, different offers on products or the effect of compound interest rates or to realise what a rip-off “commission free” currency exchanges are.

    • “It is the supreme irony that a man who gets his numbers wrong extols the virtues of numeracy. ”

      true and what I find vexing is that MSM just doesnt pull pull these people up on such statements

      most vexing – however I must calm down , after all its all a show and we have front seats

      pull up a comfy sofa and grab some popcorn – the show is getting good 🙂

      Forbin

  9. Great blog as always, Shaun. I was struck by the sentence you quoted from the Guardian: “He blamed decades of education policies – that had left numeracy levels in England only just above Albania – for holding back improvements in productivity.” The implication is that numeracy is solely a function of the education system and does not depend on the wider society. It made me think of American J.D. Vance’s book, Hillbilly Elegy, where he described how as a child his education was held back not so much by the schools he went to or the curriculum he was taught, but by the dysfunctional family he was raised in, a mother with drug problems and a rapidly changing sequence of stepdads. In the final chapter of Robert J. Gordon’s The Rise and Fall of American Growth he begins with a quote from other researchers saying: “The American family is changing…For the first time America’s children almost certainly will not be as well educated…as their parents.” Is UK society faced by the same kind of problems?
    Happy Orthodox Christmas! (Today is Christmas Eve by the Julian calendar.)

    • Hi Andrew
      Rather than dysfunctional families, I think a majority in the US believe the problem lies with the public school system and the level of teaching. Its likely a similar situation is quite a long way down the road in the UK.

  10. Shaun,
    Low productivity is no surprise when the benefits are not shared equitably with the workforce as highlighted by your chart. Add in zero hour contracts / self employed operatives who have no incentive as managers have in essence opted for contracting out their workforce to employment agencies to lower costs.
    Bill Mitchell’s proposal for a local job guarantee at minimum wage seems more workable to motivate people rather than income/ tax credits schemes to alleviate poverty.

    • Hi Chris

      In another form this is a crisis for what was called “trickle down economics” isn’t it? Whilst some gains do indeed trickle down these days the problem is that those at the top have got greedy and have blocked up the system to benefit themselves with what are sometimes obscene rewards.

      • Those at the to have been blocking the system for their own benefit since the late 70’s that I know of and probably many decades or centuries before.

  11. Hi Shaun,

    Productivity measurement is fraught with pitfalls. Recruiting the best science PHDs to write scalping software makes more money per employee, yet it’s economic contribution is a zero sum game. Humanity would benefit more were these people employed in beneficial scientic research. Likewise, if some speculator buys up a drug firm and increases drug prices -> the same number of employees are creating more income. But the patients face higher medicine costs.

    In regards to software improvements, they are hard to measure. I can go onto google earth, view the street of a hotel on booking.com, see grafiti & tattoo parlours and book my family into an alternate and more savoury location. There is a benefit in comfort and happiness which does not show in productivity statistics. Yet there is a measureable change in commissions and loss of many travel agency jobs. On the other hand, booking.com, airbnb and a multitude of new travel businesses have created many well paid technical jobs.

    The press has made a meal of 34 job losses, yet fail to mention the jobs involved in creating and supporting the AI system. We don’t cry about the lack of rickshaw pulling jobs and the lack of child labour cleaning inside cotton mill equipment.

    • Hi ExpatInBG

      You are right to point out that there are gains as well as losses and that there is a danger of moving towards the Luddite zone. In many ways I am an optimist as we see around us so much advancement and innovation. The problem these days has increasingly become how the rewards are shared which as in some sectors output is pay or a near version of it there is a trap for productivity.

      The example with drugs is one I whole heartedly agree with as it brings us back to one of my themes which is how we use inflation in measures of output.

  12. Hi Shaun,

    For me, there are two main issues with productivity growth, to add to some of those already mentioned above. The first is the never ending search for growth, with finite resources. It has to be recognised that growth will slow as those resources are used more and more, there are multiple studies showing that we’re already consuming resource at the rate that multiple earths couldn’t keep up. Perhaps mining asteroids or moving planets will help, but both of those are a long way off!

    The second is the measurement. If efficiency gains are found, then that surely is a boost to productivity. But if any of the savings are passed to the consumer instead of taken as profit, then according to the way we measure it, that productivity gain is lost.
    Similarly, you’ve got the well used example of everyone mowing the neighbour’s lawn and being paid a fiver for it, rather than mowing your own. Productivity as measured goes through the roof, yet we’ve accomplished no more.

    Oh, and “Perhaps it made a change from people pointing our spelling errors!” I’m hoping that error was meant to be ironic?!

    I’m enjoying the blog more with every passing year – keep doing what you’re doing!

    • Hi Joe and thanks

      You point about growth and finite resources is well made. Perhaps we should switch to defining productivity in terms of resources used rather than just labour as it would help on that front.

      As to the spelling error it was subliminal I think as I recall wondering if I should spell Guardian as Grauniad! So if there was any irony it was from my sub-conscious mind. On a different tack I am grateful for the spell-checker as when you check your own work you tend to “read” what you believe you wrote rather than what you actually did.

    • There are productivity solutions. If I insulate my house properly, I can massively the fuel needed to keep warm. (-15 here today). The new perovskite solar panels promise big cost reductions. Tesla has laid down the gauntlet on domestic electric storage, and I hope to see others competing there. Some healthy competition could revolutionize this market and hopefully benefit consumers.

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