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?
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.
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%?