By Michael Baxter
A lot of economists don’t get it. Why oh why, oh why? The UK economy has been contracting of late, but employment rising.
In Q1 of this year, however, UK labour productivity, measured as output per hour, fell by 1.3 per cent, and UK unit labour costs increased by 1.4 per cent. According to stats out last week, labour productivity in the UK was no less than 15 per cent below the G7 average.
The poor level of UK productivity is not news. It has been a permanent problem for the UK for decades.
Since the start of the recession in 2007, growth of UK output per hour has trailed that of the US, and the UK’s productivity has been lagging behind Germany, France and Italy for decades. Since the recession the gap has not grown, but it is still there.
If you give UK productivity per hour a score of 100, then US productivity is 127, French productivity is 125, German 122, Italy’s only marginally higher, Canada’s is the same, and Japan’s is less.
Then there is the riddle of how the UK’s employment rises while GDP falls. Some of the explanation lies in the rise in numbers of part-time workers, but on its own this explanation is insufficient.
Another theory, put forward by the Bank of England’s Ben Broadbent, is that financial markets are broken, and capital is being allocated inefficiently, and therefore business, starved of the necessary funding, is putting cash flow before investment. So rather than investing in new equipment that requires a big up front outlay, businesses are employing more staff. Extending that argument, maybe business lacks confidence. Its lack of certainty means it is reluctant to invest, and therefore hires more staff to meet outputs targets.
Martin Wolf took a look at these problems in the ‘FT’ a few days ago. He also speculated that falling wages may encourage businesses to take on staff, even when the extra productivity generated is not that great.
But then the issue of why the UK lags behind the other major economies has been troubling economists and politicians alike for years.
You may recall that solving the UK’s poor productivity was considered to be something of a priority for the Blair government. One theory doing the rounds at the time when Tony Blair moved into number 10 was that the UK’s poor productivity was down to low investment, and that was down to the erratic nature of the UK economy, drifting from boom to bust.
It is quite interesting to look back at Gordon Brown’s claim that he had put an end to boom and bust; it now seems daft. Indeed, his preoccupation with steady growth may have hidden underlying problems. It is just that in 1998, the idea made an awful lot of sense.
Here are some theories.
Part of the reason why labour productivity has fallen in recent years is down to the smaller slice given over to the City in the UK economic cake. You may argue that much of the City’s productivity was illusionary, but the fact is that, on paper at least, it is highly productive. As it cuts jobs, overall productivity falls.
As for why the UK lags behind most of the G7, maybe we need to rewind the clock back to 1997, and ask what the problems were then.
To an extent the comparison with France and Italy was clouded by the fact that employment is much lower in these two countries. Labour laws are so tough, that employers only take on more staff if the productivity gains that result are very significant. There is also anecdotal evidence that workers, and in particular management, work longer hours than they are declaring. So they have certain targets they wish to meet, but there is a limit to how many hours they are allowed to work, so they work longer to meet those targets and lie on their time sheets.
But that does not explain Germany and the US. German unemployment is lower than in the UK. Output per worker is higher. It doesn’t explain higher productivity in the US, where labour laws are of course much looser.
Well, in 1998 McKinsey came up with a theory. So, quoting the ‘Economist’ quoting McKinsey, ”[the problem partly] lies in the effect of regulations governing product markets and land use on competitive behaviour, investment and pricing.” The ‘Economist’ piece continued: “Although British food retailers are world leaders, says McKinsey, they would do better still if planning restrictions did not stop the building of stores on the scale of America and France. Hoteliers are hobbled, say the consultants, because not only are almost half of the country's hotels more than 100 years old, compared with 3 per cent in America and 14 per cent in France, but they are constrained by planning restrictions. And until recently telecoms regulators kept call charges too high relative to line rentals, discouraging greater use of telecoms.”
And if that sounds like déjà vu, maybe there is a good reason. After all, David Cameron’s call for less dither, and to make it easier to build, is very much targeting this same issue.
It just goes to show that 15 years later, we have completed the longest ever run of economic growth, but we are in the midst of the worse downturn ever, and yet peek beneath the surface and some of the challenges haven’t changed at all.
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