WRESTLING WITH THE PRODUCTIVITY PUZZLE

At the heart of economic policy is a war between a blessing and a curse.

The blessing – and it is unambiguous – is the huge improvement in the labour market since the depth of recession six years ago.

Unemployment – or at least up until recently in Scotland – has fallen sharply. The UK rate is now down to 5.5 per cent while numbers in work have hit all-time record levels.

What a slap in the face for the doom-mongers in 2009 who wailed that we were doomed to record unemployment that would take a decade – if not longer — to bring down.

In fact our labour market performance has surprised almost everyone.

Scotland shared full in this upturn until the oil price slump last winter. Investment cutbacks and lay-offs in the North Sea oil industry and the myriad of onshore service companies was a major factor in the rise in unemployment in Scotland in the first quarter of the year.

The Bank of Scotland’s labour market survey still shows continuing growth – but at a slower rate.

DR ESMOND BIRNIE, PwC’s chief economist in Scotland and Northern Ireland, says the UK economy “remains an incredible job creating machine, with employment rising by around 200,000 in the latest quarter, passing 31 million for the first time.

“The employment rate also rose to a new record high of 73.5%, while unemployment continued its fall to 5.5%, not much higher than before the financial crisis. Vacancies also rose to a record high of 745,000, indicating that it is becoming harder to fill the job openings that are arising.

“However, in Scotland, the picture isn’t quite as bright. Figures show that unemployment levels rose by 19,000 to 168,000 over the first quarter while the number of people in work dropped by 3,000 to 2,622,000 over the same period.”

Overall, the rise in the numbers in work is a blessing. But it comes with a curse.

Productivity – output per hour worked – has shown no equivalent improvement. The result is that while unemployment has fallen, wages have been very slow to improve.

And while UK employment is reckoned to have risen by around 0.7 per cent in the first quarter, preliminary GDP estimates showed output growth of only 0.3% in Q1 2015.

This, says Birnie, implies another marked fall in productivity, “which is not what we would expect at this stage in the economic cycle”.

Lower productivity undermines the competitiveness of British firms world-wide. And the lack of productivity growth undermines the ability of British firms to increase our pay.

The BBC’s ROBERT PESTON calculates that if the productivity trends of 1992 to 2007 had continued from 2008 to the end of last year, output per job would be 15% higher than it is, and output per hour would be 17% higher.

Which means, all other things being equal, each of us would be paid 15% more in total, and 17% more for each standard shift we put in. In reality, since the start of the recession, and after adjusting for taxes, benefits and inflation, we’re on average just 2% better off.

How stronger the “feel-good factor” would be if our productivity had not been so hopeless.

And there’s no sign of any early improvement. In the last three months of 2014 there was no recovery in productivity. In fact output per hour fell by 0.2% – because the number of hours worked rose 0.8% while gross value added, or the output of the economy, increased by just 0.6%.

Why has our productivity performance been so poor?

There are competing explanations…

Some blame companies lacking the confidence to invest adequately in expensive new kit, and taking on cheap labour instead to boost output.

Productivity data before the financial crisis may have been distorted by impressive-looking earnings from banks and financial firms – but which all vanished when the bubble burst.

The UK still lags in producing high skilled, innovative workers. And far from there being an improvement on the horizon, our schools in Scotland are struggling to match literacy and numeracy levels of 20 years ago. Educational attainment – and indeed the work ethic itself – has been corroded. Scotland’s education system is still in the iron grip of an entrenched teacher and local government establishment that will brook no change and which needs to be radically shaken up.

Quantitative Easing – the Bank of England’s policy of pumping money into the banking system to encourage lending to companies – has worked to preserve many inefficient businesses that would otherwise have been shaken out and their assets more productively employed elsewhere. The absence of this Schumpeterian “creative destruction” effect has been marked.

And the price of a gentler recession than would otherwise have been the case is now being paid in lower performance as we went into recovery.

Finally, the workforce has changed markedly, with  a continuing rise in relatively lower-paid over 65s in employment and more people shaken out of full time salaried employment working as self-employed out-sourced staff: cheaper for companies but not always the most efficient solution.

It’s hard to see what steps that government can take to lift our productivity performance in the short term.

Greater capital investment to improve transport and infrastructure will take years to show through. And there is little appetite for s more thoroughgoing shake-out of public sector and quango bureaucracies.

We are suffering, not from a rampant, winner-takes-all neo-liberalism but a deeply conservative mindset, one that is averse to risk and distrustful of change. That is the longer term legacy of the bubble-and-bust of 2003-2008. Average earnings and real take-home pay will improve in the immediate term.

But a real wage-boosting pick-up in productivity still looks some way off.

 

 

 

Share on FacebookTweet about this on TwitterShare on Google+Share on LinkedInPin on PinterestEmail this to someone

Be the first to write a comment.

Letters to the Editor