Productivity slumps

Today’s labour market figures are worrying in one important respect - they suggest that productivity growth has collapsed.
In Q4, total hours worked actually increased by 0.3% (table 7 of this pdf), thanks to an increase in full-time employment. However, the ONS tells us that, even if we ignore the effect of the snow, GDP was “flattish” in Q4. This means that productivity - GDP per hour worked - fell in Q4.
More importantly, it means that in the five years to Q4, productivity rose by just 1.6%. That’s not 1.6% per year, but over five years - 0.3% per year. This is the slowest rate since records began in 1976.
Now, you might reply that we’d expect productivity to be weak when output falls, so this is just a normal procyclical downturn.
You’d be wrong.
For one thing, the productivity slowdown predates the recession. In the five years to 2008Q1, productivity rose by 8.1%. That compares to 13.9% in the five years to 1979Q2, when bolshy unions were supposedly destroying British competitiveness.
And for another thing, this recovery has not seen the procyclical upswing in productivity we had in previous upturns. In the five quarters since GDP troughed, productivity has risen by just 1%. In the first five quarters of the last three recessions, it grew at an average rate of 5.6%.
This is consistent with the idea that the UK has suffered some kind of adverse supply shock. This might be a the same dearth of technological opportunities that has led to low investment. Or it might be a lack of business finance. In preventing new firms from starting up or expanding, this retards productivity growth; such growth, remember, comes more from entry and exist rather than from incumbent firms upping their game. Or it might be something else.
It is also consistent with the possibility that there’s a mismatch between supply and demand patterns, so the firms that have hoarded labour aren’t seeing the increased demand that will allow them to increase labour utilization, whilst the firms that are enjoying higher demand have to take on more staff.
In aggregate, there are two ways this could play out.
One possibility is that we will, eventually, get a normal procyclical rise in productivity, as firms either eventually sack the labour they’ve been hoarding or get an increase in demand that allows them to increase labour utilization.
The other possibility is that this sluggish growth will continue, and that firms will take on workers as demand increases.
The first possibility implies that this will be a jobless recovery. The second implies that labour costs will rise and so inflation will rise.
Whichever it is, it is not good news. We either get bad news about jobs, or about inflation.

Comments

[Luis Enrique]

it's all because nobody is buying CDs any more.

... interesting rise of online retail over the last 5 years has done nowt for measured productivity. It has surely done something to real productivity. I don't trust the data. Or is it Baumol's disease and a services economy?

ah - I blame the rise of organic food and free range chickens, retarding output / worker ratios. Damn you Riverford! **shakes fist**

[Tim Worstall]

"Or it might be something else."

sure, the deranged levels of paperwork and red tape that the EU imposes upon hte economy.

Ah, but people will say, other countries manage to have growing productivity even with this.

Yes, I would say: but we're the only people who take it seriously, for a start. And secondly, we're not used to it, meaning that this imposition is indeed coming as an adverse shock.....

[chris]

@ Luis - if productivity is being understated, then either GDP is higher than reported or employment lower. Which? And why?
@ Tim - why did the red tape become more onerous after about the mid-00s? Any particular regulation to blame?
I ask simply because there are so many questions here that aren't being asked, but should be.

[Luis Enrique]

Chris,

GDP is obviously dodgy - all those downloaded CDs and finally the Guardian has persuaded people to move into non-market production.

'course it's possible to pick holes in GDP data, but the question is of course why did it start to matter in 2004. Is that when Primark opened and everyone started buying t-shirts that cost £1? I dunno.

it's the Great Stagnation innit ... although have your read interfluidity on that?

[Nick]

Surely the reason is the increased share of the public sector as a proportion of the overall economy.

The nature of a lot of the public sector and the way that it is managed ensures that it sees much lower productivity growth than the private sector.

Over five years the addition of low productivity growth activity to the overall economy reduces total productivity growth.

[Glenn]

Hmm I don't think public sector employment increased very markedly in the last 5 years. The increase was really in the early noughties.

One explanation may lie in the increase in labour demand, and tight labour market in many areas and sectors led to employers being less choosy in their hiring practices.