Thatcherism & productivity

Simon Wren Lewis, citing John Van Reenen and Nick Crafts, says:

The Thatcher era saw the implementation of supply side reforms that ended and then reversed the relative decline of UK productivity.

That word "relative" is doing some work. Looking solely at UK data on GDP per hour worked, taken from the Bank of England, productivity growth has been slower since Thatcher than it was before.Between 1985 and 2007, productivity grew by 2.1% a year; this time period is as flattering as can be for the pro-Thatcher argument. But in the previous 22 years, it grew by 2.9% a year.

Productivity, then, has grown more slowly in the era of quiescent unions and "neoliberalism" than it did in the social democratic-corporate era.

However, if we look at the UK's performance relative to other major nations, things are kinder to the Thatcher reforms. OECD data shows that UK productivity grew 2.3% a year between 1985 and 2007. That's faster than the average for G7 countries, of 2%. By contrast, in the previous 15 year (the data begin in 1970), UK productivity grew slightly more slowly than the G7 average, by just under 2.7% against just over 2.7%.

What's going on here? There are, I reckon, two competing stories. The pro-Thatcher one is something like this:

After 1973, global growth slowed markedly. This depressed productivity through (at least) two channels. One is that Verdoorn's law - the tendency for strong output growth to generate productivity growth thanks to increasing returns - depressed such growth. The other is that a more sclerotic economy generated increased class conflict as bargaining became more like a zero-sum game. The productivity growth of the 60s, therefore, could not be repeated. We needed a new economic model, and Thatcher provided one. Had we not had the Thatcher revolution, our productivity growth would have been even worse. The fact that productivity growth fell so much in Japan, Germany, Italy and France shows the sort of slowdown we'd have had, had we not had Thatcherism.

The more critical version is something like:

The fact that productivity grew quickly in the 60s shows that strong trades unions are quite compatible with a thriving economy.Productivity slowed globally after the 1970s because macroeconomic policy globally abandoned Keynesian-style reflation in favour of policies which gave us serious recessions in the 80s and 90s and these (via Verdoorn's law) reduced productivity growth. Productivity growth isn't merely a microeconomic phenomenon, but also the product of macro policies. And bad macro policies depressed it.If the UK - and better still world - had had decent macro policies, we could have achieved good productivity growth without the huge social costs involved in bashing the unions.

As a Marxist rather than a Keynesian, I have no dog in this fight.My point is just that if you want to claim that Thatcher did improve the UK's productivity performance, you need to argue for a particular type of counterfactual.

Comments

[Luis Enrique]

What role did capital accumulation play, do you think, especially in post-war years? GDP per hour worked could rise not because production was getting any more efficient (TFP growth), but because we were building more factories etc. Could faster productivity growth pre-1970 be explained, partially, by a process of continuing industrialisation?

In language of neoclassical model, we could have been undergoing transitional dynamics, accumulating capital, and then at some point reaching our (dynamic) steady-state, in which case you'd expect faster labour productivity growth in early years.

Craft's figures seem to say we closed gap on competitors TFP-wise rather faster than output-per-worker rise in post-Thatcher years, but I'm not sure I'm interpreting them correctly.

[Keith]

I suspect the Tory "reforms" are irrelevant. My theory would be that the relative improvement is a case of reversion to the norm. Many of the traditional industries and their firms inherited by post war Governments were uncompetitive on the world market once rapid recovery got going elsewhere and the decline and collapse of these industries and firms improved the relative performance. Helping to destroy some of these firms by over valuing the currency no doubt helped the work along in 1979 to 1983. Creating space for new firms to grow.

The decline of pre 1914 industry was followed by new growth after the departure from Gold in 1931. The new industry in the midlands and south in that period also was high productivity; radio and radar replacing coal and iron. Also a period of high unemployment before rearmament. Lots of similarities between the thirties and eighties.

[Rich C]

What about the "shooting the last batsman" critique of Thatcher era productivity? In contrast to Germany and Japan (at least) the UK saw a very rapid contraction of employment, and especially manufacturing employment, in the early 1980s. Presumably, firms that went under during this contraction had lower productivity than those who survived, but since "survior bias" isn't really taken into account in calculating productivity, the effect would be to boost the measure of aggregate productivity, even as overall welfare is declining.

[Keith]

Rich C is right. By selecting any metric you can get any result you like!!

On the other hand if you are investing in the stock market you can only buy shares in firms that have not gone bust. If the firms that have not collapsed have high productivity growth the shares must reflect that. The investor is not concerned with overall welfare. This is Capitalism after all.

[Luis Enrique]

of course, even if capital accumulation does explain much of this, one might still ask why capital accumulation apparently proceeded happily under unions and did not respond positively when Thatcher weakened them.

[Metatone]

@Luis Enrique - it has been suggested that there is evidence that unions cause capital investment, because they make fiddling with workforce variables (pay, conditions, number of employees) more expensive. Now it's another leap to capital accumulation, but I think it's plausible enough to be worth exploring.

[investing]

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[Tammly]

'Presumably, firms that went under during this contraction had lower productivity than those who survived, but since "survior bias" isn't really taken into account in calculating productivity, the effect would be to boost the measure of aggregate productivity'

Ah this is the nub. We are rather assuming in this piece that we have a 'truthful' measure of the concept of 'productivity'?

In my own opinion, we havn't.