The productivity silence

Simon Wren-Lewis wonders why the government has been so silent about stagnating productivity. I suspect there's a simple reason for this: you don't look a gift horse in the mouth. The drop in productivity growth has saved Osborne a massive embarrassment.

To see this, consider a counterfactual. Imagine that productivity (defined as GDP divided by total employment) since the general election had grown by 2.3% per year - its average from 1977 to 2007 - and that output had followed the course it actually has*. If this had happened, employment would now be 2.48 million lower. If half of this number were counted as officially unemployed, there'd be over 3.4 million registered as unemployed. And unemployment would have topped 3.5 million last year. That would be a post-war record.

Now, this would not mean that the Tories would have admitted that austerity had been a horrible error. I suspect that, in this scenario we'd be hearing a lot more about the damage done to the UK from the euro area's weakness. And Tory lackeys would be claiming there had been an outbreak of mass laziness; as we're seeing in other contexts, some people will defend any atrocity if it is committed by their own side.  Even so, though, the productivity stagnation means that Osborne has dodged a bullet. It's been a massive stroke of luck for him.

Or has it? One could argue that austerity has contributed to the productivity slowdown in at least four ways:

 - A tougher benefit regime has forced the unemployed to look for work, thus bidding down wages.

 - Cuts in public sector jobs have reduced real wages and so encouraged some firms to substitute labour for capital.

 - Low interest rates have allowed inefficient "zombie companies" to stay in business. This has depressed productivity in the same way that keeping injured soldiers alive reduces the average health of an army.

 - Standard multiplier-accelerator effects mean that austerity depressed private sector capital formation, and the subsequent lower capital-labour ratio has reduced productivity.

I suspect that, except for the first of these, there might be something in these mechanisms. But perhaps not enough to explain all of the massive slowdown in productivity.

And, in truth, I suspect the Tories agree. Back in 2010 none of them said "Sure, austerity will depress output growth, but it will also depress productivity and so reduce unemployment." And even now none of them are claiming credit for the productivity slowdown.

But unless they do make these claims, they cannot - by the same reasoning - take credit for falling unemployment. This is because unemployment is lowish (on the official measure) and falling solely because of the productivity slowdown, and not because of strong output.

In this sense, the Tories' silence about productivity is because they are doing what decent people do - they are keeping quiet about some extraordinary good fortune.

* Is this scenario plausible? You could argue that it's not, because higher unemployment would have depressed consumer spending - though this only strengthens my point that the productivity slowdown has been a gift to the Tories. Alternatively, you might argue that productivty has been weak because output has been weak. However, the fact that productivity hasn't risen even as output has recovered renders this claim less plausible than it was a year ago. 

Comments

[ExtraBold]

So the Tories are wrong in reality and in your counterfactual.

A more impressive wrong in reality would be illustrated by being ri5ght in counterfactual.

[sjb]

"as we're seeing in other contexts, some people will defend any atrocity if it is committed by their own side."

*confused*

[Keith]

political point scoring aside, this may be good in the short term for the Tory party, although they are languishing in the opinion polls; but for society as a whole it is a mess.

As J S Mill said political economy is the science of wealth. To increase human happiness requires making more wealth. Working more to produce less is the opposite of what society is trying to achieve in its economic activity. It is failure.

[Luis Enrique]

I think there's a simple reason too. Voters care about unemployment and, for reasons that are not clear to me, GDP growth. But they neither know nor care about productivity, so neither to politicians.

I also struggle to care about it, because I just can't think why the thing that actually matters for real incomes, the path of our productive capacity, should have been permanently knocked down a peg by the crisis, so I am inclined to blame mis-measurement, or investment in the form of not yet fully utilised human capital, rather than thinking we really have a productivity problem. But these opinions are not backed by evidence.

[TickyW]

Regarding welfare reforms as the driver of low productivity and increased employment count:

Jonathan Portes argues that JSA off-flow rates and the increased job count would be more closely correlated if the welfare reforms were a driver of the rightward shift of the labour supply curve.

I am not so sure. Perhaps the so-called welfare reforms have depressed on-flow rates such that people without jobs prefer to scratch a living on zero-hours contracts, or to engage in faux self-employment, rather than submit themselves to the new regime administered by IDS's cuddly DWP.

Benefit conditionality has been tightening for some years now, as measured by JSA sanctions, but is now tightening at an accelerating and alarming rate. It is hard to believe the recent growth in low quality "employment" is unrelated to this recent tightening benefit conditionality.

More research is needed to ascertain whether there is a link, I suggest.

[Dan Kervick]

Well, it seems to me that the initial post-crisis surge in productivity was the result of the decimation of the workforce, and the extra work squeezed out of all of those terrified and subjugated people who were left behind to cover the jobs of the dearly departed. But you can't keep extracting more strokes per minute from the galley slaves indefinitely.

When politicians blame output stagnation on productivity stagnation, it sounds like they are blaming their already overworked working citizens for not working even harder and even smarter. So I'm not suprised the politicians don't want to go that route.

They also might be unwilling to shine a light on the fact that the last great technological surge in productivity resulted from technologies that were incubated by mission-oriented, state-driven investment. Mariana Mazzucato has been trumpeting the data on the role of the entrepreneurial state, but she's Labour, and the mad state-shrinkers in the US and Europe want to have no knowledge of that dimension of economic reality.

In any case, the counterfactual seems implausible to me. Why assume that a growth in productivity would have been accompanied by the same level of output?