Why Hammond's wrong

Philip Hammond is copping flak for blaming the productivity slowdown on disabled workers. He said:

It is almost certainly the case that by increasing participation in the workforce, including far higher levels of participation by marginal groups and very high levels of engagement in the workforce, for example of disabled people – something we should be extremely proud of – may have had an impact on overall productivity measurements.

The problem with this is not that it’s offensive, but that it is mostly wrong.

The ONS estimates that since 2013 the number of disabled people in work has risen by over 20%, from 2.9m to 3.5m. This means they’ve increased from 9.7% of all workers to 10.8%.

What impact might this have had upon aggregate productivity?

Let’s say – for the sake of argument – that these additional 595,000 disabled workers are only one-third as productive as average workers.

Yes, I’m picking a number out of the air here. One the one hand, this is a very low estimate: you can work as well at a desk in a wheelchair as you can if you’ve got the use of your legs. But on the other hand, it might be that the extra disabled workers are unproductive and have been cajoled into work by the threat of benefit sanctions.

I don’t think, though that the gap can be very much greater than this. For this to be the case, one or both of two things would have to be true: that the able-bodied are massively productive; and/or that the newly-employed disabled are very unproductive. The former cannot be true because wages aren’t that high (unless you want to argue they are heavily exploited which I don’t think Hammond does). And the latter cannot be, because it would imply that employers have hired tens of thousands of people whose marginal product is below the minimum wage.

Let’s, then, run with that number just to get a Fermi estimate. If we do, then it implies that the additional disabled workers have reduced productivity by 1.2% over the last four years, or 0.3 percentage points per year.

During this time, total productivity has grown 0.35% per cent per year. That compares to average growth of 1.7% per cent per year in the 40 years. So there’s a productivity growth shortfall of 1.35 percentage points, of which increased employment of the disabled accounts for 0.3 percentage points. That’s just over one-fifth.

Which of course means that fourth-fifths is due to something else. We have countless candidates here (pdf): austerity, the legacy of the financial crisis in dampening animal spirits and investment; the slowdown in world trade which has slowed the rate of increase in the international division of labour; a slower rate of innovation, or a slower rate of diffusion of those innovations due to weak competition; and so on.

All these different explanations, though, have something in common: they attribute the productivity slowdown to either bad policy or to features of capitalism.

Which brings me to what is really wrong with Hammond’s claim. First, it reveals a lack of feel for numbers: any ball-park rough estimate attributes only a small fraction of the productivity slowdown to increased employment of the disabled. And secondly, it deflects blame for that slowdown away from where it really lies and onto our weakest and most vulnerable citizens.

The first fault is hard to forgive in a chancellor. The second is hard to forgive in a human being. And Hammond is supposed to be one of the more sensible members of this government.

Update: Jonathan Portes points out that, on average, disabled people earn 10% less  than the able-bodied. Even if we assume that the productivity gap is greater than the wage gap, and that the newly-employed disabled are less productive than the previously-employed ones, this suggests that my calculation errs on the side of being too kind to Mr Hammond. Which of course only reinforces my conclusion. 

Comments

[Carol]

On a par with Senator Graham claiming that people who work for a living at shrinking wages aren't saving money because they are spending it on wine, women and song (I suppose the women are spending it on wine, men and song, but in Graham's world, there are no women except those who can be bought).

[Dipper]

just wondering what the measure of Stephen Hawking's productivity is ...

[e]

I read PH as saying: in practice our welfare reforms/ Universal Credit look to be embedding low wage low productivity into our economy. Something to be extremely proud of ?

[aragon]

Let me commit heresy, snd suggest productivity is not that desirable when it comes services.
People need to have the time to address your problems (e.g helpdesk).

Amazon are capturing efficiency when it comes to retail, or at least the warehouse, and like Uber will employ anyone with a car for the delivery (people or parcels).

Delivery by drone would increase productivity while reducing employment as would self-driving deliveries.

As for the disabled they can be as productive as anyone else as the real gains are in machine productivity (automation).

This is where Economists get it wrong, Amazon may be good for productivity in retail, but has an undesirable effect on wages and employment.

The productivity we seek, and automation will give is in Productivity in tangable goods. Productivity in services is called under or un-employent.

Spreadsheet Phil's explanation works less well in the North where disabled participation is lower as is productivity.

The availability of cheap labour is used to substitute for investment in capital equipment (new machines). Cheap Labour results in a slump in productivity as does financialisation.

Productivity is beneficial when applied to tangible goods (more stuff), and Economists are missing the huge jump in productivity as per 'Humans Need Not Apply' on Youtube.

Which may express itself in unemployment for the unskilled.

[Blissex]

«for example of disabled people ... may have had an impact on overall productivity measurements»

Note the weasel words "for example", "may have had". Our blogger has proved that the example is correct as is possible that 0.3% of the missing "productivity" was due to employing disabled workers.

But it is also possible to look at "overall productivity measurements" being somewhat off, for example not only because of the usual confusion between GDI and GDP, but also because they may be "overestimated".

This graph of electricity consumption by UK region since 2005 by a commented on another blog perhaps is relevant:

https://uploads.disquscdn.com/images/d95944777bd2fcb316e937ca45e2207bbe35b040eb9d3910a1a6589df00a3b2a.png

Electricity consumption , which has increased for decades pretty linearly with GDP, suddenly has become "detached" from GDP, and is falling while GDP is growing, since the early 2000s in some EU countries:

This spreadsheet table 4:

http://ec.europa.eu/eurostat/statistics-explained/images/b/b5/Electricity_production%2C_consumption_and_market_overview_YB2017.xlsx

Shows a graphs with a remarkable fall in electricity consumption in some countries like UK and Italy in the 2005-2015 period. This is from Eurostats 2004-2015 for all electricity consumption:

https://imgur.com/a/KXV5O

and this is for household-only electricity consumption:

https://imgur.com/a/ckDRD

In this report on UK energy consumption there are a number of interesting graphs, fgor example these two on total energy consumed by type and sector 1970-2016:

https://imgur.com/a/lFpys
https://imgur.com/a/GWMwr

As other graphs show efficiency of energy consuming devices has improved since 1970, but also obviously something broke a few years past 2001. For example domestic and energy energy consumption started falling even before 2008.

Physical output and productivity depend a lot on energy input...

[aragon]

"obviously something broke a few years past 2001"

https://www.ofgem.gov.uk/electricity/retail-market/gb-electricity-retail-market

"Full competition was introduced into Britain’s electricity retail market in 1999. Since then domestic and non-domestic consumers have been able to shop around for their electricity supplier."

Monopoly profits extracted especially from the Transmission network.

[Blissex]

«Monopoly profits extracted especially from the Transmission network.»

That's a probably good point, and for the UK it has contributed a lot of unnecessary complication, but there was a general inversion of the line of tendency towards an increase in electricity consumption in parallel with an increase in GDP post-2001 in many countries.
I suspect something quite fundamental has broken. Some of the possibilities:

* We never got out of the 2001 recession.
* A good chunk of first-world country economies has moved to China and India.
* Various governments have aimed strategically for lower GDP and thus energy imports, disguising that with a crazy debt boom.

None of those things are good for "producitivity" or actual, instead of fake, GDP-per-median-worker.

PS: a lot of Economists look at aggregate GDP, some better ones look at GDP-per-head, not many look at GDP-per-employed-worker or GDP-per-adult-18-to-65...

[Nanikore]

Where are Hammond's idiotic conclusions coming from - HM Treasury?

[Blissex]

«* A good chunk of first-world country economies has moved to China and India.»

Well it turns out that sharp inversion of a century-long steady increase in electricity consumption in the UK (and Italy and other first-world countries) happened soon after the entry into the WTO of China, and roughly at the same time as a very visible surge in electricity consumption in China and a huge increase in net chinese exports:

http://www.euanmearns.com/wp-content/uploads/2014/06/china_energy_consumption.png
http://www.euanmearns.com/wp-content/uploads/2014/06/china_trade_balance.png

The WTO entry of china happened in December 2001, and it took only 1-3 years for the sharp change in trends to happen.

Perhaps this had a much bigger impact on reported "productivity" than a small number of disabled people joining the work force.