Writing in The Independent a week ago former Bank of England Monetary Policy Committee member David (also known as Danny) Blanchflower considered what believed to be the ‘The productivity puzzle’.
Blanchflower believes that despite collectively working more hours and unemployment falling, output divided by the number of workers has risen by about 0.5% per year; an increase being insufficiently impressive as to be problematic.
Blanchflower explains that contained within the Office for Budget Responsibility’s analysis of last December’s Autumn Statement there is an assumption that productivity will rise steadily to reach 2% by 2019.
Indeed, he shows, the OBR does acknowledge that their forecast of the “long-awaited return of sustained productivity growth” is at the heart of their assumptions.
Additionally we are aware that the Autumn Statement is based on the assumption, borne out by analysis conducted by the OBR that real earnings will increase over the next five years (0.8% in 2015, 1.4 % in 2016 and 1.8% in the period 2017-19).
It is pretty normal that the more productive we become the more we earn.
The problem that Blanchflower has identified is that austerity severely undermines earnings growth which has correspondence with productivity.
This is borne out by ONS data for recent years and, as he stresses, “productivity remains about 2 per cent below its level prior to the economic downturn in 2008 […]an astonishing 16 per cent lower than had productivity maintained its pre-downturn trend.”
One of the strange characteristics of the recession experienced in the UK is that despite the predictions of some of the doomsayers, employment has remained relatively healthy
Thankfully, job losses were not as dramatic as had been experienced previously.
However, the price that people have paid is stagnant earnings.
Interestingly what the ONS data that Blanchflower has analysed shows is whilst productivity dropped dramatically in the immediate aftermath of the ‘credit crunch’, it started to recover in 2009 when quantitative easing was implemented by the Bank of England and under then chancellor Alistair Darling.
After the general election we were subject to sweeping austerity measures which, as the ONS data shows, had the effect of causing productivity to fall consistently from the middle of 2011 to the end of 2013 when, George Osborne decided to implement policies intended to stimulate the economy.
Accordingly, what worries Blanchflower most is that given we are promised more austerity after the next election, productivity will once again dip which is hardly conducive our long-term recovery.
Blanchflower also uses Chartered Institute of Personnel and Development (CIPD) data which suggests that wage growth will remain modest at between 1-2%.
Apparently, according to the CIPD, many companies that they had been in contact with believe that they can recruit without any problem so why should they feel the need to increase wages.
Undoubtedly particular sectors and different regions have their own challenges.
A recent economic survey by Greater Birmingham Chambers of Commerce (GBCC) for the last quarter of 2014 suggests that 74% of firms that responded had experienced difficulties over the previous three months recruiting workers with the right sort of skills.
The announcement by Jaguar Land Rover (JLR) to recruit an additional 1300 workers to produce the new F-PACE sports utility vehicle (SUV) at the Solihull plant which goes on sale next year is welcome news.
These are jobs that are likely to add to the individual’s skill-set and, of course, produce products that will be bought be customers in this country potentially in preference to imports.
Even better the F-PACE is likely to sell well outside the UK which is exactly what is required.
The sort of jobs being offered by JLR will positively contribute to improving productivity.
Unfortunately, however, the sort of jobs that JLR has announced are the exception rather than the rule and too many new jobs are low-paid and do not require skill.
When there is a surfeit of unskilled labour to carry out such jobs – as it’s the case at the moment – it is all-too-easy to simply employ people on rates of pay that are poor and to avoid on investing in training them to do things more effectively or efficiently.
Investment in new technology or equipment is delayed on the justification that it is better to wait until times get better.
More cynically, short-termism by investors means that such investment is seen as either unnecessary or avoidable.
For this reason we have a productivity dilemma which, given that we are told we are likely to experience further austerity, is unlikely to be fixed anytime soon.
If you want to see how things are done differently and how productivity is consistently improved you can take your pick but in the latest ONS data available GDP per worker showed that in 2013 we are 19 percentage points below the average for the rest of the G7 and lag behind Canada, Germany, France, Italy and the US.
Blanchflower is right to be concerned about our inability to improve productivity and we need to start learning urgent lessons before we fall even further behind our major competitors.
