Solving the productivity puzzle

10 Oct

In recent days, there has been much “I told you so” in the air. The IMF has revised its forecast for growth in the UK, predicting that the British economy will grow more than it had expected in earlier forecasts. The French chief economist at the IMF, Olivier Blanchard, had raised something of a storm in the UK earlier this year when he criticized the government’s austerity drive. Now that the UK appears to be growing more than expected, the British Chancellor George Osborne feels vindicated.

This squabbling over numbers points us to one of the problems with the austerity debate as it stands. Much of it has rested on forecasts and estimates. Projections of growth trends and government revenues three or four years down the line are notoriously difficult and yet both sides of the debate have claimed that their estimates make the most sense.  

This focus on numbers is particularly problematic in the UK as it detracts from the main issue. Newspaper headlines and public debate tend to focus on interest rate movements, the UK’s government-fuelled housing price bubble, the revision of growth forecasts that we have seen in recent days. What is not being discussed is the real mystery in the UK since the beginning of the crisis: the marked dip in productivity. Writing in the Financial Times, Chris Giles rightly points out that being so focused on the ups and downs of fiscal policy has meant we have missed the big issue of the UK’s productivity puzzle. Looking back at forecasts made in 2008, the main finding is that growth is much lower and inflation higher than was predicted.

 According to Giles, this tells us that the main problem in the UK is not a lack of demand due to austerity policies. Rather, “it suggests that something has gone wrong with the supply of goods and services in Britain” – this is what economists are calling the productivity puzzle and few have any explanations for it. Steve Nickell, a member of the UK’s Office for Budget Responsibility committee, recently admitted that whilst there are many theories about this puzzle, there is still no coherent explanation for it (FT, 10/10/13).

One idea (see Charles Goodhardt’s article here) is that if employment is held roughly constant, then falls in demand will lead to falls in output, which will then depress productivity. Logically this holds: if the same number of people are producing fewer things, then their productivity (output per worker) will fall. Compared with previous recessions in the UK (early 1980s and early 1990s), employment has held up well. We have not seen the collapse in manufacturing employment that we saw in the early 1980s, for instance, which had the effect of boosting productivity. A feature of the 2008-2013 downturn in the UK has therefore been the protection of manufacturing capacity and the avoidance of massive liquidation and bankruptcies. The result has been a fall in productivity. In other countries, like Spain, where unemployment has mushroomed, productivity has risen noticeably. Why this job-rich recession in the UK? And what about other countries like Germany, who have also managed to hold up employment? Has productivity fallen there too?

Goodhart’s is one explanation amongst many others and it may not convince everyone. After all, unemployment in the UK rose from just over 5% in 2008 to 8% in 2010. Isn’t that enough to keep up productivity levels? If not, then how much is enough? Compared to the petty points scoring of Osborne and co, though, and the fixation on forecasts and projections that has characterized both sides of the austerity debate, this is what we should really be thinking about.

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2 Responses to “Solving the productivity puzzle”

  1. David Bickerton October 10, 2013 at 12:26 pm #

    Maybe the notion of “unemployment” is too vague. Germany and the UK have protected jobs by reducing time worked, thereby avoiding redundancies.Could the UK’s “amount of work” have gone down and thereby avoided increasing unemployment statistics? Some French workers have accepted “temps partiel” to keep their jobs, but on what scale one wonders.

  2. hughsmall October 11, 2013 at 1:19 pm #

    There is an evidence-based explanation of part, possibly all, or the ‘productivity puzzle’, It comes from a study at Imperial College London. Everyone seems to be so keen to put their name to a new ‘idea’ about the cause that nobody seems interested in the only explanation backed by evidence. See the non-technical explanation at http://www.matureeconomy.org/?p=239 where there is also a link to the scholarly paper by Prof. Jonathan Haskell and others

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