BRITAIN’S DRUDGERY ECONOMY: Economists Puzzled by Falling Productivity

Various commentators have noticed a peculiar feature of the ‘recovery’ from the credit crunch from 2008. Corporate profit rates have climbed back to pre-crisis peaks and businesses are sitting on top of huge piles of cash, but investment and employment have not recovered by similar degrees. Today, James Heartfield provides a guest post assessing a further oddity of the recovery, at least as it appears in a recent report on the UK: falling productivity. This, Heartfield argues, has to do with a persistent feature of the modern economy as a whole: whether growing or slowing, the economy is dominated by extensive growth of employment, not intensive growth of productivity. The waste can be measured not just in terms of unemployment increases and wage stagnation, but in the failure to invest in labor-saving technology and innovation. Soaring profits go hand-in-hand with low wages and low productivity.

James Heartfield is speaking at the 3Million Stories conference, Vanderbilt University, March 8, on the ups and downs of the creative economy. His webpage is www.heartfield.org, and he thanks Ian Abley and James Woudhuysen.

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This Wednesday the Institute of Fiscal Studies with the Nuffield Foundation and Oxford Economics published their pre-budget analysis of the British economy (The IFS Green Budget, February 2013). It seems that the country’s public finances are unlikely to improve because of what these braniacs call the ‘productivity puzzle’. What is puzzling them? ‘Labour productivity has fallen substantially’ after four years of recession. Yes, that is right, productivity is actually falling. Output per hour worked has fallen, and, there are more people in work than before the recession. This, they say, is very different from past recessions. Then, productivity did dip, before rising above pre-recession levels. And the numbers in work fell, so that overall productivity rose.

Why is it not happening this time? The most obvious reason is that there has been no shake-out in industry. While some public sector jobs have been lost, overall there has been no great employers’ offensive against labour. Indeed the IFS cite Bank of England statistics to show that there might even be some ‘labour hoarding’, that is employers hanging onto workers without making full use of their time. The threat of mass lay-offs was widely anticipated, as many expected the Con-Dem (Conservative-Liberal Democrat) coalition to replay the Margaret Thatcher attack on industry manning levels. But as Martyn Perks and Richard Sedley noted at the outset of the recession in 2007, today’s managers have neither the experience nor the stomach for taking on the workforces (Winners and Losers in a Troubled Economy, cScape, 2008, p 15). And so far the Cameron government has echoed the reluctance of business leaders to restructure. The non-appearance of the expected offensive is one reason that Britain’s far left is in disarray, as their hoped for fightback failed to find a target.

The second reason for the falling productivity is more predictable, but much more problematic, too. Investment by businesses has dropped by nearly a quarter since 2007, and even more in construction, distribution and manufacturing. A Department of Business Innovation and Skills  survey showed that two thirds of firms expected to make no new capital investment in the last quarter of 2012. (The IFS Green Budget, p 78)

In the moderate, but prolonged growth of the British economy between 2000 and 2007 it was noted that this was ‘job-rich’ growth, with a marked expansion of the workforce but surprisingly little capital investment. That was the first time that the ‘paradox’ of Britain’s falling productivity was first noted. Then it was claimed that the UK’s ‘strong labour market performance may actually have . . . the effect of lowering average measured productivity’; and again ‘the economy has generated an additional 1.5 million jobs at a quicker rate than it has increased investment’. (‘UK productivity and competitiveness indicators’, DTI Paper no. 9 (2003), p. 9; DTI, UK Competitiveness Indicators (2001), p. 75).  Back then it was put down to the way that the economy had shifted with a larger, and more labour intensive service sector growing at the expense of more capital-intensive manufacturing. But today’s report says that declining productivity is not due to any change in the composition of industry. (The IFS Green Budget, 63)

LOW WAGE DRUDGERY

One key feature is that labour costs are very low because wages are very low. Even though employment is high, the combativity of the working class is not, leading to ‘reductions in real wages’, which have ‘grown more slowly than prices’. (The IFS Green Budget, 67) And ‘low real wages – by keeping employment higher than it would otherwise have been – play a part in explaining the large fall in labour productivity’. (The IFS Green Budget, 74) As long is labour is cheap, the incentive to invest in machinery is less:

Some firms are choosing to substitute investment away from capital to labour … encouraged to the extent that falls in real wages are making capital a more expensive input relative to labour. This will again reduce the capital-to-labour ratio, which would be expected to reduce labour productivity. (The IFS Green Budget, 78)

But then this was also the reason that the International Monetary Fund said that the preceding period was one of job-rich growth:

Employment growth driven by wage moderation fits well with the phenomenon of job-rich growth. As workers moderate their wage demands, firms have less reason for adopting labor-saving technology. As a consequence, output per worker [labor productivity] grows less rapidly and the inverse, job intensity, accelerates. (‘Rules-based Fiscal Policy and Job-rich Growth in France, Germany, Italy and Spain’, IMF Country Report, No. 01/203, November 2001.)

It seems that whether the economy is growing or slowing, capitalists are committing less to new technology and more to low-wage drudgery. Risk averse British capitalists are committing very little to research and development, because they are not interested in changing the way things are made or done, happy to squander more man hours on the problem as long as they are cheap.

The evidence is that what is marked in Britain and Europe may be a problem in the US, too. Though productivity there has risen, the Economist warns of a worldwide slowdown in technological innovation, as capitalists prefer extensive growth (more of the same) to intensive growth (innovation). (Innovation pessimism: Has the ideas machine broken down? 12^th January 2013) Across the board, America’s top companies, like Britain’s, are sitting on vast reserves accumulated as their businesses tick over, but committing less and less to research and development.