Sunday, March 06, 2016
Let's relax and learn to live with low productivity
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

We all need a break from the referendum this week, so I will provide one here. The only thing I will mention in passing is the question of whether Brexit fears are already weakening the economy as they have weakened the pound.

Brexit uncertainty is one factor cited by Markit, which produces the monthly purchasing managers’ surveys, all three of which (manufacturing, construction, services) weakened last month. If Brexit is indeed a factor in what looks to be a slowdown, it plays both ways.

The Remain camp will say it shows anticipation of how the economy will suffer if we leave. The Leavers will argue that it is not Brexit fears hitting growth but wider worries about the global economy. The rest of us might conclude that a government that says we should not take risks with the economy has itself introduced risk by holding the referendum.

Anyway, it is another area of weakness I want to address this week; productivity. Britain’s poor productivity performance has been one of the stories of the post-crisis period. Productivity – output per hour or output per worker – is the lifeblood of the economy, the source of all our prosperity. In the famous phrase, “productivity isn’t everything but in the long run it is almost everything”.

But if productivity is almost everything, in recent years it has not been very much at all. Output per hour across the whole economy has crept above its pre-crisis level, but only just. In the latest figures last year it was 1.6% higher than in early 2008. That, however, was nothing to celebrate. The Office for National Statistics points out that had it kept up with the pre-crisis trend it would be 13% higher than it is.

I should say at the outset that plenty of business people dispute the extent of the productivity gloom. My colleague Dominic O’Connell encountered such scepticism at a high-level dinner a few days ago. The EEF, the engineering employers, published a major report on productivity recently which found that for many in industry, official measures of productivity are poorly specified and poorly measured. Economists at Legal & General, in a new report, say official statisticians are “failing to capture the revolution in distributed networking and cloud computing”.

But, staying with the official numbers, a large chunk of potential productivity growth has been lost, apparently never to be regained. Even now, while output per hour is rising, it is doing so at barely half the rate that was the norm before the crisis. The picture for output per worker, another productivity measure, is, if anything, even more muted as a result of the strength of employment growth. The latest figures had it just 0.7% up on pre-crisis levels. If it had grown as fast as in the seven years leading up to the crisis it would be 14% up.

If you want to get really depressed about productivity, meanwhile, look at the comparisons with other countries. Official figures last month showed that output per hour in Britain in 2014 was 18 percentage points below the average for the rest of the G7 (America, Germany, Japan, France, Italy and Canada).

Worse, Britain appears to be doing appallingly badly in comparison with our near neighbours. French output per hour is 31% higher than Britain’s. In the case of Germany, the gap is a whopping 38%. The British disease, once characterised by too many strikes and tea breaks, appears to be back. How worried should we be?

In terms of the international comparisons, there is not a lot to the proud of, but the picture is not as black as it first appears. German and French workers have much shorter average working weeks than their British counterparts, 26.4 and 28.3 hours respectively, compared with a British average of 32.3.

Some of that is explained by legislation, some by the part-time, full-time split. But it means that if we take an alternative measure, output per worker, then Germany is a more manageable 11% higher than Britain, and France 15%.

There is another comparisons produced by the Office for National Statistics. This, a constant price productivity measure, suggests that Britain achieved significantly stronger growth in output per hour in the 10 years leading up to the crisis, and somewhat weaker since. Britain is behind, but on this measure by only a few percentage points.

The bigger question is how worried we should be about the weakness of productivity which, in the post-crisis period, has not been just a British affliction. The point has often been made in recent years, including by me, that strong employment growth has been a price worth paying for weak productivity but that it cannot go on forever.

Now I wonder, both whether lower productivity is temporary and also whether we should be that worried about it, a suggestion that is almost sacrilege in economic circles.

Many years ago, in the 1980s, when the world was looking to Japan, both as a tough competitor and a model economy, international productivity comparisons showed up something very curious. Despite its fearsome reputation Japan’s productivity was lower than the other big industrial countries, including Britain.

Japan, in those days and indeed now, combined high levels of productivity in the export-facing sectors it needed to compete, including manufacturing, with low productivity across large swathes of the rest of the economy, including much of the service sector and agriculture. Japan combined a high degree of competitiveness with a high employment, indeed virtually full employment and a lifetime system of job security.

Japan is no longer a model to follow in a general sense, but its productivity approach has a lot to be said for it. Combine high productivity in export-facing sectors such as manufacturing and internationally-traded services with low productivity across a whole range of domestic service industries and you end up with something that, if not ideal, is not bad. Having the most productive hairdressers in the world will not necessarily help Britain compete.

Low-productivity services, of course, imply low wages, or else there would be an inflationary threat. But they also imply high employment.

What about the sectors in which we need to compete? The EEF notes that manufacturing productivity has grown at twice the rate of the rest of the economy, and of services, over the past 20 years. Its chief economist Lee Hopley, noting that good data is hard to come by, cites figures showing that Britain’s manufacturing productivity grew faster than Germany, France, Italy and the Netherlands in the five years straddling the crisis. But there is work to be done – a lot of it – to make manufacturing more productive.

As for internationally-trade services, the picture is mixed. Productivity growth in financial services has gone into reverse since the crisis, while business services continue to perform pretty well. Across the services where Britain is strongest, there is no reason for complacency but none for deep gloom either.

Productivity matters, but it matters more in some sectors than others. It is those sectors in which government should direct its efforts. And it is in those sectors – not everything – we should worry when we fall behind.