It looks like 2013 Q4 is going to have very bad productivity numbers.
This post is a little premature, we need to wait for another month of labour market data, and the month 2 estimate of GDP. But the data seems likely to show that the UK has had around six quarters of fairly steady, fairly strong demand growth, averaging at least 4% NGDP growth from 2012 Q3 to 2013 Q4. Yet the level of market sector output per hour is likely to show almost no change at all over that period. This is starting to look like a total disaster for those of us hoping for at least some validation of the “endogenous aggregate supply” theory.
Chris Giles comments, as does Duncan Weldon. Duncan picks up a point which friend’o’the’blog James made in the comments here in a previous post: that average productivity is looking bad as low-productivity, low-waged workers regain employment, even if productivity might be rising for the rest of the workforce. Karl Smith makes a similar point at FT Alphaville. That’s all very reasonable, but this idea is giving in to supply-side pessimism. Supply-side optimists need to argue we have high-skilled, highly productive workforce part of which is merely sitting idle waiting for demand to return and put them back into work. But that does not appear to be happening.
It would be very interesting to see an update of the IFS analysis which showed where the loss of productivity has occurred in terms of movement of output/hour by sector and in the composition of hours between sectors.
I spent five minutes with the Labour Productivity data for 2013 Q3 and I get a feeling that I won’t like the answers. Here is a (perhaps) startling statistic: in the finance sector total hours worked is already back around the same level as 2008. Output per hour in that sector is down 12%. That hurts so, so much. Karl says, and he’s made the point before:
However, we should not forget that British productivity was supported by two very high margin wells which have begun to run dry, North Sea Oil and City of London Financial Services.
Replacing those sources of wealth will not be easy – but I add, it very likely will be done. Oil and Finance promoted a high priced pound and as a result made life difficult for other British exporters and life sweet for British importers. As that phenomenon turns around we should see a Britain that is increasingly self-sufficient and investing in technology and education to support the needs of its population rather than serving foreign demand for energy and complex derivatives.
It is an uncomfortable message to receive. To end on a positive note, I heartily endorse Sam Bowman’s “Alternative Agenda for Hope“.