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Productivity Shocker

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“.

Categories: Productivity
  1. bill40
    January 29, 2014 at 00:44

    There is a simpler explanation for the lost productivity, though not complete I hasten to add. Let’s add up all those on zero hours contracts, (miraculously counted as full time) those on workfare, pointless courses, interns hell even those benefit sanctioned they’re all classed as working. Producing what exactly remains a mystery.

    The lost productivity is mostly a matter of changed calculation I would suggest.

    • January 29, 2014 at 08:45

      Zero hours contracts and the like should mean labour input can adjust quickly with demand. Such labour market flexibility should make make productivity less pro-cyclical, because demand shocks will reduce hours not reduce output/hour. I am not sure if that is your point. Are you arguing that the hours worked are not captured correctly in surveys?

  2. bill40
    January 29, 2014 at 11:12


    My point is that is that employment fiddles are skewing the productivity figures. A zero hours contract worker is shown on the figures as full time whether they work 1 hour or 48. This is to boost employment figures and ratio of full time jobs. This has to show up in the figures somewhere so yes, the hours worked are not being correctly captured.

    • January 29, 2014 at 11:33

      What we care about here is actual hours worked, which is captured directly in the Labour Force Survey. The employed versus not-employed distinction is irrelevant to productivity defined as output per hour worked. Is there any suggestion that the ONS believe the hours data is wrong because of ZH contracts? I have not seen that.

  3. james in london
    January 29, 2014 at 14:26

    That ONS Survey is not sooo gloomy. Maunfacturing producitivity (Fig 6) looks noisy, Services productivity (Fig 8) looks like it is begining to turn, and it is the far bigger of the two sectors.

    Also, you wouldn’t expect businesses to invest in higher productivity until all that surplus cheap labour is absorbed, surely? It wouldn’t be rational.

    This recovery is highly unusual with regards to productivity exactly because it was so highly unusual to have occured in such a low inflation environment in the first place.

    Good to see those regional productivity numbers vindicating the case for London, or the South East to secede from the UK. And all those Scottish and Newcastle tax collectors will have to find some productive work to do. ;-)

    • January 29, 2014 at 15:30

      James, I follow your argument on “cheap labour” but it presumes the pessimist case is true still.

      Maybe a better way to put the “puzzle” is this: presume the workers ejected from the labour force in 2008/9 are today’s “cheap labour” finding re-employment, dragging average productivity down. Then it must also be true that average productivity should have risen those workers left the labour market in 2008/9. That’s a reasonable description of what happened in the US recession, for example. But in the UK, productivity collapsed in 2008/9.

      This seems to lead to the conclusion that we had a permanent loss of “potential output” in 2008/9. Which is the conclusion I want to avoid. :(

      London… London is a different country. I saw a Eurostat graph which had that output/hour chart across EU subregions. There was London, there was Luxembourg, and everything else was the “long tail” of low-medium incomes.

      • james in london
        January 29, 2014 at 19:21

        I don’t buy that permanent loss of output, but I do think the lower incomes/lower productivity in the (widely-defined) City swamped the effect of lower producitivity workers leaving the workforce. The City has not yet gone back to the old (higher income/higher productivity) days, higher tax rates have partly seen to that. But lower productivity workers are definitely coming back to the labour force.

        Or are you referring to the sad (continuing) demise of UK manufacturing to cry over that Duncan Weldon and the other representatives of the “working class” like to cry over?

  4. bill40
    January 29, 2014 at 18:56


    I think you are overcomplicating this. If a firm has say 10 all but idle work placement victims they are reported to working that’s an extra 380 hours per month producing next to zero. In the USA such people simply vanish from the figures and are written off. The collapse in productivity has to be linked to falsified unemployment figures at least to a degree. I don’t have the expertise or time to prove it.

    As to London, Luxembourg and, I’m willing to bet, Switzerland where there are tax havens and interest payments banked there will lie the greatest productivity. not theirs of course just the banked sum of everyone elses.

  5. January 29, 2014 at 19:57

    James, OK, so you think the City can “snap back”? Manufacturing is something that poor countries are good at. Almost every idea I see from the left seems to be a variation on “Let’s see if we can raise productivity by rerunning the 1970s.” Well, duh.

    You are right to point out the emperor has no clothes. We’ve had five years of Westminster waging war against high productivity high income workers (aka the City), and simultaneously complaining that there aren’t enough high productivity high income workers. And again… well, duh.

  1. February 20, 2014 at 20:35

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