Disentangling The Uk Productivity Problem

As it has instruct clear to the non-FT/Economist media, in addition to every bit it has been clear to economists for a long time, productivity increase is a far to a greater extent than of import occupation for the U.K. than the deficit. However I recollect give-and-take tin instruct confused if it fails to distinguish betwixt 3 aspects to the problem.

First, the U.K. is non lone inwards seeing large falls inwards productivity growth. Now some of that may live related to the global fiscal crisis, but non all of it is. As this nautical chart taken from the excellent paper past times Richard Jones shows, inwards the G7 productivity appears to guide maintain been declining since at to the lowest degree the 1980s.

For simplicity’s sake I volition telephone telephone that the global productivity decline.

The instant chemical component inwards the UK’s productivity functioning is a structural weakness relative to other countries. I know of no amend agency of convincing you lot this exists than this chart, taken from the latest OECD survey of the U.K. economy.

The robots may live coming to accept our jobs, but at this charge per unit of measurement U.K. manufacturing volition live the lastly house this volition happen. As this written report in addition to the Jones newspaper also show, the UK’s R&D expenditure is weak in addition to below the OECD average. Polly Toynbee shows it is no amend on the workforce grooming side. [1] 

I am fairly sure, however, that what nosotros guide maintain seen since the Global Financial crisis is an additional tertiary weakness. Here is the annual increase inwards U.K. output per hour.

The historic trend, which showed no clear sign of next the global tendency in addition to declining afterward 1980 (a clear U.K. success), is roughly 2.25%. Now it is clearly possible to debate that this information shows a turn down from this long run tendency starting inwards the mid-2000s based on this aggregate data. If you lot cistron inwards every bit good that these aggregate numbers are flattered past times unsustainably fast productivity increase inwards fiscal services from 2001 to 2006 thus you lot tin perhaps break the get-go of a slowdown from the start of the millennium. This would non live surprising, every bit it would live real difficult for the U.K. to buck the slowdown inwards global productivity for real long.

Having said all that, what happened afterward the Great Recession is something quite different. But it is incorrect to sentiment this menstruation every bit only i of constant zip increase gloom. Productivity began to recover inwards 2010 in addition to 2011, to levels that practice non aspect also bad past times international standards, but striking negative territory inwards the next 2 years. Another, this fourth dimension to a greater extent than modest, 2 yr recovery was followed past times some other collapse inwards 2016. This does non aspect similar only the global productivity turn down plus some additional structural weakness. Achieving negative productivity increase 2 years running indicates a deeper malaise.

This is why I recollect at that spot is a tertiary cistron behind this terrible performance. To explicate it nosotros need to start thinking almost productivity increase every bit non some variety of manna from heaven, churned out past times our universities, or fifty-fifty the production of R&D past times firms, but also every bit something akin to an investment. If you lot are confident of futurity increase in addition to profitability, you lot are to a greater extent than probable to invest inwards productivity improvements (which may or may non involve physical investment) than if you lot are unusually uncertain or gloomy.

After recessions are over, productivity unremarkably picks up. Firms sympathize the trace of piece of work concern cycle, in addition to inwards U.K. trace of piece of work concern cycles over the lastly forty strange years recessions are followed past times rigid growth. So when recessions guide maintain levelled out, it makes feel for firms to invest inwards productivity improvements. That is i argue why productivity increase resumed inwards 2010 in addition to 2011. The exclusively occupation is that something quite unexpected happened. Growth did non render at all. At i phase people were talking almost a instant U.K. recession. Firms became both uncertain in addition to gloomy, in addition to productivity increase stopped. That shock, which nosotros tin reasonably telephone telephone austerity, was the foremost daze that striking the economic scheme afterward the GFC.

By 2013 it looked similar the recovery had finally arrived. Productivity increase could resume, but perhaps to a greater extent than cautiously than before. And that caution was justified because inwards the election of 2015 a novel uncertainty arose: the possibility of Brexit. Brexit would live i of the most profound shocks to striking the U.K. for decades: sure for firms involved inwards trading or international provide chains in addition to likely wider than that. Just every bit the costs of waiting are little for a large investment determination when at that spot is serious uncertainty, thus Brexit meant that productivity improvements would i time once to a greater extent than live lay on hold.

Thus nosotros guide maintain 3 aspects to the UK’s productivity slowdown. The foremost is the global slowdown, which nosotros managed to avoid for 2 decades but no longer. The instant is a long term structural weakness inwards developing in addition to applying novel technology. The tertiary is the deport upon of 2 shocks, austerity in addition to Brexit, which has caused U.K. firms to lay productivity improvements on agree in addition to instruct real gloomy almost the UK’s future. I somehow dubiousness that nosotros tin start doing something almost the UK’s long term structural weaknesses spell nosotros croak along to shoot ourselves inwards the human foot amongst crazy policies similar austerity or Brexit.

[1] If you lot recollect the budget made a pregnant divergence to all this, read Anna Valero here