The productivity crisis in the UK

by on March 21, 2013 at 3:00 am in Current Affairs, Economics | Permalink

This is not mainly an AD crisis:

The latest jobs numbers out Wednesday morning show the British economy continues to generate good jobs growth. Yes, unemployment also rose, but that’s only because more people were coming back into the workforce — generally a good thing.

These employment numbers would normally offer at least some explanation for why inflation has been persistently sticky above the Bank of England’s 2% target. Except that none of the price pressure is coming from wages, which continue to trend down, and overall economic growth has been flat.

These conflicting forces — strong employment, poor GDP growth, sticky inflation — are in part reconciled by Britain’s terrible labor productivity. The most recent data showed that output per hour worked for the whole economy declined 2.4% during the third quarter of last year from the same period a year earlier.

That is from Alen Mattich.  He offers one possible hypothesis:

…[it] reflects a deeper restructuring of the economy from high value added financial services and oil production (deceptively so in the case of financial services) to generally lower value added activities. Productivity might be poor because the economy’s new activities are actually old ones–retail, distribution, low value added manufacturing.

On the new budget, Martin Wolf has interesting comments, mostly it won’t matter.

Ray Lopez March 21, 2013 at 3:09 am

Right, further evidence of the Great Stagnation, and how services are less efficient (and more prone to inflation) than manufacturing. What we need is an overhaul of our patent laws to encourage manufacturing again, to encourage green industry (with carbon taxes, which BTW I saw a headline that the Obama admin is seeking expertise on), and to make people orient themselves more towards sustainable production (and savings) and less towards consumption (and borrowing and spending). I myself quit the sciences because there’s no money in it; much better to be a rent seeker (DC real estate among other things for me). Is this the model for the future? If you believe in the freetards it is: ‘your exciting career in multi-level marketing–enroll today at the DeVry Institute!”

ChrisA March 21, 2013 at 4:39 am

“Evidence of great stagnation” perhaps or maybe that GDP is not the right way to measure hendonic progress. In other words perhaps the additional people working in low paid services sector are actually making peoples live better overall, rather than the same people engaged in the financial services industry, despite the fact that their “productivity” as measured by pounds (the currency not the weight) being lower.

I can imagine an economy that has basically zero traded goods, because automation basically creates everything you need. Creative stuff is freely shared with other people for the sheer joy of it. Measured GDP in this society would be zero, and so would productivity. Hedonically though this would be a pretty good place. An extreme example, but you get my point.

roy March 21, 2013 at 7:27 am

How are the feedstocks created? Where does the energy and material come from?

Ryan Miller March 21, 2013 at 12:35 pm

For the sake of argument, automated recycling and fusion/solar/wind. I mean, obviously you’re not going to get to zero on those costs, but as long as they’re low enough, intermittent tradeability of the other sectors might prove enough (think of the way, say, writing and music are more often than not free, but occasionally paid, or childcare the same). I really wonder if we’re headed in that direction.

Rahul March 21, 2013 at 5:40 am

The decline of western manufacturing has had less to do with patent laws than with the spike of suitable third world labor willing to work for cheap.

Patent reform might encourage innovation but I fail to see how these would lead to a resurgance of western manufacturing jobs. So long as labor price differentials are so vast the western world manufacturing sector will only grow in the automated, labor-scarce sense (if at all) and all innovations will get manufactured elsewhere.

Ashok Rao March 21, 2013 at 6:21 am

A lot of MNCs are now seeing the value of keeping manufacturing in the same location as R&D. There’s been a pretty strong re-shoring of manufacturing (Apple, GE, and Lenovo to name the big ones) for this reason.

So while a lot of the re-shoring has to do with diminishing wage differentials, as you note, firms are interested in keeping manufacturing near hubs of innovation. To this end, patent laws can be very relevant in terms of factory employment. So far, it seems innovation in the USA is more attractive than manufacturing in China.

Of course, firms are also interested in keeping R&D near large consumer bases, which grows exponentially in China. But this is usually realized in the form of new operations altogether, not as an off-shoring of industrial activity.

Ted Craig March 21, 2013 at 8:03 am

Another reason for so-called “re-shoring” is the supply chain bit many manufacturers in the behind in 2011.

Bill March 21, 2013 at 9:02 am

Ashok, +1.

I am dismayed by those who presume that by somehow weakening patent laws we will increase manufacturing in the US. The alternative is trade secret: but, then ask: why do you think China is hacking into corporate servers to obtain trade secrets. Patents require disclosure, in exchange for protection.

Somehow, people seem to have no appreciation of history, nor do they want to test there concept of “patent freedom” by looking at different periods of US patent enforcement history. During the 70’s, patents were very difficult to enforce, protect, and obtain, and easier to challenge because different courts of appeals had different standards for patents. As a consequence, it was easy for Japanese and Korean manufacturers to enter some industries. Today, it would be China, were it not for the fact that during the early 80’s we had significant statutory patent reform which strengthen enforcement and standards. (Ironically, Japan and Korea created patent thickets to protect innovation in their industries.)

Anyone who wants to go back to the good old days should first look at enforceability and standards at different times.

Andrew' March 21, 2013 at 9:30 am

I don’t know what you are saying Bill. Ray is for drastically strengthening patents.

Disclosure simply gives the blueprints to Asians who we may or may not be able to enforce protections upon.

derek March 21, 2013 at 10:25 am

And here I thought the 70’s manufacturing decline had something to do with US products being uncompetitive in the market.

This sounds very much like ‘we should erect trade barriers then our industries would thrive’.

I vaguely remember Ford vehicles rusting away within a couple of years. Also the huge engines that sucked fuel and didn’t produce power. The innovations seemed to be mactac fake wood grain. The Japanese car manufacturers oddly enough produced a vehicle that was reliable and cheaper to run.

Right now the industry where I work is being challenged in a similar way. It isn’t cheaper stuff, it is new technologies and better solutions for the marketplace that are more reliable than the US manufacturers. US manufacturers are being bought by Asian firms for their access to distribution and service chains in the US. Technology wise the US manufacturers are making 40 year old products cheaper and cheaper to the point that they are unusable. This is 70’s all over again. The reaction of the US manufacturers are to amalgamate into large behemoth firms that first get rid of anyone who actually knows the business, cut any robustness out of their product lines, then shave the distribution channels to save money when no one wants to buy their stuff.

They are having their collective clocks cleaned by better technology in the products themselves as well as the production.

derek March 21, 2013 at 10:28 am

Further, this isn’t China. This is Korea and Japan. A Korean firm that I dealt with had serious problems with their products when they outsourced a component to a Chinese manufacturer, which ended up being not up to spec and failing. There are 5 of these in each of the 20 million or so units sold world wide. They have outsourced to a Japanese manufacturer now.

Bill March 21, 2013 at 12:20 pm

Andrew, I was responding to Ashok, not Rahul, which should have been clear when a gave Ashok a +1, and as to Ray I think it is unclear when, as Ray said, “we need an overhaul of our patent law”–what is Ray talking about? Is it Alex’s overhaul?

derek, I really don’t understand what you are saying so I can’t comment.

The Anti-Gnostic March 21, 2013 at 12:55 pm

derek:

US manufacturers are being bought by Asian firms for their access to distribution and service chains in the US. Technology wise the US manufacturers are making 40 year old products cheaper and cheaper to the point that they are unusable. This is 70′s all over again. The reaction of the US manufacturers are to amalgamate into large behemoth firms that first get rid of anyone who actually knows the business, cut any robustness out of their product lines, then shave the distribution channels to save money when no one wants to buy their stuff.

I thought I was the only one who noticed this. I’m old enough to remember certain things, and I am seeing the shoddy methods, slippery accounting, perverse incentives, creep back in a lot of areas.

I think some serious monetary issues are being obscured.

Ted Craig March 21, 2013 at 8:00 am

There are also energy and environmental issues. Workers in China are willing to live in soot-covered dorms, just as American workers were in the 19th Century.

Ashok Rao March 21, 2013 at 9:18 am

Actually, that’s effectively a wage differential. Providing good conditions, meeting regulations, etc. is all part of the cost of hiring an additional extra worker (which is greater than the wage rate, most probably).

Rahul March 21, 2013 at 10:31 am

By your logic is paying higher raw materials costs also, “effectively a wage differential”

Ashok Rao March 21, 2013 at 2:13 pm

…Not at all

Raw materials has nothing to do with hiring more workers. Being forced to provide – either by government regulation or societal pressures – non “soot-covered” rooms and all are associated with labor itself…

Have no idea where you got that…..

Rahul March 21, 2013 at 3:42 pm

@Ashok Rao:

“Energy and environmental issues” are as related to “hiring more workers” as are “raw material costs”.

Is my Effluent Treatment Plant or Electrostatic Precipitator effectively a “wage differential”?

Andrew' March 21, 2013 at 9:28 am

Patents have the same problem as carbon taxes vis-a-vis offshoring.

Ray Lopez March 21, 2013 at 4:23 pm

Very interesting thread, enjoyed reading it, I wish we had a better way to respond than this crummy website.

As for my statement “what we need is an overhaul of our patent laws to encourage manufacturing again” my thesis is that services are labor inefficient, and productivity wise inefficient, whereas manufacturing is not. However, since manufacturing is not protected, due to, among other things, poor patent protection (and that includes giving patents to patent bullies who threaten smaller parties with costly patent litigation–we need a “German style” patent court that is fast and cheap) there’s a race to the bottom in manufacturing and a over-emphasis on services. It is a mistake to have 70% of an economy be in services. . But that’s a topic for another day.

BTW, when there is weak patent protection you get bad patents that are part disclosure and part trade-secret–a real muddled mess. I’ve seen this many times but that’s also a topic for another day.

Luis Enrique March 21, 2013 at 5:58 am

“These conflicting forces — strong employment, poor GDP growth, sticky inflation — are in part reconciled by Britain’s terrible labor productivity.”

what does the word “reconciled” mean here? Labor productivity is not something we observe separately from these facts which explains them, we are only saying labor productivity has fallen because employment has risen but output has not, so much.

UKGB March 21, 2013 at 7:30 am

Luis is right. Productivity is just a residual here, and the implicit and unproven premise of Tyler’s title here is that if the UK had had higher AD, it would have been largely nominal not real, because the weak productivity is a hard fact that is largely invariant on how AD turned out.

In a largely services economy I don’t think that premise is warranted, at all.

NGDP growth in 2011-15 is expected to have been 3.4, 1.5, 2.7, 3.8, 4.2. Far below the 4.5 per year that would be normal. There is nothing in the article Tyler cites to show that it would have been all inflation. There is no reference to real supply side factors that would produce such constraints. No evidence of sector-level pressures that would have spilled out. The biggest market of all – the Labour market – is quite palpably efficient right now. The one that isn’t – credit – would get more efficient with higher AD.

So I think this is too casual a conclusion from a single fact, being used to confirm a pre-existing bias …

Alen Mattich March 23, 2013 at 6:21 am

Fair questions. By “reconciled,” I merely meant that productivity was the balancing bit of the equation.

I’ve written in the past about why I think plenty of evidence from the ten years leading up to the financial crisis points to a drop in the UK trend growth rate from the long run post-war average and why I think this lower trend rate prevails. I’ll revisit the subject soon. This isn’t particularly unorthodox thinking. Jeremy Grantham has cogently argued the U.S.’s trend rate of growth has dropped from around 3% to around 1%. And of course Professor Cowen has also made the same argument more generally.

And you’re right, employment hasn’t recovered fully, in no small part because of government cuts. But private sector hiring has been surprisingly strong, catching everybody off guard. Only part of this is explained by contracting out of government services or people setting up as sole traders after losing their jobs.

Current March 21, 2013 at 10:36 am

This is how I understand the point…

If wages are sticky to a trend and inflation is below expectations then a fall in output and unemployment will result. The Keynesian logic is that the rise in unemployment represents a opportunity for production that is foregone.

But in Britain employment has recovered, though output is still below trend. So, if there is a firm link between unemployment and output why isn’t it showing up here? His explanation is that productivity has fallen. I think that’s quite sensible. The financial services sector has been hit hard by the 2008 crisis, the recession and the euro crisis.

A Keynesian could argue that there isn’t a firm link between unemployment and output. But, that would mean abandoning such a link in the other direction too. And Keynesians generally always argue for stimulus when unemployment is high, even if output is also good.

It could be argued that productivity would have been higher if there had been more stimulus. But, that’s a very difficult argument to make, why should it have been higher?

Luis Enrique March 21, 2013 at 11:48 am

unemployment has not recovered in the UK, it is merely better than you would expect given the (lack of) recovery in GDP

Current March 21, 2013 at 2:23 pm

Good point, I was wrong.

AC March 21, 2013 at 7:13 am

Funny enough, the US recovery seems to be the opposite: GDP recovery with less than spectacular employment growth, and high productivity gains.

ladderff March 21, 2013 at 7:55 am

Perhaps nothing is ever “mainly an AD crisis.”

Merijn Knibbe March 21, 2013 at 8:23 am

As an addendum to the post:

there seems to be an effect that the very large 1946 and 1947 birth cohorts are going into retirement which, while the overal employment rate for 65+ is not changing, cuases 65+ als a % of the total labour force to rise rapidly. These pensionado’s seem to work for rather low wages (as they are subsidized by meagre pensions?)

Wu March 21, 2013 at 9:48 am

Oh for Christ’s sake Tyler. It’s like you’re more interested in saying clever things than in helping your readers understand the truth better. You want to talk about productivity and how it works over the business cycle? Then do so. Instead, you leave cryptic messages in order to avoid ever having made an actual argument while still being able to get away with criticizing what you want to criticize. Just another cowardly post from a coward.

JWatts March 21, 2013 at 12:16 pm

If you don’t like his posting style, then why are you reading his posts? Content is certainly fair game, as well as, accuracy and bias. But it always seems pointless to criticize bloggers on their style. At that point you should just go read some other source.

Locke March 21, 2013 at 4:27 pm

So you want your content to be dumbed down, mass digestable, unnecessarily incendiary, vanity soaked demegaugery? Have you tried the New York Times?

derek March 21, 2013 at 10:49 am

How can you have a productive economy when 49% of it is overhead?

Steven Kopits March 21, 2013 at 12:34 pm

Low productivity growth is entirely consistent with our models on oil and the economy. Britain, by rights, will not be the only economy affected, but the problem is exacerbated there because oil production is falling so rapidly, and Britain has become a net oil importer, rather than the exporter it was just a few years ago.

mulp March 21, 2013 at 1:09 pm

Making real stuff is low value work??

Making bad loans is high value work??

Obviously today’s economists see Cypress, Iceland, Citi, JP Morgan, and their squandering of other people’s money on debt in failed ventures as the ideal economy because they are based on high value business activity.

Steve Sailer March 21, 2013 at 3:58 pm

Thank goodness Labour implemented a secret mass immigration plan in 1997 or there might be higher productivity today.

Steve Sailerx March 22, 2013 at 1:16 pm

Yes, because god knows Japan’s productivity is limitless.

It’s one thing to be the racist shitbag that you are, but you don’t even have the guts to say it directly, instead wrap it around pseudo data.

When clearly you really want to wrap your lips around a superior African cock.

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