There’s no quick fix for our deep productivity problem
One of the topics I get asked about a lot is productivity. People do not necessarily put it this way, but is the coronavirus crisis unleashing the “creative destruction” that will propel us out of more than a decade of productivity stagnation? Is the working-from-home revolution and other changes adopted by businesses, which, in other circumstances, might have taken years to evolve, good or bad for productivity?
What about the shakeout in jobs that we are seeing? Is the extremely bad news for the hard-hit hospitality sector, and the people who work in it, good news for the economy’s overall productivity?
These are big questions and I cannot promise definitive answers on all of them. Before I try, let me give you another in the series of extraordinary statistics this crisis is throwing up. The Office for National Statistics (ONS) has just published figures for productivity in the UK’s public services. The measure used is slightly different from the way we typically measure productivity for the economy as a whole, which is on an output per hour or output per worker basis. Public services productivity is measured by the amount of inputs going in — public spending — versus the outputs emerging in return.
On this basis, productivity in public services plunged by 35.7% in the second quarter, compared with a year earlier. This was comfortably the largest fall since it was first measured on this basis, the previous record being the 3.8% annual drop in the first quarter.
It happened because inputs into public services, mainly health and social protection (benefits, free school meals, etc), increased sharply, while outputs fell. School closures hit the output of education, and non-Covid work in the NHS also dropped. No public sector workers were furloughed.
These huge declines should not be taken as evidence that the public sector can never deliver productivity gains. Between 2010 and last year, productivity in public services rose by more than 5%, with the biggest gains occurring during the period of maximum austerity. Treasury old hands used to say that putting the squeeze on spending was the only sure way of delivering such gains.
The official statisticians are still working on final productivity data for the whole economy in the second quarter, to be published shortly. We will have to wait even longer to see how much productivity bounced back in the third quarter, if it did, as the economy recovered from its slump. Friday’s monthly GDP figures for August were a touch disappointing, showing monthly growth of only 2.1%, but they put the economy on course for a 16% third-quarter bounce.
In the meantime, we have the ONS’s “flash” estimate for second-quarter productivity, which showed a 19.9% fall in output per worker and a 2.5% drop in output per hour. The fall in output per worker was so large because furloughed employees were counted as still being in jobs, even when they were not working. The output per hour drop, though smaller, was still the biggest on record.
These figures will change — the second-quarter drop in GDP was marginally smaller than first estimated — but they will confirm that any productivity recovery will start from a low base. What are the prospects for such a recovery?
As far as the public sector is concerned, and productivity in public services, one feature of this crisis is that a lot of money has been poured in, the “inputs”, often without due diligence. Contracts have been hastily signed and the services not delivered. That is not unusual — there was much wastage in the Second World War — but it does not bode well for public services’ productivity.
For the private sector, there are two big questions. One is whether productivity gains will result from changes in working practices. We should not exaggerate such changes. The latest ONS business impact of coronavirus survey showed that from September 7 to September 20, 9% of employees were furloughed and 28% were working remotely, but 59% were at their normal place of work.
Looking to the future, only 19% of the companies surveyed expected to use increased homeworking as a permanent business model. Of these, improved productivity was only the third most popular reason, cited by 34%, behind improved staff wellbeing (60%) and reduced overheads (55%).
This will be the test of changes in working practices — whether firms can point to productivity gains — and so far the evidence is thin. I am aware of surveys showing that employees believe they are more productive when working from home, as well as an improved lifestyle when they do not have to commute. For salaried workers, however, getting a set amount done in a shorter time so you can take the dog for a walk does not mean an increase in measured productivity. Only when more is done each day does productivity improve. I note that some firms are keeping a remote eye on employees, to make sure they are working.
Any productivity gains from changes in working practices have to be set against other losses. Sir James Dyson was speaking for many when he said that businesses need the interaction of people working together. “I’m 73 and when I come into work I’m learning all the time, we’re learning from each other,” he said. “You can’t train people and learn when you’re sitting at home.”
The jury is out on this. What about the changes in the economy resulting from Covid-19, which the chancellor has described as a “permanent adjustment”? All sectors have their productivity leaders and laggards, but a labour-intensive industry such as hospitality has much more of a challenge in improving productivity than, say, manufacturing. Many hundreds of thousands of hospitality jobs are at risk.
Economists talk about the “batting average” approach to productivity, which is that if you eliminate low-productivity firms, indeed large parts of low-productivity sectors, the economy’s average productivity will be higher.
That may happen, but it is probably not a good thing. Hospitality and other domestically focused services may drag down the productivity average but they have generated huge numbers of jobs and they have a minimal impact on the UK’s ability to compete in global markets. At this time in particular, we need those hospitality jobs.
The keys to raising our productivity game are the same as before: more investment, more innovation and better infrastructure, together with improved skills. This crisis is extremely unlikely to come to the rescue.
PS
I asked for jokes to get us through these difficult times, and you provided them, but I’m always greedy for more. Stephen Gold reminded me of Woody Allen’s definition of a stockbroker: someone who invests your money until it’s all gone.
Geoff Hope-Terry, a past winner of my annual quiz, defined the difference between a sales trip and a marketing trip: if you got an order, it was a sales trip, if you didn’t get an order, it was a marketing trip. And, while many of us are yearning for the return of entertaining, his memory of the finance director’s advice on ordering wine struck a chord: “Ask them if they know anything about wine. If they say yes, then say, ‘They have a rather splendid house red here.’ If they answer no, say, ‘OK, we’ll just have the house red.’ ”
Steve Haynes went slightly surreal with this one. A dog goes into a pub, puts his paws on the bar and asks for a pint. “Wow!” says the landlord. “A dog who can talk. You should apply for a job in the circus.” “Why?” says the dog. “Do they need an accountant?”
Finally, I should pay tribute to the joke machine that is David Lewis. He provided enough for a week-long stand-up engagement. A few examples of David’s art. Timely: “At this point I would feel safer if the coronavirus held a press conference, telling us how it is going to protect us from the government.” Technological: “I asked the wife how to turn off Alexa. She replied ‘Walk around the room in your socks and underpants. It works for me.’ ” There’s also one mocking tech nerds. A wife says to her husband, a software engineer: “When you go shopping, buy one carton of milk, and if they have eggs, get six.” He comes back with six cartons of milk. She asks him: “Why the hell did you buy six cartons of milk?” ... “They had eggs!” More from David’s vast collection next week, unless you can do better.
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