Some evaluation regarding productivity in the UK

Hopefully you are aware that we have a "productivity puzzle" in the UK - strong growth, but poor productivity improvement. From class you should recall that one issue is the influx of cheap labour - why invest in capital goods if you can hire cheap, hard-working East Europeans? Not only that, but their spending creates GDP growth - what's not to like?


Dig deeper, and we start to stumble over a few awkward issues - which is where this fits into evaluation:

1. Does our standard measure of the economy (GDP/output) really capture productivity gains?
2. Does it take into account structural changes, such as the "sharing economy"?

Read on; I have highlighted key passages (later in the post). Skip to these if you must, but the whole is really quite a good recap of key points.


Posted on May 6, 2016 by notayesmanseconomics 
      

A regular feature of economic analysis in the credit crunch era has been where has the productivity growth gone? The knee-jerk reaction from establishment economists was as usual to assume that reality was wrong and their models correct and so they assumed that it would rise even faster in the future to make up the gap. For example back in June 2010 the hapless UK Office for Budget Responsibility forecast that UK productivity growth would have recovered such that wage growth would have been  be running at above 4% since 2013/14. Problem solved! Except that only in their Ivory Towers did such a solution work as below the clouds the situation changed little if at all.


To my mind it is the last 3 years or so that have really illustrated the issue as we have seen the official measure of economic growth rise on a sustained basis. On that measure the recovery has become mature and one would therefore have hoped that productivity growth would have picked up and risen noticeably. So it is especially troubling that we find ourselves wondering what happened to it right now. Even worse if this week’s Markit business surveys indicate a new trend of slowing economic growth.


The establishment could not ignore it for ever


Half way through 2014 someone at the Bank of England must have decided that enough was enough and that maybe something had changed.

Since the onset of the 2007–08 financial crisis, labour productivity in the United Kingdom has been exceptionally weak. Despite some modest improvements in 2013, whole-economy output per hour remains around 16% below the level implied by its pre-crisis trend………This shortfall is sometimes referred to as the ‘UK productivity puzzle’,

Indeed the comparison with past recessions was stark.

Even six years after the initial downturn, the level of productivity lies around 4% below its pre-crisis peak, in contrast to the level of output, which has broadly recovered to its pre-crisis level.

However the response of the establishment followed a disappointing theme as another hapless body gave us Forward Guidance on productivity.

A key judgement in the May 2014 Inflation Report is for productivity growth to pick up.

We can skip the cyclical arguments presented back then as we have cycled on so to speak but there were issues raised then partially dismissed which do apply.

Growth rates in output per hour  have been persistently weaker than GDP, reflecting strong employment growth over the past few years.

This reflects two factors in my view. Firstly ( and the Bank of England either forgot or redacted this) is that for years and indeed decades economists in the UK had wanted us to be more like Germany and keep more workers employed when a recession hits. The other has been an increase in supply of labour as more people have moved to the UK to find work. This is a politically charged issue and the Bank of England tip-toed around it.

In addition, it may be that the financial crisis led to an increase in labour supply in the United Kingdom.

But they have to face up to some of the consequences.

The crisis is likely to have reduced both current real incomes and expected future labour incomes, which may have encouraged more people to seek work and participate in the labour market.

In other words the labour supply curve shifted downwards as labour became cheaper and more of it was used. On that road there was less pressure to improve productivity as wages were lower. You may also note that right up to now we have been discussing weak wage growth and the establishment continues to expect a turn higher at every turn.


Output per individual


The Bank of England tried to shuffle past this issue but I think it matters a lot because there are strong hints of an issue from the GDP per head numbers.

GDP is now 7.3% above its pre-downturn peak and has been growing for 13 consecutive quarters.

We know that the population has grown however so that GDP per head is lower. If we look at the boom phase since 2013 then this has continued with GDP growth being 8.3% but per head only 5.2%.


Sectoral Issues


The Office for National Statistics has been listening to this debate and offered some views on Wednesday and today.

Administrative and support service activities has grown by the largest amount, with a growth rate of 22.3% for the 4 year period, closely followed by professional, scientific and technical activities at 19.1%.

Okay so they have been the leaders so who are the laggards?

production industries made up 3 of the 5 slowest growing industries. One production industry – electricity, gas, steam and air conditioning supply – was one of only two industries to experience negative growth across the four-year period.

I think that the recent mild winter may be a factor in the energy supply industry as it has high fixed costs but it is revealing that it is another area where production has been struggling. Shakespeare was ahead of the game with his point that troubles like this come in “battalions” rather than “single spies”.
Oh and I wonder if those calculating the numbers have overrepresented their own productivity!

However, administration and support service activities features toward the top end of both distributions,

It has had another go this morning and confined itself to the market-sector of the economy.

These estimates also suggest that lower capital service per hour worked and weaker than normal improvements in labour quality held back productivity growth in 2014.

So 2014 was a bit better but still below past experience. I was pleased that such numbers exclude matters such as imputed rent and see that as a success for my arguments and campaigns.


The Services Problem


This is the issue of how we measure this and it is twofold. Firstly there is the problem that many services are intangible and thus output measures are problematic. The other is that some gains here are from products which are in effect free but GDP measurements need a price (that is not zero). For example it is only anecdotal but a friend told me last week that Linkedin and Facebook were very useful for his business but he only used the free versions. So his productivity was in his opinion higher but our national accounts cannot measure it.
Back in 2014 an effort was made but it was vague. At least Price Waterhouse had a go.

Total revenues for the five most prominent sharing economy sectors – peer-to-peer (P2P) finance, online staffing, P2P accommodation, car sharing and music/video streaming – could rise to around £9 billion in the UK by 2025, up from just £0.5 billion today, according to new analysis by PwC.

Professor Diane Coyle has been looking into this and suggested some numbers to give us an idea of scale.

it is highly likely that more than a million people are providing services via these platforms. This is equivalent to about 3% of the workforce, although many or most of them probably do not regard this as employment in the conventional sense.

We wonder what is employment quite regularly on here of course. But it is missed also by the productivity numbers.

The debate about the UK’s productivity performance should take account of the fact that the sharing economy acts as a kind of technological progress, equivalent to increasing the amount of capital available in the economy. But this effect is not recorded in the measured statistics and productivity.

Actually as she points out it may even reduce it as things which are measured are replaced by things which are not measured.


Comment


At times of large structural change there are always going to be issues for official statistics. We have seen and indeed are seeing three large moves at one. The credit crunch blitzed some sectors and sent the whole economy into reverse. The official response has been to try to pump up sectors such as housing and banking. Meanwhile there has been enormous change in technology and the virtual world which we are often missed by the old ways of measurement.


Thus we need ch-ch-changes but the initial problem is the way that we have become wedded to GDP as a measure. Or to be more precise it would as a beginning be helpful if the UK returned to publishing more openly the three different GDP measures adding Income and Expenditure to Output. Why? Well the income figures from the US have added value but when I tried to get similar data for the UK I was told that Nigel Lawson scrapped much of it as I guess it “frightened the horses” to coin a phrase. Yet as Diane Coyle points out something seems to be happening.

In the past, the statistical discrepancy was of the order of £1bn, and more recently £2-3bn.. In 2014 it reached an extraordinary £9bn.

We can do much more to get data from the online world using so-called big data and web scraping. This will not give us a complete answer but it will be better and I believe there will be more cheer in it than the official data we get now. As the sun is out let’s have a little optimism and hope it will wean our establishment off pumping up the housing market.

Solid article on France & structural reform:

This is good for EU context, as well as being a comparator for UK policy:

France is on a road to nowhere without reforms

With strikes and red tape a part of everyday life in France, can the eurozone's second largest economy haul itself out of stagnation?

A French flag is seen on a striking taxi as drivers block traffic during a demonstration at Porte Maillot during a national protest about competition from private car ride firms like Uber, in Paris, France Photo: Reuters

By Szu Ping Chan

3:40PM GMT 13 Feb 2016

96 Comments

It’s almost lunchtime in Canary Wharf, and Julien shivers in the shadows of the giant buildings. A French banker who has worked in London for more than seven years, he’s never quite got used to the cold. 

Emmanuel Macron, France’s rock star economy minister, famously said France’s controversial 75pc top tax rate would turn France into “Cuba without the sun”. Britain is certainly not Cuba, but it also doesn’t have the sun. 

But Julien, like thousands of other French nationals who have moved to London and other parts of the UK, is undeterred by the winter weather. 

It’s been more than three years since David Cameron, the Prime Minister, said he’d roll out the red carpet for high-earners looking to flee France’s high tax regime. 

For Julien, who first came to the UK a decade ago to study and now works for a top investment bank, France has never been a place of opportunity. He left for the second time in 2008 and never looked back. 

“I used to think London was the city lacking dynamism, but there are a lot more opportunities here,” he says. “There is just a more open-minded atmosphere. It’s a much more global city.” 

Many of his friends have also moved abroad. Those who stayed and “accepted their fate” in France complain about inefficiencies and bureaucracy that are holding the economy back. 

“France has this paralysed mindset, it’s conservative, narrow minded. People still have a very socialist attitude towards businesses. For them, there is no two-way relationship. Bosses and managers are almost enemies. It’s like everything has to involve a struggle.” 

Plainclothes police officers check chauffeurs at the Paris' Gare de Lyon railway station. "Chauffeurs" - like those who drive for Uber, claim they are victims of discrimination by the government, while taxi drivers complain about unfair competition.  Photo: AP

Even Uber, which introduced the free market to taxis, has experienced France’s meddling state at first hand. 

Threatened by the competition, France’s highly regulated taxi industry lobbied the government to impose stricter controls on companies such as Uber. It got its way. 

The California-based company is fighting back in the only way France knows – by striking. Uber is suspending its service in France for four hours on Tuesday in a protest against the government’s decision. After all, if you can’t beat ’em, join ’em. 

In some cases, things have got ugly. 

Security staff help a shirtless Xavier Broseta, Air France human resources manager, to safety after angry workers ripped off his clothes

Last October, two Air France executives had their shirts ripped off their backs by furious workers protesting against job cuts at the airline. 

In another example, Renault, France’s second-biggest car manufacturer, put itself on a collision course with the government last year after the state beefed up its stake in the company to secure double voting rights under French law. 

It was thought the government was trying to ensure that jobs at Renault-Nissan were kept in the country. Some even believed France would try to move Nissan’s factory in Sunderland across the Channel. 

While the dispute was eventually resolved, it is only the tip of the iceberg of France’s problems. 

Weak growth, near-record unemployment and mountains of red tape threaten to leave France in permanent stagnation. 

It wasn’t always this way. Before the 2008 financial crisis, France’s unemployment rate stood at 7.1pc. This was the lowest since the 1980s and even below Germany’s rate of 7.8pc. 

Fast forward seven years and the tables have turned. In Germany, the jobless rate has dropped to 4.5pc, while France’s rate remains stubbornly high, at 10.2pc, according to Eurostat. 

The International Monetary Fund (IMF) recently slashed its forecast for French growth over the next two years. 

While France continued to cling to its social safety net and bloated public sector, Germany reaped the benefits of its radical Hartz reforms between 2003 and 2005. 

France's labour laws make it extremely difficult to fire permanent staff, so companies have responded by only offering temporary contracts, many of which last less than a month. 

Christine Lagarde, the IMF’s managing director and France’s former finance minister, warned last year of a “new mediocre” for global growth. France is quickly becoming the poster child. 

The eurozone’s second-largest economy has consistently been in Brussels’ bad books for spending more than it earns in taxes and is unlikely to reduce its deficit below the 3pc limit this year. 

France has struggled to shake off its reputation as a fan of red tape and bureaucracy. According to the World Bank’s “doing business index”, it’s easier to start a new company in Kazakhstan and Ukraine than in France. 

All these factors led Francois Hollande, the French president, to declare a “state of economic emergency” last month. 

French Economy Minister Emmanuel Macron (L) comes face to face with companion robot BUDDY during a visit to French tech startups at CES 2016 in Las Vegas  Photo: AFP

Enter Macron. The former Rothschild banker is trying to guide France back towards competitiveness. While he found himself in the middle of the Renault-Nissan spat with the government last year, Macron has most recently been championing entrepreneurship at the Consumer Electronics Show (CES) in Las Vegas. “We created 1,500 start-ups last year,” he declared. 

This pro-business strategy is backed by Hollande, who announced extra measures last month to try to bring down France’s jobless rate. This includes the creation of 500,000 training schemes, more subsidies for small business and a programme to boost apprenticeships. 

This, combined with tax cuts for business worth €40bn (£31bn) over three years, is designed to give the economy a shot in the arm. 

Pierre Gattaz, president of MEDEF, France’s main pro-business organisation, describes the plan as a “step in the right direction”. 

“We’ve seen a change, because [Hollande’s] speech was pro-entrepreneurs and pro-business. So the direction is there. We need business, we need agile companies. The world is moving fast so we need to rehabilitate the jobs market.” 

"There’s always something policymakers have to row back on or tweak." 

Jessica Hinds, Capital Economics 

Gattaz followed Macron to Las Vegas last month, and insists that the government’s drive to create more entrepreneurs will be a success. 

But success also requires reform. Policymakers are now ready to take on one of France’s untouchable political totems – the 35-hour working week. 

The policy was first introduced by Lionel Jospin’s government in 2000, but policymakers want to relax the law so that companies can decide on an individual basis the maximum number of working hours. 

Gattaz believes the government can pass reforms while preserving the 35-hour week for most companies. “Sometimes, when it comes to the 35-hour week, people say around the world that French people don’t like to work any more – this is the kind of French bashing we expect, but Hollande’s speech, and the advice we hear from the prime minister [Manuel Valls] and of Macron has been in the right direction.” 

For others, France’s problems are much deeper. Jessica Hinds, at Capital Economics, says “steps in the right direction” and rhetoric are not the same as executing the policies. 

“The French have started to do the right things, but the reforms have not been ambitious enough given the scale of problems facing the French economy. 

"There’s always something policymakers have to row back on or tweak. Reforms to employment tribunals were deemed unconstitutional. There’s just no sense that the government is really going for reforms. 

“This means if you’re a businessman or factory owner and employ people in France, despite the fact that the workforce is well educated with high productivity, if you’re going to be saddled with regulation and unable to fire people when things go wrong you’re never going to take the plunge and that really does hold the economy back.” 

"The French are always complaining – but I can tell you that the business community understands and appreciates the reforms." 

Pierre Gattaz 

Gattaz remains optimistic. “I think we have to create at least one million jobs within five years and continue to work on the competitiveness of the French economy. 

"Lower taxes, more flexible hiring and reforms of labour laws will create confidence for investors. And when confidence arrives, so will success for the French economy.” 

“The French are always complaining – but I can tell you that the business community understands and appreciates the reforms. “You have to be coherent and tenacious, that’s what Hollande, Valls and Macron are trying to do.” 

For Julien, while ministers like Macron are a “breath of fresh air”, there are not enough radical thinkers in government to make a difference. 

“French people are looking for a messiah that will guide them and enlighten them,” he says. “But there is such a mistrust of the political class that at the end of the day they never find this messiah. So they always end up disappointed, and things always seem to end up even more hopeless than they used to be.”

A few articles - Swiss franc, balancing the UK budget, ditching inflation targets

Swiss franc is a sideshow, it's the euro that matters

Will politicians really balance the budget?


This is a really interesting read for A2 students wanting solid extension material for the inflation/deflation debate; it argues that rather than a flat 2% target, regardless of economic conditions, an "average" rate (a bit like the balance of payments) should be the target. Higher inflation that does not stem from damaging excess demand should be tolerated, as should deflation from benign sources. If you do get an inflation/deflation question in the exam there is material here to extend your answer and garner marks:

BoE should drop its inflation target