Britain s productivity deficit: history, significance and prospects

Transcription

1 Britain s productivity deficit: history, significance and prospects Professor Peter Nolan Centre for Sustainable Work and Employment Futures University of Leicester 18 June

2 The productivity problem in context Britain s expanding productivity deficit with other G7 countries and its own recent history has surfaced as a major issue in the past year. It has been connected to other apparently vexing questions: why, ask the policy makers, are real wages flat or falling when employment is surging? Productivity is said to be low because employment growth has outstripped real output growth. The coincidence of low productivity (output growth) and rapid employment growth has kept wages in check. Going a step further, some have argued that low wages may have sustained inefficient production and some labour hoarding. So the problem becomes self-reinforcing. None of these contentious issues surfaced during the recent Election campaign. Instead the focus of attention was on the case for austerity, the budget deficit, and, latterly, the national debt! The state of the real economy its low real wages, low investment, low productivity, and large and growing trade deficit - were largely ignored.

3 The concept and measurement of productivity Productivity is defined as output per unit of input. Total factor productivity measures all outputs and all inputs. But the more common partial labour productivity measure specified the relationship between output (gross value added) per unit of labour time (eg., output per hour). These measures are widely used to make international and historical comparisons of performance, but they are fraught with problems. How do you add heterogeneous outputs and inputs? How do you measure public services that are not marketed? The labour productivity figures provide only an extensive measure and not an intensive measure of output per unit of labour time. They do not measure the intensity of work, and yet the latter is likely to vary considerably across time and place and with power shifts in the workplace and labour market. This is a non trivial issue. (Economics and sociology).

4 Output e: efficiency gain i: more labour input T2 C T1 e i B A L1 L2 Labour Input (Hours) Efficiency, Productivity and Labour Intensification

5 Productivity G7 Countries (source ONS 2014)

6 Whole economy output per worker hour: source ONS July 2014

7 Index, 2010=100 (LHS) % Change on % Change on quarter a previous year ago (RHS) quarter (RHS) LZVB LZVD TXBB 2008Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Edition:Q Source:Office for National Statistics Contact:Productivity@ONS.gsi.gov.uk +44 (0)

8 The historical record It has been suggested that the productivity deficit is a recent phenomenon, the by-product of our labour market `success story. The generation of many new (self employed and small hours) jobs in private services has averted a severe crisis of unemployment, along the lines experienced elsewhere, but the downside is declining average productivity. For those familiar with Britain s post economic history this claim must appear eccentric. In the 1960s productivity advanced at an impressive 2.6% p.a. But this was judged deficient by international standards. In the 1970s Britain s productivity slumped and was judged the cause of Britain s parlous trading position.

9 Policy responses Countless economic tombs sought to expose the sources of the problem. Many writers fixed on industrial relations. Public enquiries and Commissions were established to investigate possible connections with what many claimed was a chaotic and counterproductive industrial relations system that militated against productivity-enhancing changes in production. The Donovan Commission was established by the Labour government to investigate relations between employers organisations and trade unions. It had much to say about the deleterious price and productivity effects of the chaotic IR arrangements and conduct at workplace level.

10 Reform...not revolution Reporting after 3 years research, the Royal Commission pointed to serious deficiencies in the prevailing IR system: poor senior management; a yawning gap between the official trade union structures and workplace developments (the growth of lay unpaid officials); and chaotic and dysfunctional payment systems. Productivity was damaged by fitful and frequent unofficial strikes. That s just a flavour. On productivity, the report was schematic and descriptive; it did not set out to establish clear causal chains. Focusing on headline nominal wage deals, it failed to see that Britain had already assumed a position within the IDL as a low labour cost country. Hence it failed to see the connections between low labour costs and sloppy labour utilisation practices. But crucially, and to the irritation of right wing voices, it did advance a powerful case for voluntary rather than state-led compulsory reforms. That was Fast forward to 1979.

11 Thatcher s revolution Drawing support from key advisers Hayek, Joseph, Friedman - Mrs Thatcher s government saw unions as `the main reason for the relative decline of the British economy Hayek, 1980). A programme of labour legislation, designed to drain union membership and influence, was set in motion in 1980 at a time of soaring unemployment and mass bankruptcies particularly in manufacturing industries. The consequences are still evident. Union membership peaked at 13.3 million in 1979: it now approximates 6 million. The results of these policies were commonly calibrated at the time in terms of their impact on labour productivity. Many writers supported the view that there had been a `miracle.

12 Assessment The productivity gains of the 1980s can be explained but without recourse to the `miracle references that were so common. The gains had three main sources: The shedding of labour (roughly 2 million jobs) in manufacturing; Fundamental power shifts in production and increased work intensity (Metcalf s `fear factor, 1988); and, The recovery by 1985 of output levels with a greatly diminished workforce. During the same period, fixed capital investment in plant and machinery and new building work fell dramatically in real terms. With labour s `countervailing force diminishing, wages stagnated and profits soared. Talk of a `miracle was misplaced. Basically capital sweated its assets.

13 Assessment Were the productivity gains induced by Thatcher s polices indicative of greater efficiency? There are two key points. First, the large measured gains proved ephemeral. Second, the gains that underpinned higher profits were secured by structural shifts in employment (hemorrhaging of jobs in manufacturing, coal and steel) and work intensification: in other words increased labour input. In short, no robust evidence of efficiency gains.

14 The past strikes back The re-emergence of a significant productivity deficit has been a long time in the making. Low labour costs and low rates of investment in plant, people and technology have been longstanding features of the British economy. The decline of employment in manufacturing has been underway for decades, but the destruction of manufacturing capacity was overseen and encouraged by the policies of the Thatcher governments. There was no inevitability about this process. Similarly the offensive against the trade unions also began in earnest in the 1980s and has continued with brief periods of respite ever since. The corollary is the disenfranchisement of large sections of the British workforce, a chronic representation gap, widening inequalities, and the removal of an effective challenge to sloppy management practices.

15 The present conjuncture I have stressed historical continuities in Britain s post 1945 economic record, but there are now new elements to the longstanding deficit story. The rapidly rising proportion of low wage, low tech, service sector jobs was not inevitable. It has been encouraged by public policy, by permissive structural that facilitate rather than militate against work degradation. Service sector employment accounts for approximately 80 per cent of GDP. The higher the proportion of low wage, low value added jobs in that total, the more difficult it will be to escape from the low wage, low productivity vicious circle that we are in. Quite why policy-makers and politicians find this puzzling can only be explained by their alarming ignorance and neglect of work.