Low productivity: don’t blame the workforce

Allister Heath reckons economists are complaining too much about Britain’s dismal productivity:

Too few economists seem prepared to accept that at least some of the UK’s productivity shortfall was a good thing. It happened because a large number of low productivity workers found work in the UK, dragging down the average. Similar workers have not been able to get jobs in other countries.

Productivity in countries like France, he says, is only higher because they have kept all their low productivity people from getting jobs:

To see why this matters, consider the following thought experiment: imagine two countries with identical economic characteristics and where the bottom 10pc of workers contribute 5pc of output. In the first country, a new law is passed banning them from working. They all lose their jobs, GDP drops by 5pc – but productivity shoots up by 5.5pc. Now imagine that all these workers move to the second country and immediately find work. That economy’s GDP goes up by 5pc, but because the number of workers rises even faster, average productivity falls by 4.5pc.

What country would you prefer to live in? The one being cheered by economists for its buoyant productivity and high-wage model, or the one with booming employment, where migrants, the young and labour market outsiders all find work?

So the UK, with its welfare reforms and flexible labour market, has encouraged the shirkers and the poorly skilled to get back into work. The downside is that productivity falls because a lot of these ‘labour market outsiders’ are not very good.

It sounds very plausible and it’s an argument that seems to have a lot of traction. I’ve seen a couple of TV discussions recently in which the productivity puzzle was framed as a problem of poor quality workers.

But, while it may sound plausible, it’s wrong.

Firstly, almost all the job growth since the point where productivity growth stalled has been in high skilled occupations.

Emp By Occ Feb 2015

Source: ONS Employment Stats, February 2015

Now it might be that some of this is due to people bigging themselves up in the Labour Force Survey but the numbers are so big that, even allowing for such an error, the pattern is clear. People in high skilled occupations make up a greater proportion of the workforce now than they did before the recession.

Over the same period, not only did the percentage of employees in high skilled roles increase, so did the proportion of workers with tertiary education.

Screen Shot 2015-03-04 at 08.21.02

Source: Growth Through People, UKCES, February 2015

Compared with many other EU countries, a high proportion of the UK’s workforce is both highly qualified and in high skill occupations.

A recent paper by Peter Goodridge, Jonathan Haskel and Gavin Wallis concluded that the make up of the labour force could not have been the cause of low productivity.

[I]ncreased growth in labour composition is driven by (a) an increased employment share for the high-skilled, and (b) strong falls in hours worked of the low- skilled.

[T]he inclusion of labour quality (composition) deepens the productivity puzzle….. [I]t is not the case in the recession that, for example, there was a move to low skilled workers, either in terms of quantity or price, that lowered the composition of labour and so slowed productivity growth. Rather, the opposite occurred.

The ONS agrees (my emphasis):

Labour composition has made positive contributions to output growth in every year since 2000, but notably since 2008.

As noted in Franklin and Murphy (2014), the positive contributions since 2008 have exacerbated the ‘productivity puzzle’ as it implies labour input to production has been even stronger than implied by a non-weighted measure of hours worked. Alternatively, it also implies that the average productive potential of each hour worked has improved over this period, reflecting – on average- a shift towards labour market attributes that are associated with higher productivity such as educational attainment and experience.

The composition of the workforce has increased productivity but other factors, the unknowns of Multi Factor Productivity (MFP), have more than contracted its effect. But for the improved skills, experience and qualifications of the workforce, the fall in productivity would have been even worse.

Decomposition of annual output growth, 2000-2013
Whole economy

productivity growtgSource: ONS Multi Factor Productivity Estimates, January 2015

In short, then, productivity has fallen in spite of the quality of the labour force not because of it.

It may be that some new jobs have been created for the poorly skilled and that some long-term unemployed have been nudged back into work. This can’t be the reason for the fall in productivity, though, because such workers make up a smaller proportion of the labour force than they did before the recession.

Low productivity, and therefore low wages, can’t be explained as the price we pay for getting labour market outsiders back to work. The skills, qualifications and capabilities of our workforce are as good as they have ever been, if not better. Since 2007, we have seen a high skill, low productivity, low pay employment recovery. Whatever else is responsible for the UK’s fall in productivity, it’s not the quality of our workers.

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23 Responses to Low productivity: don’t blame the workforce

  1. sdbast says:

    Reblogged this on sdbast.

  2. If I could hazard a guess, UK lower productivity is due to lower levels of longterm investment in infrastructure and technological innovation

  3. Great piece. I come at it from the opposite angle – being surprised the ‘lie’ hasn’t had more outings. I guess the thing is that not many (general public and politicians) are actually interested in the productivity puzzle.

  4. John says:

    All of which suggests that the culprits are management and not the workers, as well as no help from government policies at all. Something to reflect on on May 7th.

  5. Excellent work, Rick ! Shining a light in the darkness.

    I am sure Allister is a nice guy, but boy, does he get things wrong!

    Some time ago he did a piece for the ASI where he asserted that Britain would boom if Capital Gains Tax was abolished.

    Yeah, right, Allister. Have you taken your medication?

  6. tom schuller says:

    Good stuff. As John says, it’s surely a management issue: but is it line management or senior management? In any case I wonder, as usual, how much is due to underutilisation of qualified women? (though this doesn’t directly explain why we do worse than other countries)

  7. Vince Lammas says:

    So we should first be aware the standard measure of GDP is systematically biased in favour of capital intensive production at the expense of knowledge and labour-intensive production.

    So isn’t the low productivity calculation for the uk simply a reflection of the relatively low level of manufacturing in this country and the disproportionate degree to which the UK relies on services including Financial Services?

  8. could this be caused by signalling issues – eg employers specifying high skills as a sorting mechanism but not actually needing those skills? Are the high level jobs really high level?

    I know annecdotally of people going for frontline work in the service sector but having to go through all kinds of hurdles because even small businesses are struggling to wade through vast numbers of job applications and use whatever mechanisms they can to narrow the field.

  9. John says:

    I have thought for a long time – many decades – that the problem lies in poor industrial relations.
    Most people think of the strike as a weapon used solely by labour, in that they can withdraw their labour indefinitely from employers until such time as a reconciliation is achieved.
    What no one talks about is the decades-long capital strike on the part of employers in the UK.
    They have deliberately chosen not to invest in R&D or new technology in British industry.
    This is why productivity and industriual manufacturing and exports are all at such low levels.
    On a solely cost-benefit analysis basis, they are probably correct to behave in the way they do.
    Cash capital can be put to better use in terms of purely financial returns in global markets.
    Trades in financial derivatives, commodity futures and foreign exchange all give better yields.
    This strategy undoubtedly serves the interests of the owners of capital – but who else?
    If you agree that “There is no such thing as society…’ you can probably live with this.
    Or, such people are disloyal traitors to the economic and social well-being of the rest of us all.
    Take your pick !!!

  10. rogerh says:

    So how do you put a well trained person to productive work in the UK? I took a glance at graduate opportunities in Kent, what do I find – Retail, Police, RAF, KCC, Social Work, Teacher, Recruitment, H&Safety, Head Hunter, Defence, PR, Hotel, Property Care, Paper Maker, Accountant, Biz Analyst. Pretty similar in Essex and Surrey. All worthy occupations, but do they really drive a dynamic economy? Well two or three might but the rest are just moving the deck chairs. These jobs may count as High Skilled on the ONS chart – but do they really put a graduate to good use and do they really boost the GDP numbers?

    Recently met a graduate just finishing a science Masters. So what job was she looking for – administrator (test tubes don’t pay). Worthy, safe, pays the rent but a good use of seven years of study? I then looked for graduate jobs in Lyon, Berlin and Dusseldorf – what a difference! But TBH a look at Metz and Strasbourg was not encouraging. Our problem is worse than you think.

  11. I keep suggesting (in places like this) that, with labour so heavily subsidised by the state at the bottom end (and thus almost free for employers), firms are just using more labour and seeing no need to invest in labour-saving or productivity-improving equipment. I’m sure it’s not the whole story but surely it is part of it. Insofar as it is true then increasing wages should trigger some productivity improvements: they are waiting to happen.

  12. Luke says:

    Are there any reliable figures showing how much capital the average UK worker has to work with, whether private or public such as infrastructure, compared with similar countries? If so, would that indicate whether the problem is (a) lack of capital stuff to work with (eg a lazy fool with a tractor is more productive that a hardworking genius with a donkey) or (b) some mysterious “other” reason(s) why we’re a bit rubbish?

    Or am I missing the point and is the “productivity puzzle” the fact that there is no obvious reason such as lack of capital for the difference between the UK and, say, France?

  13. David says:

    Can’t see if the Public Sector is included in any of these stats Rik .

    • Rick says:

      This is for the whole economy David. I did find some ONS figures for private sector only but I can’t put my hand on them right now. From memory, though, the picture wasn’t all that different. I’ll dig them out and post them at some point.

      • David says:

        Thanks Rik . It’s just that I recall reading a while ago that broadly speaking the Public Sector was traditionally a generation behind the Private in efficiency . Correct or just propaganda (my experiance would suggest the former) that would contribute to the numbers , however in fairness I see no reason why the UK P.S. would be any less efficient than anywhere else . One would certainly expect there to be difference though .

  14. John says:

    Michael Edwards’ comments are absolutely right – and it should also be borne in mind that it is all of us – through our taxes – who are subsidising low-productivity organisations by meeting the cost of various state-paid benefits to their low and middle income employees.
    If they – instead – invested in new technology and working practices, this would have the added benefit of boosting their profits, the incomes of their employees and shareholders, as well as cutting the cost of the national benefits bill.
    But that will require a level of business confidence and forward thinking that is rare today.

  15. David says:

    No John , just a better way to finance that investment , ie less ‘short term ism’ by both the banking industry and the politicians . Dream on !

  16. Paul Ralley says:

    There may be four things going on here:
    1. Its plausible that UK productivity is generally lower than France, as the latter has higher unemployment (especially amongst the young) – that is NOT a post 2008 change though, and hence won’t explain the poor productivity growth since then.
    2. Measured productivity (note: measured) was very high in the banking sector up to and including 2008 – as this is a much smaller part of GDP now, it must have contributed to the productivity issue. (would explain the 2009 fall) – not necessarily to be mourned.
    3. Is not North Sea Oil also down? That is a very capital intensive, high productivity sector (with much of the capital long since depreciated), perhaps explaining the 2012 fall?
    4. House construction and house moving presumably contributes a lot to measured (again: measured) GDP, all those estate agents, mortgage brokers, surveyors, kitchen fitters – activity here is down dramatically (e.g. life insurance sales from banks down 75%).

    So 1. is true, but not explaining anything, and 2-4 are perhaps a significant contributor?

  17. the ghost says:

    I think you should leave your office ,sign up to a agency & do some real field work,The fall in productivity is because of higher theft particularly in food factories,lack of training & motivation means more down time ,more damage,which increases cost of production,poorer controls meaning poorer standards,i really really think you should get of your idealogical posteriori & see the real facts for yourself,high wastage,higher theft,higher cost of production ,lower productivity from a demoralised demeaned workforce with no need for any loyality or show any pride.
    Were you are right is this isn’t the workforces fault but flat earth economic advisor’s like yourself

  18. David L says:

    Others have noted the generally poor management of UK companies here and previously. There has been a large increase in older workers staying put with retirement changes – I wonder if there’s been a reduction in management turnover and therefore a lack of fresh blood at the top?

    • the ghost says:

      David L i think management have had zerohours & workfare forced upon them & are not very happy themselves,it has created all kinds of problems which on tight budgets are impossible to overcome,they need more resources to counteract these problems but that just makes them less profitable & unable to tender at real valued prices they are trapped between lower profitability that they can control or lower profitability they have little control over,or making a loss either way & tendering for work at loss,this is good business if somewhere else in the company they are making large profits because it can be offset by tax,but it not good for competition & the economy in general

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