No money behind the sofa for Philip Hammond

The Office for Budget Responsibility has, it appears, given up on the long hoped for productivity spurt. Chris Giles reported in the FT last week that it is to release a more pessimistic productivity forecast in this year’s budget.

For a time, a couple of years ago, it looked as though productivity might be on the rise again but it has stalled recently. The take-off never came. The ONS figures released on Friday show output per hour and per worker more or less where they were at the end of 2007. That’s almost a decade without any productivity growth.

As Gemma Tetlow explained, although employment is at record levels, much of the increase has been in the economy’s least productive sectors and firms, which has created a drag on productivity.

Britain’s productivity woes have deepened in the past year because less productive services companies have hired more staff, while higher value manufacturing has shrunk.

Albert Bravo–Biosca and Stian Westlake noticed something similar when they looked at the allocative efficiency of the UK economy in the decade before the recession. The net effect of new firms coming into the market, they found, was to reduce productivity; the opposite of creative destruction.

It appears that, after a brief post-recession respite, the economy reverted back to its tendency to create low productivity jobs.

Chart by Gemma Tetlow, FT

Also released last week were the ONS measures of economic well being. The ONS points out that the overall household income level didn’t fall as much as other measures because low interest rates reduced mortgage payments. That this effect is now spent as inflation is starting to bring down real household incomes. The general picture is that, whatever measure you use, the economy has barely recovered from the shock it experienced a decade ago. The UK’s post-recession increase in GDP is, therefore, mostly accounted for by an increase in population.

As the Resolution Foundation’s Matt Whittaker said, we can’t blame Brexit for all of this (my emphasis):

The bigger picture here is that household income per person remains no more than 5 per cent higher today than it did a decade ago. The decade before the crisis delivered growth in the region of 30 per cent. It’s easy to fixate on the impact on Brexit, but it shouldn’t blind us to other domestic challenges that have led to a tough ten years for living standards, let alone the last 12 months.

The OBR looks set to adopt a more pessimistic stance by downgrading its productivity projection at the forthcoming budget. That decision is being driven not by an assessment of lower productivity in a post-Brexit world (previous OBR outlooks have already incorporated some such assumptions), but rather by the conclusion that post-crisis productivity stagnation is more permanent than previously thought.

That’s the worrying bit. We were running into productivity problems before 2007 and the recession just made them worse. The British economy’s weaknesses, it seems, run deep.

The OBR has come to the conclusion that we are not likely to see much improvement in the near future. That is likely to mean less tax revenue and, most probably, a significant hit to the public finance projections in next month’s budget.

It’s only two years since the OBR found some money for George Osborne down the back of the sofa. Philip Hammond won’t be so lucky. The sofa is on the skip. Until productivity improves we won’t get a new one.

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7 Responses to No money behind the sofa for Philip Hammond

  1. Dipper says:

    I don’t know why this is difficult to understand. For the last ten years or so the main growth area in the UK has been casual low paid work fuelled by government subsidy of low wages via working tax credits and a steady and massive supply of smart workers from Eastern and Southern Europe. This work does not generate enough income to pay for the massive collateral increase in demands for public services and housing. In 2015 a quarter of all babies born in the UK were born to immigrant mothers. so in 2019 a quarter of all reception classes will be for children of immigrants, a quarter of all paediatricians will be working on children of immigrants, and as we don’t carry a massive surplus of teachers and doctors we will have to import immigrants to look after the children of immigrants. A family of five will require about £15K per year for the children’s education, £10K per year for the NHS. There is absolutely no way that doing minimum wage jobs at the local contract packing establishment will generate anything like enough tax receipts to pay for that. And we haven’t even started on what this does to the housing market.

    As every manager knows, you get the behaviour you reward, and we have rewarded low-productivity work.

    • You seem to be forgetting that immigrants have filled high-skill, high-wage jobs as well as low-skill, low-wage ones. The former has resulted in a boost to GDP per capita, which partly explains why there has been a growth in the latter. In other words, Dutch bankers and Italian software engineers in London have paid for Polish van drivers and Greek baristas as well as native hairdressers and bouncers.

      The aggregate impact on wages of migration – specifically the free movement of EU citizens – has actually been positive for the UK since the mid-90s. However, this obscured the underlying, secular shift in wage growth that occurred as result of globalisation during the same period, which the aftermath of 2008 subsequently revealed (the crisis of productivity is a reflection of weak capital investment, i.e. businesses hoarding cash, and thus insufficient growth in high-skill sectors).

      Wages internationally are converging – what’s known as factor price equalisation – but while this puts upward pressure on Chinese wages, it also puts downward pressure on UK (and other developed nation) wages. This means we will continue to see a tendency towards stagnation in the UK (albeit with episodic blips) for years to come, regardless of any changes we might make to immigration policy. This would also be the case if we remained in the EU, though this would still be better than the alternative – i.e. weak wage growth vs falling real wages.

      This isn’t a novel dynamic. The same thing happened in the late-19th century with the emergence of the US and Germany as industrial powers, and again in the postwar years with the reconstruction of Germany and Japan. The UK used empire to defray the impact of that first wave of globalisation, and the EEC (albeit late) to defray the second wave. What’s different this time is the greater size of the wave (most of Asia) and the more limited ability to offset the impact due to neoliberal “reforms”, such as the removal of capital controls.

      It also means that the contemporary concern over migration springs from the same source as the growing calls for trade protection – i.e. anxiety over “unfair” competition rather than xenophobia. The problem is that in a modern economy, protection will cause more damage at the top end of the wages scale (i.e. high-skill jobs), which is more likely to be geared to exports or sensitive to international regulation, which will in turn undermine demand for domestic low-skill services irrespective of a reduction in low-skill labour.

      • Dipper says:

        thank you for the reply David.

        There aren’t just Dutch and Italian bankers in the city. There are also quite a lot of Russian, Chinese, Indian, Australian, Turkish, Brazilian bankers, to name the ones I worked with. We just took them without offering the rest of their nations free movement, and we could do the same with members of EU states. We can cherry pick, we don’t have to do a wholesale deal.

        I don’t believe that concerns over migration spring from some kind of xenophobic approach about unfair competition. In my area there is concern about the consequences of a sharp increase in population on our infrastructure – mainly visible in permanently snarled up roads, but also in strains on housing, schools, and hospitals. Irrespective of wage equalisation, importing low-wage jobs does not seem to make any sense.

        And surely the argument about protectionism applies mainly to the EU which is erecting protectionist barriers against the rest of the world?

        • MJW says:

          Agree with Dipper, economic migrants treat economic migration as an economic activity, and attempt to head for wherever they think they’ll get the best deal. I see no inconsistency in the UK treating the inflow of economic migrants on the same basis, we want the most economically productive economic immigrants we don’t want the ones who drag productivity or who cost us more than they generate when we factor in all the costs they generate (e.g. increased demand for housing, healthcare, schooling for their children etc…).

          I believe that economic immigration does have a positive effect on the UK economy, but that’s an argument in favour of cherry picking, not an argument in favour of taking the low productivity immigrants alongside the high productivity ones.

        • gunnerbear says:

          “importing low-wage jobs does not seem to make any sense.”

          You’re right, it doesn’t….importing immigrants to do the job (whilst getting vast subsidies from the UK taxpayer is insane).

    • gunnerbear says:

      Well said….time to turn off immigration….all of it.

  2. Caradog says:

    When the first two graphs talk about “Output per Hour” and “Output per Worker”, how are they measuring “Output”?

    If they are doing something dumb, like using unit price or revenue as a proxy for output, then it’s quite likely that those two graphs are just noisy versions of something else. In which case you need to look at the original to understand what is really happening.

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