The Economist: The Productivity Puzzle

[Will!]

Britain’s stall in productivity is more serious than that of any rich-world peer. A closer look reveals different industries travelling at very different speeds

Quite an interesting discussion in The Economist of the relative productivity of the various sectors of the UK economy.

Some of it is a bit weak, such as:

The slump has had two separate phases. When the economy stumbled into a year-long recession in 2008, many firms decided that, rather than fire workers, they would keep them on and weather the storm, to avoid costly rehiring later. Employing the same number of people while producing less meant that output per hour fell. As expected, when the economy began to recover so did output per hour, rising by 3% between 2009 and 2011.

Then something mysterious happened. Contrary to most forecasts, productivity froze. Growth continued, but instead of getting more from their existing workforce, employers went on a hiring spree. As a result Britain added 1.3m jobs between 2010 and 2014.

Something mysterious? Negative real interest rates and increasing in-work state benefits perhaps?

Also:

Technological advances, aided by collaboration between firms, universities and government, are making manufacturing more efficient. Rolls-Royce, an aerospace company, has halved the time it takes to manufacture fan discs and turbine discs used in jet engines, using methods developed at the Advanced Manufacturing Research Centre (AMRC) at Sheffield University. The AMRC was established in 2001 and now forms part of a network of government-backed “catapult centres”, whose aim is to forge links between academia and industry. Such links are crucial for success in manufacturing, says Hamid Mughal, Rolls-Royce’s director of manufacturing, as they create a “sandbox” environment, allowing experimentation that would never be viable for a single firm.

That'll be why Rolls Royce has a negative return on capital employed then.

Nevertheless, it's a nice picture of which parts of our economy are zombified because of our failure to grasp the nettle in 2008.

[Dorkins]

I don't get what the huge productivity mystery is supposed to be. The UK is a country in which productive work is not really rewarded due to the system of rents (high near employment centres) and taxes (mostly raised from labour). Many people quite sensibly respond to this by avoiding heavily taxed productive work as much as possible (e.g. doing the minimum number of hours required to qualify for tax credits) and instead focus their efforts on extracting rents from other people (e.g. arranging their living arrangements to maximise benefit and tax credit income, becoming BTL landlords).

Maybe if there was some kind of reward for productive work (higher net income, better standard of living, ability to buy secure housing) then people would do more of it?

[mikthe20]

I don't get what the huge productivity mystery is supposed to be. The UK is a country in which productive work is not really rewarded due to the system of rents (high near employment centres) and taxes (mostly raised from labour). Many people quite sensibly respond to this by avoiding heavily taxed productive work as much as possible (e.g. doing the minimum number of hours required to qualify for tax credits) and instead focus their efforts on extracting rents from other people (e.g. arranging their living arrangements to maximise benefit and tax credit income, becoming BTL landlords).

Maybe if there was some kind of reward for productive work (higher net income, better standard of living, ability to buy secure housing) then people would do more of it?

Very well put!

[R K]

High price of oil during most of this period is probably significantly underestimated as a contributory factor

As it was as a proximate cause of the so-called "financial crisis".

http://stockcharts.com/h-sc/ui?s=%24WTIC&p=W&yr=5&mn=0&dy=0&id=p09420926478

Oil around $100 (after the reflation) until last summer will have taken its toll on productive output.

Edited June 5, 2015 by R K

[interestrateripoff]

Isn't the service sector low productivity anyway?

If you are on a crap wage why are you going to put the effort in, and even if you do put the effort in increased productivity means higher wages which the BoE and the neoliberals don't want. Which then means the increased productivity gets pocketed by the rentier class.

Also if you are on low pay you are on work welfare why put the effort in?

[durhamborn]

I don't get what the huge productivity mystery is supposed to be. The UK is a country in which productive work is not really rewarded due to the system of rents (high near employment centres) and taxes (mostly raised from labour). Many people quite sensibly respond to this by avoiding heavily taxed productive work as much as possible (e.g. doing the minimum number of hours required to qualify for tax credits) and instead focus their efforts on extracting rents from other people (e.g. arranging their living arrangements to maximise benefit and tax credit income, becoming BTL landlords).

Maybe if there was some kind of reward for productive work (higher net income, better standard of living, ability to buy secure housing) then people would do more of it?

100%.That is whats happened.There is very little reward for working hard for a huge percentage of people.The ones who see their tax pay for it also decide to do less.Business doesnt need to buy expensive machines etc that need 10 years to depreciate.They simply employ NMW labour whose wages the government make up and are easy to sack/lay off.

I myself am a classic example.I worked for a huge pharma company on very good money (and tax).A lot of work i did saw production increase 50%/100%+ per hour.I left and set up myself in a retail business and keep my earnings at tax allowance level.I have no interest in feeding the system with tax.

[evetsm]

it's no puzzle. and it's got nothing to do with oil. We are near the bottom of the productivity heap and everyone needs oil.

as said above , it's because we rent and sell each other houses. The rest sell coffee and burgers. A few sell high end services.

This is because like no other country, we sold our soul to the financiers. When the middle man becomes the economy, then the economy is dying. By definition.

Instead of selling goods into a market of 7bn people, we choose to sell houses into a market of 60 million. The Germans saw that joke coming. Instead of ploughing their savings into a house they started export manufacturing companies. The potential profits were 100x bigger in a market that is 100 times bigger. But because it's tough, it requires optimal productivity, education,innovation and efficiency to export, we opted out.

[renting til I die]

I don't get what the huge productivity mystery is supposed to be. The UK is a country in which productive work is not really rewarded due to the system of rents (high near employment centres) and taxes (mostly raised from labour). Many people quite sensibly respond to this by avoiding heavily taxed productive work as much as possible (e.g. doing the minimum number of hours required to qualify for tax credits) and instead focus their efforts on extracting rents from other people (e.g. arranging their living arrangements to maximise benefit and tax credit income, becoming BTL landlords).

Maybe if there was some kind of reward for productive work (higher net income, better standard of living, ability to buy secure housing) then people would do more of it?

I don't get this productivity mystery either, it seems that you have stated it pretty clearly!

I would be interested in anyone who can explain to me how they calculate these broad country wide productivity levels. Most of the capacity levels we get feedback for at my firm appear to be b****x's.

Edited June 5, 2015 by renting til I die

[Timak]

Again is it a mystery?

When I was growing up we had automated car washes installed in most petrol stations. Now you get an Eastern European man handwashing your car in the supermarket on a zero hour contract.

[SillyBilly]

The fact such an important metric is seemingly a mystery to the BoE tells me enough to have lost all faith in the "system". I buy Dorkin's explanation, what is the point in working hard? If you want top dollar, then go to the States and be prepared to work hard. You can work equally hard here and be no better off than some lazy **** sat on a property in the right location or a family on tax and child tax credits, sooner or later people figure the game out I guess. You may get a few more quid in your pocket but is it worth it?

[Si1]

I agree with everything I've scanned from the above. The economist has a property correspondent who is bullish on uk house prices and is in favour of tax credits, do you know.

Edited June 5, 2015 by Si1

[Si1]

Also. On a personal level, putting aside financial remuneration, owing to special protection of rentiers, upper management (who are just rentiers) and capital - the business markets that we do have, have poor performance feedbacks, that is they become protected markets, so efficiency goes unrewarded anyway, just for personal achievements sake, many people stop bothering because actions no longer have consequences in the current economy.

[LabConH8er]

it's no puzzle. and it's got nothing to do with oil. We are near the bottom of the productivity heap and everyone needs oil.

as said above , it's because we rent and sell each other houses. The rest sell coffee and burgers. A few sell high end services.

This is because like no other country, we sold our soul to the financiers. When the middle man becomes the economy, then the economy is dying. By definition.

Instead of selling goods into a market of 7bn people, we choose to sell houses into a market of 60 million. The Germans saw that joke coming. Instead of ploughing their savings into a house they started export manufacturing companies. The potential profits were 100x bigger in a market that is 100 times bigger. But because it's tough, it requires optimal productivity, education,innovation and efficiency to export, we opted out.

I worked with an East German recently and he spent the week looking at houses he was interested in buying online.

The price range he was looking at was around 300K Euro in some provincial town i'd never heard of, and the places he as looking at were similar priced to the ones in southern England i'm looking at.

Too add German banks got bailed out just as ours did, Greece is in such dire straits at the moment as the IMF ECB shifted this German/French bankers debt onto Eurozone taxpayers.

[LabConH8er]

One reason we have poor productivity has to be due to the fact managers in Britain have got into their position due to rs kissing and not their ability. And once in a position of power its a them and us scenario.

There isn't too many bosses i've had in my time that i've wanted to work that bit harder for.

[davidg]

The Germans saw that joke coming. Instead of ploughing their savings into a house they started export manufacturing companies.

That will be the Germans with euro jobs and lower productivity than the disorganized French. The French who have such repressive tax and social security contributions that many can't be bothered to get out of bed in the morning. The French with 5.6 million unemployed. So why is French productivity high? Well because French companies prefer to put a strike free robot in to do a job rather than a high cost human.

[Si1]

That will be the Germans with euro jobs and lower productivity than the disorganized French. The French who have such repressive tax and social security contributions that many can't be bothered to get out of bed in the morning. The French with 5.6 million unemployed. So why is French productivity high? Well because French companies prefer to put a strike free robot in to do a job rather than a high cost human.

And/or because all the unproductive people are unemployed

[canbuywontbuy]

We put so much emphasis on unproductive-assets-as-wealth, coupled with a bloated welfare system, actually drawing beads of sweat from your brow in order to earn your money is so passé.

[steve99]

I don't get what the huge productivity mystery is supposed to be. The UK is a country in which productive work is not really rewarded due to the system of rents (high near employment centres) and taxes (mostly raised from labour). Many people quite sensibly respond to this by avoiding heavily taxed productive work as much as possible (e.g. doing the minimum number of hours required to qualify for tax credits) and instead focus their efforts on extracting rents from other people (e.g. arranging their living arrangements to maximise benefit and tax credit income, becoming BTL landlords).

Maybe if there was some kind of reward for productive work (higher net income, better standard of living, ability to buy secure housing) then people would do more of it?

Which points to the fact that the UK is one big 'Rentier' economy whereby ticket clipping has gotten so big that real stuff does not work like it should and we end up with a perverted abstract economy and life arragements as bad as places in the world and history where religion for example has done likewise.

egs's

1) Housing is for speculators and landlords, not shelter for people (unless they pay the massive landlord tax) What sort of perversion is it when 3/4s of the population belive that this is right?

2) 50%++++ of the so called economy is in business models that support the reniter economy (how real is this?) agents, bankers, some government departments etc

3) This also of course applies to comercial enterprises whereby the taxes, that is, busines rates and massvie comercial rents take up much of a businesses output, so much in fact that it becomes pointless opening a new business in many cases. (the government and so called industry groups will only focus on 'high' wages as a barrier while at the same time most of the Uk is a low wage economy visavsis its cost of living).

4) According to the government and right wing talking heads, the 'City of London' is the most productive place in the UK and that says it all, but in fact little of value gets done, no food grown, no houses built,, nothing, just big money laundering, scheming and scamming by paraiste scumbags extracting the work of the majority and not only claim the productivity and enterprise reward but at the same time do it entirely off the backs of real workers in the economy (and slave labour in developing countries).

This is just a snippet, and Im sure smarter people around here can add to this list but this is what the UK has been reduced to.

[steve99]

We put so much emphasis on unproductive-assets-as-wealth, coupled with a bloated welfare system, actually drawing beads of sweat from your brow in order to earn your money is so passé.

A welfare system that is prmarily a sop to big business in that it removes the need for them to pay a living wage. ie the middle classes paying big income tax bitches about the unemployed and lower paid types but in fact it it the big end of town that they are subsidising. See how everything would colloapse if this welfare was removed.

[LeeT]

I agree with just about all of the above. Just thought I'd add another couple of factors.

People acquire skills over time. The baby boomers entering retirement are also retiring their highly productive skills to be replaced by young immigrants who, despite often having degrees find themselves working in low productivity employment. Arguably as more of these oldies retire the services they demand are geared to the personal services side of things and will weigh of future productivity too.

As far as I'm aware the productivity of the public sector is measured by their wages as there isn't a market price for their services. Public sector job losses in the early coalition period led to productivity gains as the former civil servants found themselves entering private sector work where a productivity mark-up was added to their wage bill in the form of a sales price for services rendered. As austerity has slowed and the public sector workforce has become more stable this productivity boost has disappeared and has been compounded by public sector pay freezes which don't match inflation.

There's also the zombie company argument that low interest rates have enabled low productivity companies to hang in there that in a more realistic interest rate environment would have gone bust, thus raising average productivity per hour.

With unemployment now being so low it makes intuitive sense that the marginal new employee will be less productive than those already in employment and will drag the average down.

As the governments plans to meet deficit targets involve higher levels of personal debt to create demand in the economy I'm guessing we'll see more expansion in low pay/low productivity consumer tat retail and other consumer services.

In the Economist article I found the focus on car manufacturing interesting given the slowdown in that sectors growth just announced. Reasons for this suggested have included people running out of PPI money and the recession causing a fall in new car sales and a corresponding scarcity of second hand cars a few years later meaning high second hand prices so new cars were bought instead. I found an article from last August to the effect that 80%+ of new car sales are now on credit. Car manufacture really is just a set of big financial institutions with production divisions.

Edited June 6, 2015 by LeeT

[spyguy]

As far as I'm aware the productivity of the public sector is measured by their wages as there isn't a market price for their services. Public sector job losses in the early coalition period led to productivity gains as the former civil servants found themselves entering private sector work where a productivity mark-up was added to their wage bill in the form of a sales price for services rendered. As austerity has slowed and the public sector workforce has become more stable this productivity boost has disappeared and has been compounded by public sector pay freezes which don't match inflation.

Not really.

Edited June 6, 2015 by spyguy

[davidg]

And/or because all the unproductive people are unemployed

Another valid idea.

[LeeT]

Not really.

OK, tell me more. Do they use some kind of shadow pricing and see what an "equivalent" worker would contribute to productivity in the private sector? I did get the feeling that we were being taught a simple version of this in my economics courses at uni.

[spyguy]

OK, tell me more. Do they use some kind of shadow pricing and see what an "equivalent" worker would contribute to productivity in the private sector? I did get the feeling that we were being taught a simple version of this in my economics courses at uni.

http://www.ons.gov.uk/ons/guide-method/method-quality/specific/economy/productivity-measures/public-service-productivity/faqs/index.html#4

[LeeT]

Cheers for the link Spyguy.

The view from FTAlphaville

http://ftalphaville.ft.com/2015/06/08/2131096/banks-businesses-or-the-bust-deeper-into-the-uk-productivity-puzzle/