21 October 2016

Britain’s productivity has fallen. That’s a good thing


No one will ever abolish boom and bust. Not while human beings are driving the business cycle. So our reaction when the inevitable downturn comes is important. This past recession shows the value of the neoliberal – Thatcherite even – insistence on a flexible labour market. For when GDP dropped so did productivity – rather than employment.

The Sheffield Political Economy Research Institute (Speri) thinks this was a bad thing. I do not.

If GDP drops, then either fewer people must be employed to produce it, or all those producing it must produce a little less. If, as was nearly the case, GDP were to drop by 10 per cent, then we should expect 10 per cent of the workforce, perhaps more (it will be the lower productivity jobs which go first), to be made unemployed. It is this which drove fears of 4-5 million job losses. But these, obviously, didn’t happen.

They didn’t, because productivity fell. This isn’t something that we’d like to happen over the long term; rising productivity is the key to us all becoming richer over time. But as a short-term response, everyone producing less is better than 10 per cent of people producing nothing at all. As well as everyone seeing a shaving of their wages, rather than 10 per cent getting no wages at all.

The reason productivity fell rather than jobs being lost, was because we’ve spent decades trying to ensure that this is exactly what happens. We’ve removed many of the protections upon employment. Employers can pick up or discard labour as they see fit, unlike in countries where jobs are protected. The effect of this is that terms of employment also become flexible. And it is those terms, at the margin, which took the brunt of the GDP fall.

Speri tells us:

Most importantly, while manufacturing output has grown slightly in the last five years, the growth in manufacturing output – traditionally evident despite job losses – has effectively stagnated, even as more jobs are being created.

This suggests that the UK manufacturing sector, after decades of increasing productivity by retaining higher-skilled jobs, has now become adept at instead creating lower-skilled jobs, with a more limited impact on productive capacity.

This is neither an error nor a problem, this is the point. We’ve struggled mightily to bring forth what is being called a mouse: low productivity in manufacturing. But this was precisely our aim, to lessen the pain of those busts which afflict any human economy. We do so by making incomes and productivity take the strain, not employment itself. We could of course do things differently: four million on the dole instead of wage cuts and the ignominy of falling productivity. But who is convinced that differently would be better?

Tim Worstall is Senior Fellow at the Adam Smith Institute.