Where did all the productivity go?

The ONS examines how employment is rising, even while GDP falls.

Joe Grice, chief economist of the ONS, released a report today that addresses the recent GDP-employment paradox.

As seen last week, employment has fallen by only 1 per cent since 2008, in spite of a 4 per cent drop in GDP over the same period. As the number of hours worked rises and output decreases, it can only be concluded that people are producing less per hour.

Output, Employment and Total Hours Worked

This stands in contrast with previous recessions, when productivity progressively increased. This has led economists, including the ONS, to probe into why this is happening.

Firstly, Grice suggests that this phenomenon could be linked to the growth of part-time and temporary jobs.

In particular, the author notes that the increase of part-time work to the detriment of full-time jobs has led to a smaller increase in hours worked than number of jobs would suggest.

Full-time and part-time employment (people aged 16 and over)

Permanent and temporary employees

The proposed hours-to-jobs ratio decline is seemingly confirmed by the rise of the proportion of people who are forced into part-time or temporary work for lack of full-time, permanent options.

Involuntary part-time and temporary workers as a proportion of total part-time and temporary workers

This, Grice notes, suggests that the UK market has adjusted to the recession by becoming more flexible.

There is also evidence to support the idea that companies have been reluctant to shed employees, in spite of the dip in output. The rise in real income has significantly slowed in the last ten years (in large part due to the wage adjustment resultant from a more flexible labour market), making it more affordable for companies to maintain staff levels.

Earnings growth, quarter on same quarter a year ago

Furthermore, as the cash flow for non-financial companies shows - unlike in previous recessions - firms have remained financially buoyant enough to retain employment.

Financial surplus/deficits of private non-financial companies

Finally, the report draws attention to the notable rise in self-employment, perhaps as a direct consequence of lay-offs. However, it is stressed that the exact effects of this rise on output and hours worked remain unclear. (I’ve been told by the ONS that a break-down of self-employment jobs by industry will be published from next month onwards – it’ll be interesting to see whether these "newly self-employed" are genuine entrepreneurs, people who are basically unemployed by another name, or just corporate attempts to dodge the statutory rights conferred to the elusive, and rather narrowly defined, "employee".)

Self Employment as a percentage of total employment

The report goes on to conclude that while the aforementioned reasons may play a significant part in explaining the mystery (further research is being done to confirm this), it is important to consider other issues.

For instance, some commentators have attributed the paradox to consistent under-reporting of GDP. However, the ONS admits that this is unlikely, as previous periodic assessments of GDP revisions haven’t shown any significant bias. Grice does concede that the survey data may be out of sync with GDP estimates, as the former can give information about future trends, while the latter are necessarily based on past tendencies. Nonetheless, some pundits believe that the GDP doesn’t reflect the strength of PAYE and/or tax receipts. But the report contends that the ratios do not seem abnormal:

Ratio of PAYE and VAT receipts to GDP

Moreover, when compared to productivity across Europe, the UK conundrum seems less puzzling. Registering the same trends as its continental counterparts, the drop in British productivity, argues the ONS, could very well be explained by common international factors.

International comparisons of productivity (Real labour productivity per hour)

Following reports by the OECD and IMF, the ONS speculates that the financial crisis may have altered the UK’s productive potential. While acknowledging that there were many forces at work during the crisis, Grice points to a few main factors that may have contributed to the current recession’s exceptionalism.

Firstly, the author argues that "over-exuberant financial intermediation" led to the investment of resources in activities with poor returns. It is argued that as a consequence, we are now left to deal with shoddy machinery and poorly trained individuals. Secondly, due to the drop in financial intermediation after the crisis, firms lost access to financing that would boost productivity. Finally, the report states that because the risk premium increased so significantly after the crisis, existing capital stock was rendered unviable because it was unable to generate the required return at the higher rate.

The ONS concludes that all the aforementioned explanations are likely to play a role in explaining the dip in productivity, and that each one warrants further, extensive research.

A journalist sleeps at his desk. But falling productivity doesn't mean lazy workers. Photograph: Getty Images
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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

***

Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.