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
Photo: Getty
Show Hide image

Who will win in Stoke-on-Trent?

Labour are the favourites, but they could fall victim to a shock in the Midlands constituency.  

The resignation of Tristram Hunt as MP for Stoke-on-Central has triggered a by-election in the safe Labour seat of Stoke on Trent Central. That had Westminster speculating about the possibility of a victory for Ukip, which only intensified once Paul Nuttall, the party’s leader, was installed as the candidate.

If Nuttall’s message that the Labour Party has lost touch with its small-town and post-industrial heartlands is going to pay dividends at the ballot box, there can hardly be a better set of circumstances than this: the sitting MP has quit to take up a well-paid job in London, and although  the overwhelming majority of Labour MPs voted to block Brexit, the well-advertised divisions in that party over the vote should help Ukip.

But Labour started with a solid lead – it is always more useful to talk about percentages, not raw vote totals – of 16 points in 2015, with the two parties of the right effectively tied in second and third place. Just 33 votes separated Ukip in second from the third-placed Conservatives.

There was a possible – but narrow – path to victory for Ukip that involved swallowing up the Conservative vote, while Labour shed votes in three directions: to the Liberal Democrats, to Ukip, and to abstention.

But as I wrote at the start of the contest, Ukip were, in my view, overwritten in their chances of winning the seat. We talk a lot about Labour’s problem appealing to “aspirational” voters in Westminster, but less covered, and equally important, is Ukip’s aspiration problem.

For some people, a vote for Ukip is effectively a declaration that you live in a dump. You can have an interesting debate about whether it was particularly sympathetic of Ken Clarke to brand that party’s voters as “elderly male people who have had disappointing lives”, but that view is not just confined to pro-European Conservatives. A great number of people, in Stoke and elsewhere, who are sympathetic to Ukip’s positions on immigration, international development and the European Union also think that voting Ukip is for losers.

That always made making inroads into the Conservative vote harder than it looks. At the risk of looking very, very foolish in six days time, I found it difficult to imagine why Tory voters in Hanley would take the risk of voting Ukip. As I wrote when Nuttall announced his candidacy, the Conservatives were, in my view, a bigger threat to Labour than Ukip.

Under Theresa May, almost every move the party has made has been designed around making inroads into the Ukip vote and that part of the Labour vote that is sympathetic to Ukip. If the polls are to be believed, she’s succeeding nationally, though even on current polling, the Conservatives wouldn’t have enough to take Stoke on Trent Central.

Now Theresa May has made a visit to the constituency. Well, seeing as the government has a comfortable majority in the House of Commons, it’s not as if the Prime Minister needs to find time to visit the seat, particularly when there is another, easier battle down the road in the shape of the West Midlands mayoral election.

But one thing is certain: the Conservatives wouldn’t be sending May down if they thought that they were going to do worse than they did in 2015.

Parties can be wrong of course. The Conservatives knew that they had found a vulnerable spot in the last election as far as a Labour deal with the SNP was concerned. They thought that vulnerable spot was worth 15 to 20 seats. They gained 27 from the Liberal Democrats and a further eight from Labour.  Labour knew they would underperform public expectations and thought they’d end up with around 260 to 280 seats. They ended up with 232.

Nevertheless, Theresa May wouldn’t be coming down to Stoke if CCHQ thought that four days later, her party was going to finish fourth. And if the Conservatives don’t collapse, anyone betting on Ukip is liable to lose their shirt. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.