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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I'm far from convinced by Cameron's plans for Syria

The Prime Minister has a plan for when the bombs drop. But what about after?

In the House of Commons today, the Prime Minister set out a powerful case for Britain to join air strikes against Isil in Syria.  Isil, he argued, poses a direct threat to Britain and its people, and Britain should not be in the business of “outsourcing our security to our allies”. And while he conceded that further airstrikes alone would not be sufficient to beat Isil, he made the case for an “Isil first” strategy – attacking Isil now, while continuing to do what we can diplomatically to help secure a lasting settlement for Syria in which Assad (eventually) plays no part.

I agreed with much of David Cameron’s analysis. And no-one should doubt either the murderous barbarism of Isil in the region, or the barbarism they foment and inspire in others across the world.  But at the end of his lengthy Q&A session with MPs, I remained unconvinced that UK involvement in airstrikes in Syria was the right option. Because the case for action has to be a case for action that has a chance of succeeding.  And David Cameron’s case contained neither a plan for winning the war, nor a plan for winning the peace.

The Prime Minister, along with military experts and analysts across the world, concedes that air strikes alone will not defeat Isil, and that (as in Iraq) ground forces are essential if we want to rid Syria of Isil. But what is the plan to assemble these ground forces so necessary for a successful mission?  David Cameron’s answer today was more a hope than a plan. He referred to “70,000 Syrian opposition fighters - principally the Free Syrian Army (FSA) – with whom we can co-ordinate attacks on Isil”.

But it is an illusion to think that these fighters can provide the ground forces needed to complement aerial bombardment of Isil.  Many commentators have begun to doubt whether the FSA continues to exist as a coherent operational entity over the past few months. Coralling the myriad rebel groups into a disciplined force capable of fighting and occupying Isil territory is a heroic ambition, not a plan. And previous efforts to mobilize the rebels against Isil have been utter failures. Last month the Americans abandoned a $500m programme to train and turn 5,400 rebel fighters into a disciplined force to fight Isil. They succeeded in training just 60 fighters. And there have been incidents of American-trained fighters giving some of their US-provided equipment to the Nusra Front, an affiliate of Al Qaeda.

Why has it proven so hard to co-opt rebel forces in the fight against Isil? Because most of the various rebel groups are fighting a war against Assad, not against Isil.  Syria’s civil war is gruesome and complex, but it is fundamentally a Civil War between Assad’s forces and a variety of opponents of Assad’s regime. It would be a mistake for Britain to base a case for military action against Isil on the hope that thousands of disparate rebel forces can be persuaded to change their enemy – especially when the evidence so far is that they won’t.

This is a plan for military action that, at present, looks highly unlikely to succeed.  But what of the plan for peace? David Cameron today argued for the separation of the immediate task at hand - to strike against Isil in Syria – from the longer-term ambition of achieving a settlement in Syria and removing Assad.  But for Isil to be beaten, the two cannot be separated. Because it is only by making progress in developing a credible and internationally-backed plan for a post-Assad Syria that we will persuade Syrian Sunnis that fighting Isil will not end up helping Assad win the Civil War.  If we want not only to rely on rebel Sunnis to provide ground troops against Isil, but also provide stable governance in Isil-occupied areas when the bombing stops, progress on a settlement to Syria’s Civil War is more not less urgent.  Without it, the reluctance of Syrian Sunnis to think that our fight is their fight will undermine the chances of military efforts to beat Isil and bring basic order to the regions they control. 

This points us towards doubling down on the progress that has already been made in Vienna: working with the USA, France, Syria’s neighbours and the Gulf states, as well as Russia and Iran. We need not just a combined approach to ending the conflict, but the prospect of a post-war Syria that offers a place for those whose cooperation we seek to defeat Isil. No doubt this will strike some as insufficient in the face of the horrors perpetrated by Isil. But I fear that if we want not just to take action against Isil but to defeat them and prevent their return, it offers a better chance of succeeding than David Cameron’s proposal today. 

Stewart Wood is a former Shadow Cabinet minister and adviser to Ed Miliband. He tweets as @StewartWood.