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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Will Euroscepticism prove an unbeatable advantage in the Conservative leadership race?

Conservative members who are eager for Brexit are still searching for a heavyweight champion - and they could yet inherit the earth.

Put your money on Liam Fox? The former Defence Secretary has been given a boost by the news that ConservativeHome’s rolling survey of party members preferences for the next Conservative leader. Jeremy Wilson at BusinessInsider and James Millar at the Sunday Post have both tipped Fox for the top job.

Are they right? The expectation among Conservative MPs is that there will be several candidates from the Tory right: Dominic Raab, Priti Patel and potentially Owen Paterson could all be candidates, while Boris Johnson, in the words of one: “rides both horses – is he the candidate of the left, of the right, or both?”

MPs will whittle down the field of candidates to a top two, who will then be voted on by the membership.  (As Graham Brady, chair of the 1922 Committee, notes in his interview with my colleague George Eaton, Conservative MPs could choose to offer a wider field if they so desired, but would be unlikely to surrender more power to party activists.)

The extreme likelihood is that that contest will be between two candidates: George Osborne and not-George Osborne.  “We know that the Chancellor has a bye to the final,” one minister observes, “But once you’re in the final – well, then it’s anyone’s game.”

Could “not-George Osborne” be Liam Fox? Well, the difficulty, as one MP observes, is we don’t really know what the Conservative leadership election is about:

“We don’t even know what the questions are to which the candidates will attempt to present themselves as the answer. Usually, that question would be: who can win us the election? But now that Labour have Corbyn, that question is taken care of.”

So what’s the question that MPs will be asking? We simply don’t know – and it may be that they come to a very different conclusion to their members, just as in 2001, when Ken Clarke won among MPs – before being defeated in a landslide by Conservative activists.

Much depends not only on the outcome of the European referendum, but also on its conduct. If the contest is particularly bruising, it may be that MPs are looking for a candidate who will “heal and settle”, in the words of one. That would disadvantage Fox, who will likely be a combative presence in the European referendum, and could benefit Boris Johnson, who, as one MP put it, “rides both horses” and will be less intimately linked with the referendum and its outcome than Osborne.

But equally, it could be that Euroscepticism proves to be a less powerful card than we currently expect. Ignoring the not inconsiderable organisational hurdles that have to be cleared to beat Theresa May, Boris Johnson, and potentially any or all of the “next generation” of Sajid Javid, Nicky Morgan or Stephen Crabb, we simply don’t know what the reaction of Conservative members to the In-Out referendum will be.

Firstly, there’s a non-trivial possibility that Leave could still win, despite its difficulties at centre-forward. The incentive to “reward” an Outer will be smaller. But if Britain votes to Remain – and if that vote is seen by Conservative members as the result of “dirty tricks” by the Conservative leadership – it could be that many members, far from sticking around for another three to four years to vote in the election, simply decide to leave. The last time that Cameron went against the dearest instincts of many of his party grassroots, the result was victory for the Prime Minister – and an activist base that, as the result of defections to Ukip and cancelled membership fees, is more socially liberal and more sympathetic to Cameron than it was before. Don’t forget that, for all the worry about “entryism” in the Labour leadership, it was “exitism” – of Labour members who supported David Miliband and liked the New Labour years  - that shifted that party towards Jeremy Corbyn.

It could be that if – as Brady predicts in this week’s New Statesman – the final two is an Inner and an Outer, the Eurosceptic candidate finds that the members who might have backed them are simply no longer around.

It comes back to the biggest known unknown in the race to succeed Cameron: Conservative members. For the first time in British political history, a Prime Minister will be chosen, not by MPs with an electoral mandate of their own or by voters at a general election but by an entirelyself-selecting group: party members. And we simply don't know enough about what they feel - yet. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.