The OBR needs to get it right on productivity

If our forecasts carry on being made on faulty assumptions the government will never learn.

The Office for Budget Responsibility is making a critical mistake in being excessively gloomy about a lack of productive potential in the UK since the 2007 crisis.

One of the characteristics of the recession has been how quickly employment levels have returned to pre-recession levels. The OBR interprets this as being a result of severe damage to the productive capacity of the economy. Any demand expansion through fiscal policy to stimulate growth would, in its opinion, quickly run into production bottlenecks and hence price increases rather than an increase in output. OBR estimates put spare capacity, the potential to meet any new demand, at below 3 per cent. The issue is, where's the firm evidence for this view?

Historically, the UK economy has always returned quickly to its underlying long-run trend in productivity growth following a recession, and there's nothing to suggest this pattern has changed. The OBR is simply being far too pessimistic. Based on the evidence from past trends, the current level of spare capacity is likely to be nearer to 12 per cent than 3 per cent, mostly in the form of underemployed labour. Employers have decided to hold onto workers rather than risk running down their workforce.

The OBR has powerful allies in its position on capacity from the Treasury and the Bank of England. So who's right? What can look like an academic detail around the nature of 'spare capacity' has a direct impact on the livelihoods of huge numbers of workers and their families. It's important that such powerful institutions take a closer look at why there is so much disagreement between experts.

The first step is to understand how the current recession differs from those in the past and the implications. The drop in output has been more severe and persisted far longer than all previous recessions in the past forty years. Output has still not reached its pre-recession level after five years and there is little chance of it doing so before 2015. At the same time, employment growth has confounded the forecasters. Employment fell by 600 thousand following the 2008 downturn but recovered to exceed its pre-recession level by 2012. Despite stagnant output growth, employment increased by 700 thousand (2 percentage points) between 2010 and 2012.

The overall increase in employment between 2010 and 2012 is not all that it seems at first sight. Firstly, more than half of the additional jobs have been for part-time, not full-time, workers. For women, nearly three-quarters of the extra jobs have been for part-time workers. Secondly, workers are not working as many hours as they would like. According to the Office for National Statistics, one in ten workers wanted to work more hours than they were offered during 2012; and between 2008 and 2012, the number of workers who wanted to work more hours increased by one million. Thirdly, there were half a million fewer full-time jobs in 2012 than at the start of the recession.

Employers are temporarily "hoarding" labour so that output can be increased more rapidly when demand recovers. They don't want to lose skilled and experienced workers; keeping workers on during periods of slack demand can help build morale and good relations; and laying workers off can be difficult and expensive. There is also, for example, no evidence of large-scale scrapping of plant and machinery as happened in the manufacturing sector during the recession of the early 1980s.

The likelihood that low productivity in the UK is a consequence of labour hoarding is supported by international trends. Employers in the USA are less reluctant to shed labour during recessions than UK employers. The drop in labour productivity following the financial crisis was consequently much smaller in the USA than in the UK despite a very similar drop in output. The German experience has been similar to the UK. Jobs were protected in the early part of the recession through government sponsored short-time working schemes. This resulted in a sharp drop in labour productivity and a rise in labour hoarding.

The OBR is surely wrong to assume there has been no growth in productive potential since 2007. This not only assumes that technological progress has come to a stop because of the recession, which seems most unlikely, but also denies the likelihood that productivity has been held down because of substantial labour hoarding. The existence of large amounts of spare capacity in the UK economy implies that a demand expansion could be achieved without any serious inflationary consequences. Even if the growth in productive capacity has not kept pace with its historical trend, a growth rate of only half the historical trend would still leave enough spare capacity to justify a demand injection in order to bring a quicker end to the recession.

It is surely the right time to get the economy moving forward again by financing much needed infrastructure projects and new housing developments. To do otherwise would be seriously wasteful and ongoing pessimism could lead to a withering of productive capacity over the longer term. It is high time the Treasury took some positive action instead of burying its head in the sand.

A trader sleeps at her desk. Photograph: Getty Images

Jim Taylor is an Emeritus Professor at Lancaster University Management School.

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Jamie Reed: What it's like to stop being an MP

As I approach the whips’ office through the tearoom staircase, a colleague shouts: “It’s Steve McQueen!”

Leaving parliament was never going to be easy. Having entered the Commons at a relatively young age – I was 31 – I knew that a parliamentary existence would be strange, even weird.

I knew that I would never be a “lifer”. A long Commons career followed by a sinecure in the Lords was never for me. This was informed by an aversion not to prolonged public service – the career in the nuclear industry for which I have departed parliament is just as dedicated to public service – but to the culture in which politics in Westminster is undertaken. There is a lot wrong with parliament. I arrived with a healthy contempt for its culture, behaviours and practices; I leave with the knowledge that this contempt was correct.

As a young MP, I felt like Carraway, never like Gatsby. Still, leaving the Commons has taken a huge mental and emotional effort.

21 December 2016

The news of my resignation breaks a few hours early because of a leak. The ­Guardian’s north of England editor, Helen Pidd, brings forward the publication of our interview as a result. Within minutes, my phone explodes. Twitter is unusable. My email server begins to creak. I watch with mounting ­anxiety. Ignoring calls from journalists – many of them friends – I talk instead with my fellow MP John Woodcock.

In politics, you acquire a sixth sense for who would be with you in the trenches at the worst moments. John is such a person. I don’t remember the conversation; I just remember hanging up and crying. I ­shower, dress and head for my in-laws’ farm. When I open the door, there are bottles of champagne on the step. That night, trying to avoid the news, I learn that I was young, popular, brilliant and talented. It’s like being at my own funeral. I drink the champagne.

24 December

I receive a text from Jeremy Corbyn wishing me and my family well. I thank him for his warm words on my resignation.

9 January 2017

I’m en route to the Vogtle nuclear power plant near Atlanta, Georgia, as a guest of NuGen. At Vogtle, Georgia Power is building two AP1000 reactors – the same type as will be built in Copeland. This is a project to which I have devoted 12 years of my life – from writing nuclear policy with the Blair government to making sure that Copeland was chosen as a nuclear new-build site and working to ensure that successive governments maintained the policies underpinning the nuclear renaissance that the Blair-Brown administration began.

Clement Attlee’s Labour government created the nuclear industry, the last Labour government created the nuclear renaissance and I am leaving parliament to return to the nuclear industry – yet Labour will be forced to fight the by-election in my former seat amid allegations of being anti-nuclear. There is nothing new in post-truth politics. Lies have always had the power to seduce.

23 January

It’s my last week in parliament and I’ve made arrangements to see the whips. As I approach the whips’ office through the tearoom staircase, a colleague shouts: “It’s Steve McQueen!”

1 February

I leave my home in Whitehaven for Sellafield at 6.45am. As I drive through the frost, an iridescent light appears on the horizon: a new dawn has broken, has it not?

I collect my pass and enter a whirlwind of meetings, inductions and instructions. Everyone is generous, welcoming and warm. It is at this point that, for the first time, I am faced with irrefutable proof that I am no longer an MP. I am reminded of my parliamentary induction. Chief Whip Hilary Armstrong told us, “Get in the chamber . . . Don’t hide . . . Sink or swim . . .” New Labour was no place for a snowflake. I am reminded, too, of my induction by the House payroll and expenses administrators. A year before the expenses scandal shook Westminster, they informed me: “All we ask is that you don’t buy any antiques . . .”

2 February

As when I entered parliament for the first time, I don’t have a desk. I’m hot-desking, or hot-podding, or hot-cubing. I remind myself that, for now, I remain the Crown steward and bailiff of the Manor of Northstead.

I bump into a colleague from my first time in the nuclear industry. “All right?” he asks.

“Getting there,” I reply.

“You know what they’re saying, don’t you?” he continues.

“No. What?”

“‘The bloody ego has landed.’”

I walk away wondering if it’s now my role in life to remind people of films set in the Second World War.

3 February

It’s a Friday and it strikes me that I have no constituency surgery. Everyone around me has their head down, meeting targets, solving problems. This is a £2bn-a-year operation. There’s no room for Gatsby here. This is why my new role excites me.

The self-immolating stupidity of Brexit, combined with the complex and growing needs of my family, contributed to my decision to leave parliament. Most of all, though, it was the opportunity to work in this organisation and help to drive change within it and my community that caused me to make the switch. My former constituency can and should be at the centre of one of the fastest-growing parts of the UK economy in the years to come. A changing Sellafield and a dynamic industry will be at the heart of this, and time is of the essence.

20 February

The by-election in my former seat draws near and my time as the Crown steward is running out.

I am repeatedly approached by the media for comment and I duck every request. This is for someone else now and I wish my successor well. None of us is indispensable. l

Jamie Reed is Labour MP for Copeland.

This article first appeared in the 24 February 2017 issue of the New Statesman, The world after Brexit