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26 July 2012

Productivity’s down, but can it recover?

There probably isn't a long-term drop in productivity.

By Alex Hern

The standard explanation for the divergence between the (quite good) employment data and the (abominable) GDP data is that productivity has, for whatever reason, plummeted.

Various explanations have been proffered. It may be that the productivity slump is specific to this recession, and is caused by the government’s desperate desire to “rebalance” the economy from the public to private sectors. If it’s achieved this by laying off a lot of productive workers, they will find themselves working less well in their new jobs in the private sector, and so there will be a productivity slump – even while employment goes up.

Alternatively, the productivity slump might be a short-term effect of the slump. In this recession, for whatever reason, the drop in demand didn’t lead to people laying off workers, but instead caused them to keep them on in the hope that the slump would end and they could start using their slack capacity again. This is the preferred explanation of Free Exchange, which writes:

Supporters . . . argue that high inflation doesn’t mean there is no capacity in the UK economy: recent high inflation was down to a rise in commodity prices and the VAT increase; it has since dropped. Business surveys are often unreliable and don’t account for what happens when demand picks up. The financial crisis doesn’t explain everything: look at the USA and Spain. These countries have had much stronger productivity growth. Indeed, Bill Martin and Robert Rowthorn, of Cambridge University, have lent much support to this “temporary” explanation in a May publication. They show that the shift in jobs from high- to low-productivity sectors only amounts to a 1/4 percentage point of the productivity shortfall.

Then, of course, there is the argument that there isn’t actually any problem at all. The FT reports

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The single biggest puzzle for economists is the fact that the GDP data simply do not tally with the message from the labour market which is that employment, and the number of jobs, are growing. “It is difficult to reconcile the weakness of today’s [Wednesday’s] official GDP data with any other indicator of economic or labour market activity,” said Kevin Daly, economist at Goldman Sachs.

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Mr Daly noted that in the three months to May, employment rose by 0.6 per cent or 182,000 jobs while the unemployment rate fell by 0.2 percentage points to 8.1 per cent. That, he said, was consistent with annualised GDP growth of 1.0 to 1.5 per cent for the second quarter.

It’s Goldman Sachs versus the ONS. Of course, last quarter it was Goldman Sachs versus the ONS as well, and the ONS were very definitely proved right. Don’t expect much different this time.