Monday 16 June 2014

Solving the Productivity Problem

The high foreheads down at the Bank of England are stumped, confuzzled. Employment is up, output is up, economic growth is up but productivity is stubbornly stalled. In fact, it remains well below the pre-crisis peak. Such a scenario in economics is what Jack the Ripper is to murder mystery. There's a definite culprit, but none of the received models are capable of pinning down the guilty party. Is it the statistical measures? Is it the weather? Naturally, the Bank are right to be concerned - the less productive the UK economy, the more pronounced its relative decline would be vis a vis its competitors, even if - as now - the economy is growing absolutely as per the GDP figures.

According to the BBC's statistics bod the Bank measures productivity takes "the amount of goods and services produced in the economy and divide it by the number of hours worked." So, what's going on? Here are some suspects I'd stick in the line up.

As we are told time and again, there are more people in employment in Britain than ever before. The rate might not be at record levels but the absolute number of workers is. The most recent employment figures have 30.5 million in work. What bearing does this have on productivity figures? The more hours worked in a given economy, the more the productivity figures will be depressed. For example, in May 2008 the number of people in employment were 29.5m, an in-work rate of 74.9%. The ONS productivity measure by worker saw output fall from 103.4 to 98.3 in Q1 2009, before recovering in fits and starts to 100.5 at the end of last year - with about a million more in work. So then, do the absolute numbers have a depressing effect? If economic growth was flatlining, or numbers employed were increasing at a rate faster than GDP figures, then yes, it would appear so. Even though GDP is again on the rise, it is still below pre-crisis. Hence the productivity puzzle could be partly explained by the disparity. Then again, the ONS measure for productivity by output per hour started off with 103.1, and falling by Q4 2013 to 99.1. This outcome is too strong to be a mere effect of more workers in work. Rather, there are more employees producing less.

This is where we're going to have to get more sociological. In Feb-Apr this year, 1.633m workers, or 6.4% of the whole workforce, were on temporary contracts. While the proportion of those in temporary work because they cannot find permanent positions are falling, nevertheless this is an all-time high. There are also now 4.533m self-employed workers too, 1.175m workers with second jobs, and 8.175m part-time workers. All three of these are records as well. Without overstating the case, this points to a significant proportion of the workforce for whom precarity is their lot. The majority of these are likely to be in receipt of modest incomes, and more prone to insecurity anxiety. Furthermore, especially in the context of a period of crisis and stagnation, there remains understandable, overhanging fears for one's job. It saps workplace morale. Having had the displeasure of working under the threat of redundancy, I know. As workers are human beings and not machine inputs, anxiety + fatalism + precarity = lower productivity. If, on the other hand, a large proportion of Britain's workplaces paid at least the living wage, offered job security and more job autonomy, and various fringe benefits it's not unreasonable to assume higher morale would lead to higher productivity. You treat workers like cogs, then they'll occasionally seize up like cogs.

The socio-cultural climate pervading work will have an effect you can't measure easily on a spreadsheet. But a diffuse structure of feeling is not all that's going on. There is the employer side of the equation to consider. All employers, whether public, private, or part of the amorphous third sector engage people for what they do. In other words, they purchase their workers' labour power for certain quantities of time. Where business is concerned, it's in order to make profits. If you hold to Marx's approach to surplus value, which I do, an employer buys labour power because it generates value over and above the value of that labour power. i.e. Employing a factory hand for £7.50/hour sees them, over that period of time, produce commodities worth £77.50. This value is nominal, however. It is not realised until those goods are sold. Out of the surplus value - the difference between the labour power value and the value yielded - the employer meets their other obligations - rents, interest on loans, other obligations and liabilities, etc. Whatever is left after tax is profit which can be invested in more productive technologies for the firm, or consumed by the proprietor/shareholders.

Here, an employer will only reinvest over and above what the firm needs to stay afloat if a new opportunity for profit is perceived. Investing in new machinery and doubling output is only worthwhile if an employer believes the demand exists for their goods and services. And here is British capitalism's problem. Employers in general are on an investment strike because the opportunities for realising surplus value are perceived to be limited. Wages are outstripped by prices. There is a frightening level of individual, private debt. Whatever combination of government comes to power next year will carry on with austerity, thereby choking demand in the economy. And a huge amount of uncertainty hangs over Britain's relationship with the world's largest single market. Rather than invest in plant that gluts one's markets, it makes sense to hire additional workers for the time being, especially while wages are depressed.

That's only one part of the explanation. Another addition is the growing army of the self-employed, many of whom will have started businesses from redundancy payouts. What is the character of the new wave of businesses that have been set up since the crisis? How many are actually working for companies who get round workplace law by ensuring their "employees" are officially designated as self-employed? What kind of things are being produced, and how "productive" (in the sense of value creation) are these businesses? How many are basically hidden unemployed?

Lastly, there is the overall balance of the economy to consider. As everyone knows, Britain is lopsided and practically everyone in politics is committed to its rebalancing away from the public to the private, and finance to the "real economy". The problem is that manufacturing, the engine room of value creation and innovation, is much reduced compared with Britain's immediate competitors. Service industries, however, occupies a larger proportion of the economy. Setting aside the dynamic and money-spinning innovations pouring out of digital and creative industries, what comprises 'services'? Retail, hospitality, eating, legal, public services, media, property, etc. As tertiary industries geared around the production of a service, the opportunities for investing in productivity-boosting innovations might be somewhat limited. There are only so many ways to sell a coat, cook a meal, rent out a room, provide professional advice, etc. Investment has a tendency to be ancillary to the delivery of the core business activity, such as new IT/POS technologies and does not impact on productivity as such. Therefore when a greater proportion of an economy is dependent on industry of this character, it's unsurprising that productivity tends to lag behind the 'expected' level of development.

It's worth remembering economics is a social, not a natural science. If the Bank's team - horror of horrors - got back to the discipline's roots and contemplated looking at the situation sociologically, they might get somewhere solving the productivity problem.


Boffy said...

The reasons for low productivity are the ones you have cited such as a lot of self-employed people are really disguised unemployment. They are people who perhaps had a manufacturing job previously, and when they lost it used their redundancy pay to set up as a gardener or window cleaner or both.

They work whatever hours they can get, and the value of their output per hour now is a fraction of what it was before.

In Capital Marx also sets out how mechanisation as well as raising productivity because of the machine itself, reduces the amount of wasted time of handicraft production. That is instead of changing tools, moving around the factory etc. the worker is constantly working in one place at the machine. A lot of current employment involves workers in output where there can be a lot of downtime. Take the care workers who have to travel long distances between clients. But, in general low wages also encourage employers to be less concerned about such productivity, especially where as with the above, they can put the cost of it on to the worker.

But another major factor is that its yet again a consequence of Thatcherism. In the early 1980's I taught some of the last NCB apprentices. Thatcher and her government decided to basically scrap a lot of the skills training that had until then been taken for granted. So we had 30 years during which British labour was being degraded in quality.

Its why when it was found that there was a chronic shortage of plumbers, and they began to be paid high wages, the immediate solution was to import them from Poland.

Its rather like if you are growing vegetables. If you plant them in poor soil, fail to provide fertiliser, and starve them of light, you might get as many vegetables but they will be poor quality, and people will pay less for them.

If you fail to train and educate workers properly, they may be able to put in lots of hours of work, but the value of that work will be low.

George Hallam said...

As a rule economists look down on sociologists.

As an Indian colleague explained to me once
"If you are a good economist, you are reborn as a mathematician. But if you are bad economist, you are reborn as a sociologist."

However, your piece on productivity shows that economist have much to learn from sociologists.

Phil said...

Exactly, Boffy. In this respect, whatever one thinks about the illiberalism of Ed Miliband's announcement today on youth training (my thoughts on that tomorrow) it represents a conscious attempt to link skills training and employers in a much more systematic way than the Tories 'let just take benefits off the under 25s'.

Phil said...

Cheers George. Coming from a man with your exacting reputation, that is high praise indeed!