The Productivity Conundrum - Warning contains difficult concepts

Generali

From the Economist:

http://www.economist.com/blogs/freeexchange/2014/01/labour-markets

TODAY Britain's Office of National Statistics released a new set of labour-market statistics. The numbers reinforce that what has become known as Britain's "productivity puzzle" has not gone away. The economy added roughly 450,000 new jobs in the year to November of last year, sending employment to a new all-time high. But output has yet to recover its pre-crisis level. Correspondingly, output per hour—productivity—is below the pre-recession level and actually ticked down from the second quarter of last year to the third.

Now falling productivity is almost always associated with rising unemployment, not falling unemployment. That's how the economic theory goes and it's backed up with a huge amount of empirical evidence. It's not one of the stupid theories, it's one of the demonstrable ones. So what's going wrong with the theory in the UK?

Britain's workers are ever less productive, and firms are snapping up ever more of them. That could only make sense in a world of falling wages. Nominal wages have grown steadily over the last decade, at a pace between 1-2% per year. But prices have risen much faster, leading to a steady erosion in real pay.

Ah, ok. So if we delve deeper into the argument it would seem that economists had their theory bottom about face. Rather than productivity setting wages, wages set the required level of productivity. If wages can fall, lower unemployment results:

In a 2012 paper Bill Martin and Robert Rowthorn argued that falling real wages are the critical detail—the key to unlocking this puzzle. They suggest that wage moderation led directly to the labour-intensive nature of the British recovery in three ways. First, it kept firm income higher than it would have been, preventing some firms from going out of business. Second, it made labour hoarding more attractive. And third, at some margin, it led to some substitution of labour for capital in production, or some displacement of production from capital-intensive firms by labour-intensive firms.
The chain of causation here starts with falling wages. Because wages moderate, firms use more workers at lower productivity levels. Productivity is the dependent variable.

So it seems that the good news and the bad in the labour market are intertwined. In a recession we can have lower unemployment if we accept lower wages on average. If we want wages to keep up with or overtake inflation we have to accept much higher levels of unemployment.

Ultimately, do you want a job paying £x or not to have a job that pays £x+10%?

LydiaJ

Interesting. Thanks Gen.

I remember in about 2007-2008ish being told, at my then second job (that I was doing 1 day a week) that we were being asked to accept a pay freeze in order to prevent redundancies, which everyone agreed to. So that seems to me like an example of falling real wages causing higher employment than there would otherwise have been.

Generali

LydiaJ wrote: »

Interesting. Thanks Gen.

I remember in about 2007-2008ish being told, at my then second job (that I was doing 1 day a week) that we were being asked to accept a pay freeze in order to prevent redundancies, which everyone agreed to. So that seems to me like an example of falling real wages causing higher employment than there would otherwise have been.

Yup.

The extra leap that the research makes is that under conditions where real wages are falling, companies might actually employ more people despite the fact that they are less productive.

HAMISH_MCTAVISH

Generali wrote: »

In a recession we can have lower unemployment if we accept lower wages on average. If we want wages to keep up with or overtake inflation we have to accept much higher levels of unemployment.

Ultimately, do you want a job paying £x or not to have a job that pays £x+10%?

The key words there are "in a recession".

We will have a recession every once in a while, and whilst the last one was unusually large with the recovery unusually weak thanks to the global financial crisis and a failure by policymakers to act quickly enough initially, like all recessions it has proved temporary in nature.

We are now well placed for the next decade or so of economic upswing which is just starting now, with scope to increase wages and productivity and share the proceeds of growth.

And we're doing it from a better base than has been the case previously, on average, with fewer people unemployed and fewer people having lost their houses, etc.

Overall, the policies of the last 5 years were infinitely preferable to the policies of previous recessions IMO. Better to keep more people employed at the cost of a few percent in wages. And more people in their homes at the cost of a few percent in interest rates.

Generali

HAMISH_MCTAVISH wrote: »

The key words there are "in a recession".

We will have a recession every once in a while, and whilst the last one was unusually large with the recovery unusually weak thanks to the global financial crisis and a failure by policymakers to act quickly enough initially, like all recessions it has proved temporary in nature.

We are now well placed for the next decade or so of economic upswing which is just starting now, with scope to increase wages and productivity and share the proceeds of growth.

And we're doing it from a better base than has been the case previously, on average, with fewer people unemployed and fewer people having lost their houses, etc.

If this study is correct rather than simply interesting, the trick to the next step up is for workers to be more productive so they can earn more while maintaining this huge rise in employment.

LydiaJ

Generali wrote: »

Yup.

The extra leap that the research makes is that under conditions where real wages are falling, companies might actually employ more people despite the fact that they are less productive.

That didn't apply in the job I mentioned because it was charitable rather than commercial, so income came from donations and wasn't directly linked to the productivity or even amount of activity of the staff. I can see what the article is saying about how it would apply to companies, though.

princeofpounds

Personally when I see anomalies like this, my first thought is around the quality of the statistics.

I love it when economists try to micro-analyse macroeconomic data. It's like an astronomer trying to map out the moon's surface with a toy telescope.

Generali

princeofpounds wrote: »

Personally when I see anomalies like this, my first thought is around the quality of the statistics.

So which number do you think is wrong: GDP or employment? It's a pretty simple sum really.

princeofpounds wrote: »

I love it when economists try to micro-analyse macroeconomic data. It's like an astronomer trying to map out the moon's surface with a toy telescope.

GDP/Employment isn't really micro-analysis.

I love it when laymen try to dismiss the work of experts with a 'cutting' comment.

purch

Warning contains difficult concepts

You'll have to explain it. Can't wait for Dev to get here and break it down :eek:

CLAPTON

previous attempts to 'explain' the productivity gap have included the flux of immigrants that have meant the 'cheap good quality' staff have been used rather than introducing new technology/systems and maybe faults with the employment statistics (presumably hours worked rather than people employed)

purch

Actually I realised years ago (about 1/2 hour after I'd taken off the stupid hat) that most of the economic theories I had studied and believed in were at best not set in stone, and often just plain wrong.

Productivity is a fast moving target that is hard to pin down, so trying to link it too firmly to anything is nigh on impossible.