The Productivity Conundrum - Warning contains difficult concepts

Loughton_Monkey

My understanding of this 'measure' is that we are simply talking about GDP per employed person. This is a rough measure of 'productivity' which [at a company level] really means how hard or efficently the employees work.

So, for example, a double glazing company sees a lot of house moving, and so employs one extra salesman. Pays him £30K plus car. He gets 20 extra jobs that year adding £100K to GDP. OK, this assumes that there was some 'slack' in the factory/admin/installation end so these people just worked a bit harder.....

Down the road is a little Polish guy with a car wash. There are long queues so he brings over 2 of his mates from Poland, on minimum wage, £12K a year each, that's £24K. Maybe they can wash enough extra cars to bring in £40K. So very profitable, but adding only £20K per person to GDP.

So to what do we attribute the huge number of new jobs? The 'high end', high value work? Or the minimum wage, low value work? I think the latter. A nation of car washers is going to have far less GDP per person than a nation of Home Improvement Builders.



On the question of wage levels, there are broadly four combinations:

1. A bullish economy, but wages stay constant. Hence more work means more people taken on. Prices are stable [going down in real terms]. So nobody is working harder. So GDP per person remains ~ constant. Or even falls.
2. A bullish economy, but pressure on wages going up. Hence as above, except that either prices go up, and/or the 'whip' comes out to motivate harder work. Either way, real productivity (GDP per person) increases.
3. A falling economy, but wages stay constant. Prices will fall as competition/survival steps up. Staff laid off. GDP per person could go up or down depending upon how fast companies react or how much 'fat' is in their margins....
4. A falling economy, but wages going up. This will accelerate the urgency to lay off people. Prices must go up too. Higher real productivity is necessary for survival, so GDP per person goes up.

Clearly we have been in case 1, but are rapidly moving to case 2. So maybe we can expect higher productivity and higher inflation.

Overlaid onto this is the recent growth in the 'low value' sector, which explains the overall lower productivity.

michaels

One thing i think is ignored is the skew in (measured) output between individuals, just as we have so much difficulty 'average wages' I have a suspicion that a lot of the fall in 'productivity' may be due to a big reduction in the output of the most 'productive' in value terms.

Consider the banking sector, in the past a bond trader might have brought in revenues of £10m. Post crash with less of such busines savailable and lower rates he may only bring in £5m (say doing 10% less 'work' but also 'charging' 40% less for each bit of work he does) - still enough for it to be worth employing him but he makes less bonus and the bank makes less profit.

Although there are relatively few such individuals their 'ouput' is nominally as much as 50ordinary people so this can have a huge impact on overall output and thus measured productivity. Add in accountants, fund managers, lawyers etc and perhaps there is a dynamic where employment hasn't changed much but productivity has taken a dive....

Fella

Generali wrote: »

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.

Makes perfect sense & I would bet heavily that discussions along these lines have been had with Unions in pay negotiations up & down the country. Something like "we employ 100,000 people. Would you like a 3% payrise & 3,000 redundancies or no payrise & no redundancies?".

A 0% payrise is surprisingly palatable when the alternative is possible unemployment.

I'd also bet that behind the scenes the Government has been urging employers to act as per the above wherever possible.

princeofpounds

astronomer trying to map out the moon's surface with a toy telescope.GDP/Employment isn't really micro-analysis.

I don't mean micro analysis in the economics sense. I just mean over-analyse. Just using simple common language, and though it may be imprecise I think the meaning was evident from my brief analogy.

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

Well there are plenty of issues with how employment statistics are calculated.

But really my point is not about this specific conundrum, it's more to do with my low regard for the robustness of many economic statistics.

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

a) I am not a layman, although UK productivity is a long way from my area of expertise.

b) I may have been dismissive in tone, but I don't dimiss the actual conundrum itself.

A hypothesis in this specific instance (which I don't particularly believe) could be that unemployment numbers have been systematically adjusted to be lower, perhaps not accounting properly for under-employment, meaning that the productivity per employee person is artificially deflated.

I appreciate you want to have a discussion about the theories that may explain this conundrum, but in science when you discover an anomaly that goes against many repeated previous findings, one of the first things to consider is whether the measurements are wrong and/or biased in some manner.

There is nothing dismissive about this idea. It is good practice. But for some reason people get touchy when you question their methodologies instead of their theories.

tomterm8

Generali wrote: »

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.

You can think of the British economy as a real economy attached to a huge bank which invests money worldwide. So, for example, the assets of RBS (a largely taxpayer bank) are worth more than the entire British real economy.

Once you take that into account then it's worth speculating how a banking crises could affect productivity figures. For example, banks that are damaged might contract, reduce their profitability and income because of risk control, and therefore reduce the national income.

At the same time if government measures such as qualatative easing and interest rate reduction stimulated the real economy, sectors that are far less productive than banking might become more profitable and therefore hire more staff than the banking sector, which is one of the most efficient and automated parts of the economy, sack. Especially as the result of the contraction in British Banking might have the largest effect on employment abroad in countries such as Latvia or Estonia where the contraction in credit has been largest.

Of course, this is all hypothesis. The question is did it happen?

Conrad

GEN, could it be linked in some way to the rise in self employed contractors and agency workers?


I'm always very cautious around statistics as they so often miss critical shifts the academics are yet to spot.

IronWolf

But do the figures tell the same story if you exclude the financial sector?

Thrugelmir

Loughton_Monkey wrote: »

So, for example, a double glazing company sees a lot of house moving, and so employs one extra salesman. Pays him £30K plus car. He gets 20 extra jobs that year adding £100K to GDP. OK, this assumes that there was some 'slack' in the factory/admin/installation end so these people just worked a bit harder.....

Companies that are growing will often see a lag between employing new staff and making a positive contribution to the business.

The benefits of technology are perhaps at best leveling out. While computers have automated processes. What remains still requires manual intervention.

kabayiri

Thrugelmir wrote: »

Companies that are growing will often see a lag between employing new staff and making a positive contribution to the business.

The benefits of technology are perhaps at best leveling out. While computers have automated processes. What remains still requires manual intervention.

Progress is not even. You get growth spurts and then relative lulls.

I was fascinated recently by the Google project on contact lenses which monitor body readings for diabetics. There has also been discussion about people being fitted with onboard monitoring in future. This sort of technology could provide the next step change.

Loughton_Monkey

Generali wrote: »

So what's going wrong with the theory in the UK?

I spent the whole day researching this, without a truly convincing argument.....

Until I watched the London BBC news, which more than adequately answers the question....

http://www.bbc.co.uk/news/magazine-25401024

It's because the Ossies have been leaving England (and stopped coming here) since 2006.

Once moving to the UK was a well-worn path for many young Australians. Now the numbers arriving on British shores are falling. Kris Griffiths asks why.

Rising migration might be a source of much British soul-searching, but the numbers of one long-standing immigrant group appear to be receding - the Australians.

Ten years ago you didn't have to walk far in Shepherd's Bush, west London, in its neighbouring enclaves Acton and Hammersmith, or in nearby Fulham and Putney to encounter a ubiquitous Aussie on a rite-of-passage working holiday, using the UK as a base to hop around Europe while grafting and partying.

Manchester and Edinburgh have also traditionally been popular spots for Australians to settle.

Now they are abandoning the UK in their thousands. The number of Australian working visas issued by the Home Office has more than halved since 2006 to fewer than 15,000, while the ONS reported a drop of almost 10,000 Australians resident in the UK in the year between 2011-12.

Of course this is quite sad, but on the other hand, surely Romulans [sic] can pull a pint just as well as Australians? And cheaper......