“Productivity isn’t everything, but in the long run it is nearly everything.” Economist Paul Krugman’s dictum underlines a basic economic truth: GDP depends on how many people are working and how much they produce. The more efficient they are – in terms of output per hour – the higher the economy’s speed limit, or potential growth. That in turn bodes well for the public finances and corporate profits.
Unfortunately, UK productivity “hasn’t been this stagnant since the end of the Napoleonic wars”, says The Economist. With the employment rate at a record high and the government determined to reduce migration, only a rise in productivity will boost GDP now. The long-run average annual productivity growth figure is around 2%. But over the past ten years it hasn’t budged. It has lagged in other countries too during this cyclical upswing, but we are some way behind Germany and France in output-per-hour terms, says David Smith in The Sunday Times – 36% and 29% respectively, in fact.
There are several possible reasons why productivity has disappointed. When the banking system was undercapitalised post-crisis, it didn’t lend enough to healthy firms and was loath to pull the plug on unproductive ones. This is less of a problem now that bank balance sheets have been repaired, but points to another key issue: near-zero interest rates were an incentive for troubled banks to keep zombie firms alive, preventing the creative destruction that usually accompanies downturns. Business investment, which implies spending on equipment or systems that bolster productivity, has been much weaker than in previous cycles.
Uncertainty following the referendum may have postponed a strong rebound in investment, says Smith, but there are reasons for optimism. Without cheap labour from migration businesses will have to pay more attention to getting more out of each worker. A drift towards low-productivity sectors, facilitated by migration, may dwindle now. “It is hard to expand the number of coffee shops… when there is nobody to staff them.” It’s also encouraging to see manufacturing outgrowing services. Productivity in this sector is higher than in tertiary industry.
Perhaps we just need to update the way we measure productivity, says Neil Collins in the Financial Times. Counting cars from a factory is straightforward, but developments such as same-day delivery, internet searches, or even using a mobile on a train “short-circuit problems that took hours or even days to solve in the pre-internet era”. It’s too soon to declare a productivity crisis.