Productivity has been a bit of a problem for the UK economy for a number of years. Earlier posts from 2015 have discussed the trend in Tackling the UK’s poor productivity and The UK’s poor productivity record. Although the so-called ‘productivity gap’ has been targeted by the government, with George Osborne promising to take steps to encourage more long-term investment in infrastructure and create better incentives for businesses to improve productivity, the latest data suggest that the problem remains.
The ONS has found that the UK continues to lag behind the other members of the G7, but perhaps more concerning is that the gap has grown to its biggest since 1991. The data showed that output per hour worked was 20 percentage points lower in the UK than the average for the other G7 countries. The economic downturn did cause falls in productivity, but the UK has not recovered as much as other advanced nations. One of the reasons, according to the Howard Archer, chief UK economist at IHS Global Insight is that it ‘had been held back since the financial crisis by the creation of lots of low-skilled, low-paid jobs’. These are the jobs where productivity is lowest and this may be causing the productivity gap to expand. Other cited reasons include the lack of investment which Osborne is attempting to address, fewer innovations and problems of finance.
Despite these rather dis-heartening data, there are some signs that things have begun to turn around. In the first quarter of 2015, output per hour worked did increase at the fastest annual growth rate in 3 years and Howard Archer confirmed that this did show ‘clear sign that UK productivity is now seeing much-needed improvement.’ There are other signs that we should be optimistic, delivered by the Bank of England. Sir John Cunliffe, Deputy Governor for financial stability said:
“firms have a greater incentive to find efficiency gains and to switch away from more labour-intensive forms of production. This should boost productivity.”
The reason given for this optimism is the increase in the real cost of labour relative to the cost of investment. So, a bit of a mixed picture here. UK productivity remains a cause for concern and given its importance in improving living standards, the Conservative government will be keen to demonstrate that its policies are closing the productivity gap. The latest data is more promising, but that still leaves a long way to go. The following articles consider this data and news.
Articles
UK productivity shortfall at record high Financial Times, Emily Cadman (18/9/15)
UK productivity lags behind rest of 7 BBC News (17/9/15)
UK’s poor productivity figures show challenge for the government The Guardian, Katie Allen (18/9/15)
UK productivity lags G7 peers in 2014-ONS Reuters (18/9/15)
UK productivity second lowest in G7 Fresh Business Thinking, Jonathan Davies (18/9/15)
UK is 33% less productive than Germany Economia (18/9/15)
UK productivity is in the G7 ‘slow lane’ Sky News (18/9/15)
Data
AMECO Database European Commission, Economic and Financial Affairs
Labour Productivity, Q1 2015 ONS (1/7/15)
International Comparisons of Productivity, 2014 – First Estimates ONS (18/9/15)
Questions
- How could we measure productivity?
- Why should we be optimistic about productivity if the real cost of labour is rising?
- If jobs are being created at slower rate and the economy is still expanding, why does this suggest that productivity is rising? What does it suggest about pay?
- Why is a rise in productivity needed to improve living standards?
Labour markets can be a key indicator of the strength of an economy, with emphasis placed on measures including the unemployment rate and the rate of job creation. Over the past few decades, we have seen many changes in the UK labour market, with more women, more part-time jobs, flexible hours and a shift towards services. After the financial crisis, unemployment declined and more and more people were entering the labour market. But one criticism of this was zero-hours contracts. They are nothing new and were considered in earlier blogs.
Zero hours contracts are essentially what they say: a contract where you are guaranteed to work for zero hours. This means that under such a contract, there is no guarantee that you will have employment on any given day/week and hence this creates uncertainty. However, on the other side, there can be more flexibility with such a contract and with growth in female participation and part-time work, flexibility is essential for many people. James Sproule, Director of Policy at the Institute of Directors said:
“Zero hours contracts offer businesses and employees an important degree of flexibility. For skilled professionals, a degree of flexibility can boost their earning power, while flexibility also suits students and older people – the main users of zero-hours contracts – who cannot commit to a set number of hours each and every week.”
The ONS has found that businesses are using more zero-hours contracts, with a 6% rise. This reflects a growth in January from 1.4 million to 1.5 million zero-hours contracts, though this increase was not statistically significant. Over the past year, the use of these contracts has increased by 19%, from 624,000 people employed on them in 2014 to 744,000 people in 2015.
Although there has undoubtedly been an increase in the number of people employed on zero-hours contracts, there is also more recognition of these contracts. Therefore, part of the increase in the numbers could be down to this recognition and not just due to more and more people moving onto these contracts. With this greater flexibility, comes more opportunities for more people to enter the labour market. While this is a good thing, it can hide some other aspects. For example, if more people are working, it may suggest a fall in the rate of unemployment and a rise in employment, but perhaps this is misleading if some of those in employment are under-employed. The data revealed that:
On average, someone on a zero-hours contract usually works 25 hours a week, with around 40% of them wanting more hours, most from their current job, rather than in a different or additional one.
Furthermore, for some people there may be very few other options. However, there was also evidence that the possibility of zero-hours contracts has created opportunities for those who may otherwise not have entered the labour market: perhaps women re-entering the labour market and students in full time education. They also offer businesses greater flexibility and this may be a key way for the UK to improve efficiency and productivity. Jon Ingham from Glassdoor, an employment analyst said:
“It’s no great surprise to see the number of people on these contracts is on the up … It’s safe to say that employees who accept a zero hours contract do not do so as a career choice. For most it’s because they have limited options. For some it might be beneficial to have the flexibility to fit around their lifestyle but for others it’s a substandard contract which offers little in the way of benefits or security.”
The change in the structure of the labour market has been on-going and this may be a small change in amongst a much larger structural change. As the economy continues its recovery, we may see a return to the more typical working contract, but it appears that there will always be this greater demand for flexibility in working patterns and hence perhaps the zero-hours contracts do have a place in Britain. The following articles consider the implications of this data.
ONS Report
Employee contracts that do not guarantee a minimum number of hours: 2015 udpate Office for National Statistics September 2015
Articles
Number of workers on zero-hours contracts up by 19% The Guardian, Phillip Inman (2/9/15)
Zero-hours contracts hold their place in UK labour market Financial Times, Sarah O’Connor (2/9/15)
Zero-hours contracts jump 19% in a year Sky News (2/9/15)
19 per cent rise in people on zero hours contracts recorded across Britain over the last year Independent (2/9/15)
Use of zero-hours contracts rises by 6% BBC News (2/9/15)
Insecure ‘zero-hours’ jobs on the rise in Britain – ONS Reuters (2/9/15)
Questions
- What is a zero-hours contract?
- Outline the main advantages and disadvantages of zero-hours contracts to both workers and businesses. You should think about different types of workers in your answer.
- How do you think the increase in zero-hours contracts has affected the unemployment rate in the UK?
- What is meant by under-employment? Would you class this as inefficient?
- What other changes have we seen in the UK labour market over the past 30 years? Have these changes made the labour market more or less flexible?
- Zero-hours contracts create greater flexibility. Do you think that they create greater functional, numerical of financial flexibility?
- If a company introduces a system of zero-hours contracts, is this in accordance with the marginal productivity theory of profit maximisation from employment?
- Using the ONS data, find out how the use of zero-hours contracts varies by occupation and explain why.
You may be used to these types of blogs by now … On my commute to work on the 18th May, I listened to Start the Week on BBC radio 4 and happened upon a fascinating discussion on inequality.
Of those discussing the issue, one certainly needs no introduction: Joseph Stiglitz, a prominent economist, author and commentator on economics, in particular on inequality. He was joined by Steve Hilton, who has worked for David Cameron for many years in providing advice on a range of issues, including inequality and strategy and has written on existing institutions and their effectiveness. The final panellist was Masha Gessen, who has written extensively on Russia and in particular on the journey of the infamous Boston Bomber.
Though the discussion covers a variety of areas relevant to economics, one key area that is addressed is inequality and the policies that are being used to address the causes and the symptoms. You can access the 45-minute discussion at the link below.
Joseph Stiglitz and Steve Hilton on inequality BBC Radio 4 (18/5/15)
Questions
- How would you measure inequality?
- Why is it important to distinguish between the causes and symptoms of poverty when designing government policy?
- To what extent do you believe that education is an essential requirement for growth and development?
- Why has inequality grown in some of the most developed nations?
- How is it possible that inequality in the developed world has grown, while global inequality has fallen?
- Why does the report argue that the reforms they suggest would help boost growth?
- Do you agree that existing institutions are not suitable for society today?
New Look was founded in 1969 and is an iconic budget retailer found on most British high streets. In its history, it has been a family business; it has been listed on the London stock exchange; returned to a private company and then had the potential to be re-listed. Now, it is moving into South African ownership for £780 million.
90% of New Look will now be owned by Christo Wiese who controls Brait and who has been linked with other take-overs of British retailers in recent years. The remaining 10% will remain in the hands of the founding family. The company has been struggling for some time and in 2010 did have plans to relist the company on the London Stock Exchange. However, volatile market conditions meant that this never occurred and the two private equity firms, Apax and Permira, appeared very eager to sell. New Look’s Chairman, Paul Mason, said:
“This is an ideal outcome for New Look. The Brait team demonstrated to us that they have the long-term vision to help Anders and the team grow this brand.”
It is not yet clear what this move will mean for the retailer, New Look, but with an estimated £1 billion debt, it is expected that changes will have to be made. 
It is certainly an attractive investment opportunity and New Look does have a history of high rates of growth, despite its current debt. Furthermore, the debt levels are likely to have helped Mr. Wiese obtain a deal for New Look. Fashion retailing is a highly competitive market, but demand always appears to be growing. It is still relatively ‘new’ news, so we will have to wait to see what this means for the number of stores we see on the high streets and the number of jobs lost or created. The following articles consider this new New Look.
South African tycoon buys New Look fashion retailer BBC News (15/5/15)
South African tycoon enters UK retail fray with New Look purchase Financial Times, Andrea Felsted, Clare Barrett and Joseph Cotterill (15/5/15)
New Look snapped up by South African tycoon The Guardian, Sean Farrell (15/5/15)
New Look sold to South African billionaire for £780m The Telegraph, Elizabeth Anderson and Andrew Trotman (15/5/15)
Questions
- Why might a company become listed on the London stock exchange?
- How would volatile economic circumstances affect a company’s decision to become listed on the stock market?
- What do you think this purchase will mean for the number of New Look stores on British high streets? Do you think there will be job losses or jobs created by this purchase?
- How do you think the level of New Look’s debt affected Christo Wiese’s decision to purchase New Look?
- Which factors are likely to affect a firm’s decision to take-over or purchase another firm?
Real GDP depends on two things: output per hour worked and the number of hours worked. On the surface, the UK economy is currently doing relatively well, with growth in 2014 of 2.8%. After several years of poor economic growth following the financial crisis of 2007/8, growth of 2.8% represents a return to the long-run average for the 20 years prior to the crisis.
But growth since 2010 has been entirely due to an increase in hours worked. On the one hand, this is good, as it has meant an increase in employment. In this respect, the UK is doing better than other major economies. But productivity has not grown and on this front, the UK is doing worse than other countries.
The first chart shows UK output per hour worked (click here for a PowerPoint). It is based on figures released by the ONS on 1 April 2015. Average annual growth in output per hour worked was 2.3% from 2000 to 2008. Since then, productivity growth has stalled and output per hour is now lower than at the peak in 2008.
The green line projects from 2008 what output per hour would have been if its growth had remained at 2.3%. It shows that by the end of 2014 output per hour would have been nearly 18% higher if productivity growth had been maintained.
The second chart compares UK productivity growth with other countries (click here for a PowerPoint). Up to 2008, UK productivity was rising slightly faster than in the other five countries illustrated. Since then, it has performed worse than the other five countries, especially since 2011.
Productivity growth increases potential GDP. It also increases actual GDP if the productivity increase is not offset by a fall in hours worked. A rise in hours worked without a rise in productivity, however, even though it results in an increase in actual output, does not increase potential output. If real GDP growth is to be sustained over the long term, there must be an increase in productivity and not just in hours worked.
The articles below examines this poor productivity performance and looks at reasons why it has been so bad.
Articles
UK’s sluggish productivity worsened in late 2014 – ONS Reuters (1/4/15)
UK productivity growth is weakest since second world war, says ONS The Guardian, Larry Elliott (1/4/15)
UK productivity weakness worsening, says ONS Financial Times, Chris Giles (1/4/15)
Is the UK’s sluggish productivity a problem? Financial Times comment (1/4/15)
UK manufacturing hits eight-month high but productivity slump raises fears over sustainability of economic recovery This is Money, Camilla Canocchi (1/4/15)
Weak UK productivity unprecedented, ONS says BBC News (1/4/15)
Weep for falling productivity Robert Peston (1/4/15)
UK’s Falling Productivity Prevented A Massive Rise In Unemployment Forbes, Tim Worstall (2/4/15)
Data
Labour Productivity, Q4 2014 ONS (1/4/15)
AMECO database European Commission, Economic and Financial Affairs
Questions
- How can productivity be measured? What are the advantages and disadvantages of using specific measures?
- Draw a diagram to show the effects on equilibrium national income of (a) a productivity increase, but offset by a fall in the number of hours worked; (b) a productivity increase with hours worked remaining the same; (c) a rise in hours worked with no increase in productivity. Assume that actual output depends on aggregate demand.
- Is poor productivity growth good for employment? Explain.
- Why is productivity in the UK lower now than in 2008?
- What policies can be pursued to increase productivity in the UK?
Productivity has been a bit of a problem for the UK economy for a number of years. Earlier posts from 2015 have discussed the trend in Tackling the UK’s poor productivity and The UK’s poor productivity record. Although the so-called ‘productivity gap’ has been targeted by the government, with George Osborne promising to take steps to encourage more long-term investment in infrastructure and create better incentives for businesses to improve productivity, the latest data suggest that the problem remains.
