The IFS produced a new report today examining why British workers are getting less productive.
Low wages, low business investment and a misallocation of capital have led to a ‘dramatic fall’ in labour productivity, according to a new report.
The Institute for Fiscal Studies (IFS) believes Britain is producing 12.8% less than had labour productivity growth continued at pre-recession rates. [Source: The productivity puzzles (pdf)]
Falling productivity helps to explain why employment has been rising in the UK despite sluggish growth in output.
British workers now produce 2.6% less output per hour worked than they did at the start of 2008. The IFS believes the key reasons for this are low real wages, low business investment and a misallocation of capital.
Its research suggests lower wages allow firms to employ more people, and this in turn has a negative effect on productivity. According to the report, a more flexible labour market and more demanding benefit system are combining to cause employment to remain stable.
These two changes mean labour supply in this recession have remained higher than in the recessions of the 1980s and 1990s.
The second main reason given by the IFS for falling productivity is a fall in business investment. Investment is now around 16% lower than its pre-recession high. This is a sharper fall than in previous recessions, and a fall that has demonstrated significant persistence.
“If workers have less, and less good, capital to work with they will produce less,” says the report. The report also blames the misallocation of capital, suggesting an impaired financial sector is failing to effectively deliver capital towards more productive and away from less productive firms.
The report rejected some of the other explanations given for what it terms the ‘productivity puzzle’. One was the ‘labour hoarding’ argument, the suggestion firms are employing more workers than necessary. It also dismissed the idea the demise of financial services has led directly to a fall in productivity.
Another interesting finding by the report was the public sector has bucked this trend. There has been a 6% fall in public sector employment since 2009, a period during which public sector output rose slightly.
The report notes:
“The long run effects of lower employment on service quality remains to be seen.”
Wenchao Jin, a research economist at IFS, commented:
“The fall in labour productivity seems to have been driven by low real wages and low firm investment. Productivity slowdown has happened right across the economy. They have not been driven by a change in the composition of the economy nor by a change in the composition of the workforce.”
See also:
• This depression is the longest in modern history, so why is the economy still creating jobs? – January 25th, 2013
• GDP growth masks fall in wages and impact on union rights – October 29th, 2012
• The economic puzzle: The stats may be good but the grim jobs news keeps coming – October 26th, 2012
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29 Responses to “Why are British workers getting less productive?”
Newsbot9
Nope, wage bills have not rocketed. The additional spending has been counter-Keynsian, spending to cover for the axing of cheaper cost-saving measures.
blarg1987
Don;t forget alot of these companies are technically subsidised by the tax payer like styarbucks who on paper make no money in the UK, have employees claiming some state benefits and is asking the tax payer for tax breaks.
We need a detailed break down and open book policy for all companies as their is a difference between not having money to invest and not having money to invest on paper, which large number of companies are the latter of the two options.
LB
So are subsidies wrong?
Benefits are a subsidy.
Don’t forget too, that starbucks, amazon, google etc are still growing investing billions.
However, 7,000 plus of debts, 550 bn of taxes, 700 bn of spending. How does that work?
blarg1987
I believe it is wrong for a company to claim pverty and use state benefits to top up wages for staff to live then pay them a real wage.
\yes they are still growing but how much of that growth is at the tax payers and as you keep claiming mounting onto the debt pile? As these companies are claiming against tax to oincrease profits NOT as an investment tool.
LB
It may or not be true for the company.
However, if a company is paying min wage, and without tax, that is sufficient, then we have to lay the blame for insufficient take home pay at the doors of the state.
For companies, they have to make a profit, or they go bust. So employees need to generate more profit that the costs of employing them, or in a smaller number, more savings than the cost.
\yes they are still growing but how much of that growth is at the tax payers and as you keep claiming mounting onto the debt pile? As these companies are claiming against tax to oincrease profits NOT as an investment tool.
I can’t work out what you are trying to say here. Can you put some more detail on it?
I think you might be arguing they are getting a subsidy, and growing at the tax payers expense. For example, railways, wind turbines, all get subsidies to make profits.