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?”
blarg1987
I am talking about companies like starbucks that pay no corporation tax, but use our infastructure, the people we educate etc to increase their profits but directly give very little or nothing back.
the state is elected by us the electorate so we are all partially responsible for the state of the economy both left and right.
yes companies need to make profits or they go bust however one must question said company when it tells the tax man and its own employees it has no money to improve wages, buy new equipment, employ extra staff, pays no taxes and requires state support, while on the other hand it pays its shareholders large dividens, the board gets a massive pay rise and it has record breaking profits that is greed.
LB
Well, you pay corporation tax on profits. Are they profitable?
If you are talking about tax on turnover, then that’s VAT.
I’m not responsible for the state. You can take collective guilt, but don’t force it on others. It’s a fraud under section 2, 2006 fraud act. Inducing people to contribute to the pension via voluntary contributions, whilst hiding the debt off the books. The risk is they lose money, and that’s going on now.
Now Starbucks has money, because it earns it. However, its chosen to invest it, rather than pay tax. That’s I think what you don’t like. It’s acting as a company, not as some surrogate tax cow for the state.
So what did the board in the UK get as bonuses? What were these record breaking profits at Starbucks UK?
Meanwhile, the real issue is the state and its debts. 7,000 bn plus of debts, taxes of 550 bn, and spending of 700 bn. End result is the state is bankrupt. That means those dependent on the state because its taken their money for their pensions, have been ripped off, and will be destitute as a consequence.
LB
So what’s moral about taking 3K a year off someone earning 12K?
25% of their wages going to the state. Pretty much their biggest item of spending.
Why no comment on that?
blarg1987
it is moral as it pays for services that we use as a society, it is right will all contribute to those services, so dare I ask what do you recommend?
blarg1987
So are you admititng you do not vote? In which case surely you can not complain or hippercritical? The issue is seperate from the point I am making.
No if a company invests into an economy that is a good thing, but it should also pay a contribution to society, you moan about the state but you do not say private companies who also make up part of the debt through tax payers subsidies?