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?”
LB
Don’t you believe in a living wage?
Take the living wage, less the tax. What do you end up with?
Hmm, min wage with no tax.
Newsbot9
Incorrect as usual!
Minimum wage, pre-tax 12,070
Living wage, post-tax 13,870
You are attempting to slash billions in services, and expect this to NOT cost the poor more. It’s ludicrous, and self-centred.
LB
No, I did vote.
1. I didn’t vote for the winner. How can I be held responsible for his crimes?
2. I’ve just been asked to select an MP. I’ve not been asked about any of the issues. So if he decides to do something stupid, I’m not responsible for him.
3. So from memory, you’re party voted for the Iraq war. Doesn’t that make you a war criminal? Collective responsibilty.
If a company invests the are making a contribution. Then, and only if they make a profit do they pay corporation tax. In the meantime they pay the VAT on their turnover.
As for tax payer subsidies, let me repeat ad nauseum, its theft. It’s wrong. All subsidies should stop.
Likewise, if a company goes bust, it should not be rescued. It’s liquidated.
Likewise, if someone runs a ponzi, any ponzi, they should be jailed for life. That deals with the whole of Westminster.
And the post below just shows Newsbot at his racist best. All foreigners out, is his mantra.
blarg1987
Well considering pandoras box was opened over 30 years ago, we are all directly or indirectly responsible, through the media we consume, to the choices we make etc.
When did I say I voted for Labourjust because some of my views are on the left does not mean I agree with all of them, and I did punish the local MP at the ballot box over Iraq.
Secondly to turn it on its head and maiing an assumption should you go to jail for corruption as it was mainly the conservatice party that sold british assetts and then signed on as directors after tax payers invested money into them.
Also companies do claim against VAT so they do not necessarily pay VAT.
I think we do need subsidies in some areas although if it is required it should not be run for profit.
LB
I’m responsible for my decisions. I’m not responsible for yours. (Or any MP)mainly the conservatice party that sold british assetts and then signed on as directors after tax payers invested money into them
Name them.
Which areas need subsidies?
e.g Why subsidise the production of wind power when the result is born by poor people when they are forced to but it?
That’s just allowing the green rich to harvest tax payer’s money.
If we take rail and HS2. It’s never going to make money. Plus it probably goes past Newsbot’s front door. Why should people in Cornwall get screwed for a minority to get around fast?