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
Norman Tebbit to name one.
Well Nuclear power, the space race, early computing, all required state subsidies to become viable.
LB
1. Is nuclear viable? For example, Sellarfield hit 69 bn of clean up, so far.
2. 100 bn off the books, for clean up.
Computing. Hmmm, not much is government. Pretty much most of the investment has been private. It’s a good example of where private has done most of the research, and funding, without the state.
So lets see. Tilting trains? Failure in the UK.
British Leyland? Financial Failure
Concorde? Financial Failure
The only real success was the bailout of Rolls-Royce, offset against myriad failures.
Green power? Where is the British industry? It’s all imports. None are built here. 100 bn going overseas.
Where’s Tebbit’s profits. etc? I’m not saying he didn’t, but I’d like you to tell me what he did do.
blarg1987
Nuclear long term is as fossile fuels are exhausted, who created the first modern computers and their client, hmmm me thinks the state to break the enigma machine, and the first offical computer was used by the U.S army to work out gunnery tables all paid for by the tax payer.
Smaller and lighter computers came about by the space race so R and D was funded by……… yup tax payer.
Concorde was a success as the facilities and co operation put in place led to airbus whch is now a major player in the world aviation market.
Ask his accountant, but he was an advocate and voted for the selling of BT, and then sat on its board of directors which saw their pay largley increase compared to pre privatisaion.
Julia Cannetti
These figures show how important it is to invest in your employees. Offering a competitive wage, employee benefits and pension will help to attract and retain valuable staff who stay motivated thus increasing output, reducing sickness absence and increasing profits!