The recovery position

Why is it that British workers are so much less productive than their foreign counterparts? Output per hour—productivity—has been weak since the economic crisis of 2008. It has recovered in countries elsewhere, but not Britain.

This is so worrying because, as the Office for National Statistics pointed out this morning, “productivity is a key determinant of living standards,” meaning that if productivity is weak, then wages will not rise, and if wages will not rise, then living standards will be slowly eroded by inflation.

The extent of productivity weakness in Britain is startling. Today’s ONS release compares British productivity as measured in 2012 with that of other economies. The report finds that: “Output per hour in the UK was 21 percentage points below the average for the rest of the major G7 industrialised economies in 2012.” This, the report said, was the widest productivity gap since 1992.

To ensure that there was no confusion on the point, the report added that: “On an output per worker basis, UK productivity was 25 percentage points below the average for the rest of the G7.” News such as this cuts sharply across the British government’s narrative of reviving economic conditions.

But on the face of it, the government would have some justification for brushing aside worries about productivity. Unemployment is coming down—confounding the predictions of the many economists who predicted otherwise—and what is more the economy is growing and inflation is a moderate 1.9 per cent, which is below the Bank of England’s 2 per cent target. These three economic measures combine to create a very reassuring picture.

But so what? If improving conditions are having no effect on peoples’ lives, then are conditions really improving at all? And it seems that people are not convinced that the economy is on the right track. According to a recent YouGov poll, “18% think the economy is in a good state, 47% think it is in a bad state." That seems fairly clear. A reason for this bearishness was suggested in the minutes of the Bank of England’s most recent Monetary Policy Committee meeting, which noted that: “Pay growth had remained subdued,” in Britain and went on to say that: “Evidence from a recent survey by the Bank’s Agents suggested that wage growth would remain muted for the time being.” Growth, inflation and unemployment numbers are irrelevant if people are getting none of the upside.

A counterargument to this might be called “the optimistic analysis.” This would hold that productivity is simply lagging the recovery. It is poor at the moment, but that is because Britain is still emerging from the biggest economic shock in a century. Once the recovery has strengthened and fully taken hold, output will become bolstered and productivity will rise with it. Living standards are stagnant at present, but the return of growth means that they will rise eventually. There was a hint of this optimistic outlook in the Bank of England’s MPC minutes, which stated that: “As labour market slack and weak productivity growth started to unwind, wage growth was likely to pick up.”

The pessimistic analysis would say that Britain has fallen into a self-reinforcing trap in which demand is weak, output is weak, productivity is stagnant, wages are low and living standards are declining. (There are historic reasons for taking this gloomy view, reasons which predate the arrival of David Cameron in Downing Street.) This pessimistic analysis would go on to say that the situation will not change because the government’s recovery is concentrated on financial services and on stimulating a house price bubble, which together benefit a small section of the economy while the majority is left out in the cold with declining wage growth, rising bills and no possibility of a pay rise. The pessimist would conclude that the government has no plan in place to change this state of affairs.

And so which is correct—optimistic, or pessimistic? A fair answer to that question is impossible this side of the general election.