The UK’s employment and productivity puzzle
Favourable trends in employment relative to population are not going to be repeated
Martin Wolf
The 'gig economy' has contributed to a rise in UK employment levels © Yves Herman/Reuters
What has happened to the UK economy since the financial crisis at the most aggregate level?
What does this suggest about the issues lying ahead in the coming decade?
The short answer to the first question is that employment has boomed while productivity has been a disaster.
The combination has delivered a weak, but not catastrophic, rise in gross domestic product per head.
In the next decade, that is much less likely, unless the productivity trend improves.
A recent article by three economists, including David Hendry of Oxford university, a distinguished econometrician, sheds bright light on what has happened. Productivity and real wages have stagnated since 2007. But real GDP per head is up by 20 per cent since 2000 and 10 per cent since its trough in 2009. So what is going on?
The most important point is that the aggregate productivity performance of the UK economy since the financial crisis of 2007-08 has been its worst by far since 1860. Never before over this long period, so far as we know (evidently, the measures for the distant past are even more uncertain than those for the present), has there been such a prolonged period of productivity stagnation.
This is the single most important fact about the economy. Needless to say, it has attracted essentially no serious political attention in the hectic debates of recent years. We do not know why this has happened. But one reason, surely, must be the fact that over 2010-19, the UK’s average investment as a share of GDP has been the second lowest in the EU (ahead only of Greece).
As one would expect, real wages have tracked productivity very closely over the entire period since 1860, including the recent period: stagnant productivity has meant stagnant real wages.
In fact, real wages have slightly lagged behind the stagnant productivity trend, because labour’s share in GDP has fallen a little. Unsurprisingly, this made the 2010s a joyless decade for many. For this reason, some duly sought a scapegoat — and found it in EU membership.
Yet, despite the stagnant real wages, real GDP per head is up significantly. The explanation for this divergence between real wages and GDP per head is the rise in employment relative to the population as a whole. Indeed, as the paper notes, “the present level of employment is the highest ever for the UK and has grown much faster than the population over the last quarter of a century”.
After a sharp fall during the crisis, employment again grew faster than the population: between 2009 and 2018, employment rose 12 per cent, while population rose only 7 per cent.
The rise in employment reflects a flexible labour market and new forms of demand for workers, notably the “gig economy”. Also important must have been the arrival of large numbers of working age immigrants, which meant that the active labour force increased more quickly than the population. In all, with both the total number of workers and the ratio of workers to the total population rising, and real wages flat, total earnings rose substantially.
This, in turn, explains the relatively buoyant performance of GDP per head.
A noteworthy part of the analysis is on the emissions of carbon dioxide. While real GDP and GDP per head have risen significantly, UK emissions fell sharply from 529m tonnes in 2008 to 361m in 2018. This is rather encouraging, though part of the explanation is that the UK is creating emissions elsewhere by importing emissions-intensive products, especially from net exporters of manufactures.
What are the implications of this analysis for the coming decade? Here there is bad news and possibly some good news.
The bad news is that the favourable trends in employment relative to population, notably since the crisis, are not going to be repeated. Unemployment is now very low. Immigration is almost certain to be cut.
Above all, the population is rapidly ageing. For all these reasons, the number of people in employment is quite likely to fall relative to the total population, reversing the favourable story of the last decade.
The good news is that, with a lower rate of growth of employment, it is likely that productivity will rise somewhat. Since one explanation for the productivity stagnation was the lower marginal product of labour in a rapidly growing labour force. But that will not be enough to generate a rapid rise in overall productivity.
Higher private and public investment and more dynamic innovation and competition will also be needed. In a country damaged by the coming Brexit shock, this is going to be a huge challenge.
Will it be met?
It will take a great deal of intelligent and determined effort to do so.
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