PERSPECTIVES
HAMISH McRAE
Getty Images, Richard Walker
USING PEOPLE MORE EFFECTIVELY IS ONE WAY TO SOLVE THE PRODUCTIVITY PUZZLE. EASILY SAID, SO MUCH HARDER TO DO “PRODUCTIVITY isn’t everything, but in the long run it is almost everything,” wrote Paul Krugman, the Nobel Prize-winning economist. His point being that unless economies raised productivity they could not raise living standards, an observation that has particular resonance for the UK. The economy has just passed its previous peak of 2008, but real wages are still on average 4 per cent lower than they were then. Yet employment is at an all-time high. If more people are working and putting in more hours to achieve the same output, it follows that productivity must have fallen. Why this should have happened is a huge puzzle, especially because we haven’t seen a similar decline in other developed economies. America’s GDP is now about 5 per cent larger than in 2008 but employment has not returned to its former peak. Though much of Europe has struggled to create any new jobs, Germany has increased output and employment to record levels – although critics say many of these new positions are “mini-jobs”, with low pay and limited hours. It appears that the UK has been successful at creating jobs but unsuccessful at increasing the efficiency of those jobs. This is a puzzle no one has fully solved. As often happens, you don’t
know what has been happening until years after the event. There are some partial explanations – namely, that we have been under-measuring output. It is harder to measure the output of service industries, which comprise two-thirds of the economy, but the under-measuring would have to be massive to explain the entire shortfall. Self-employment and the shift to part-time working may be part of the answer. The most convincing explanation has come from Ian McCafferty, “Human ingenuity will mean we figure out how we do more with less. And there are huge prizes for those that succeed in doing so” a member of the Bank of England’s Monetary Policy Committee, who calculated that more than half the fall in productivity could be attributed to three industries – North Sea oil and gas, education and financial services – while another five industries accounted for the rest. This would make sense. In the North Sea, as oil and gas output falls you need as many people, maybe more people, just to stem that decline. In education, the drop may be offset by improvements in the quality of output, as school and university results improve. In financial services, output is measured
by fees and other earnings, which were probably unsustainably high, and rewarded activities that did not really make the nation wealthier. This leads to the somewhat troubling conclusion that the fall in productivity will not automatically correct itself. The oil and gas industries will probably need more people to produce what will inevitably be less output. McCafferty’s calculations suggest that 60 per cent of the shortfall in productivity could be attributed to non-cyclical factors and will not self-correct as demand recovered. What is to be done? The obvious solution is for employers to use their people more effectively. Easily said but harder to do. This is an immediate challenge for the UK and a longer-term one for the entire developed world. The pessimistic view is that gains in productivity will be tougher to achieve than before because it has proved harder to increase output per head in service industries than in manufacturing. That said, you have to be a real pessimist to believe that human ingenuity will not figure out ways of deploying talent more efficiently: by better training and education, more flexible use of labour, greater use of communications technology, and so on. How do we do more with less? There are huge prizes for those that succeed in doing so.
Hamish McRae is associate editor of The Independent.
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