2 thoughts on “The UK productivity puzzle – or is it?”

  1. Posted 23/06/2013 at 16:39 | Permalink

    There is no “productivity puzzle”. It is quite unremarkable that there is a fall in labour productivity during a recession. The reason is fairly obvious. Capital is now internationally mobile and developing countries can match us in productive efficiency per unit of capital. It follows there will be a constant drain of productive capital to where capital is scarce and labour is abundant – where rents are high and wages are low.

    Normally, a capital drain is moderated by capital formation. However, in a downturn, capital formation dries up but the capital drain continues. As labour now has less capital to work with its marginal product falls and, consequently, so do real wages.

    The capital drain will cause other difficulties as well. Over time, the output gap will slowly evaporate making the recovery somewhat protracted. A fiscal stimulus will then be less effective as it now has less headroom for expansion. Also, as domestic demand picks up in the recovery phase, the owners of capital may choose to invest abroad to meet local demand. The vital domestic investment response may go missing, again prolonging the recovery.

    There will also be some obvious long term consequences. Slower growth, real wage stagnation, a big increase in income for owners of capital (they are the big winners in this scenario, not only earning higher rents abroad but also earning higher rents at home as capital is now more scarce there), rising inequality as a result of the above, low investment and reduced or stagnant labour productivity.

    The good news is that this global capital transfer will end when factor prices (wages and rents) have roughly equalized. The bad news is this may not happen in our lifetime!

  2. Posted 01/07/2014 at 14:18 | Permalink

    Here is the U.S. of A. we notice several factors in play.

    1. The structual changes brought about by globalization have moved some jobs out of the country. The home work force has been reduced to compensate. Workers most likely laid off are the newest and/or the least efficient. The result is a more efficient remaining labor force.
    2. The remaining labor force is happy to remain employed and is unlikely to demand (or expect) wage increases. Reasonable consumer price increases are tolerated.
    3. Employers are wary of new government regulations sprouting from the current state-minded administration in Washington D.C. Thus they are are disinclined to increase capital investments or workforces at this time. The record low interest rates are ignored. (Perhaps with the new administration in 2016)

    So there you have it – high labor productivity, little labor cost increases, moderate inflation, little capital investment, little GDP growth. How much of this is applicable to the UK, you decide.

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