8 thoughts on “Working harder – but not more productively”

  1. Posted 30/01/2014 at 08:44 | Permalink

    Some reasonable points are made here. However, I do wonder about productivity figures. During the credit-fuelled boom, productivity appeared to be rising reasonably strongly because output per person appeared to be increasing because GDP was increasing. However, as we now know (if we didn’t before) GDP was unsustainably inflated due to to the credit boom. Do we not see an opposite effect during and immediately after the crash? Just as the productivity figures looked better than they really were, can they not now look worse?

  2. Posted 31/01/2014 at 10:47 | Permalink

    I am willing to concede that the ONS often gets the measures wrong and it is possible that the GDP figures for 2013 are understated but whether the credit boom systematically inflated the GDP figures pre-crisis so as to distort productivity estimates is questionable. If you examine an 8-month moving average of the growth in GDP per hours worked so that you iron out noise and measurement errors, what you see is that underlying productivity growth remained in the 2-3% between 1995-2007. Only in 2003(1)-2004(1) did underlying productivity growth rise above 3%. So the credit boom did little to distort the productivity figures systematically. By 2006 underlying productivity growth had fallen to the bottom of the range, so productivity growth had begun to weaken before the excesses of the credit boom, consistent with the argument that the expanded state sector was destroying capacity in the private sector.

  3. Posted 31/01/2014 at 11:14 | Permalink

    Kent – An 8-month moving average will certainly iron out noise and measurement errors but that does not mean that the resulting figure tells you the underlying productivity growth. It merely tells you an averaged figure – it does not tell you that it represents ‘underlying’ productivity growth. We know that we experienced an extremely long credit boom. As measured GDP and productivity growth were reasonably steady across this period, I would conclude that the average figure merely concealed the fact that underlying productivity growth was slowing because it was increasingly replaced by credit-inflated ‘growth’. This is consistent with the figures for particular sectors that we do have. Manufacturing productivity grew strongly, yet output stagnated and then fell. Much more was spent on the public sector but, for example, we know that the government’s own figures showed NHS productivity and public sector productivity in general falling. This would suggest falling overall productivity growth but the figures show it to be fairly steady. Surely the difference can only have come from credit expansion?

  4. Posted 01/02/2014 at 11:34 | Permalink

    HJ – You are right that a credit boom will inflate GDP growth and boost measured productivity growth but this is normally temporary becuase it is what Friedman calls a monetary phenomenon which works into GDP growth through an expansion in demand and the money supply. Usually this would result in inflation as output expands above productive potential. But inflation did not occur because international tradeables were kept low by the Chinese policy of shadowing the dollar and expanding traded output. However, there were several years when actuasl output was above potential and in the short-run productivity might appear to be inflated but theory also tells us that output cannot rise above potential at the same rate as the growth in hours worked in a sustained way because to expand above capacity results in dimminishinng returns. However, your point that the decline in public sector productivity is well taken. This is consistent with the point that the expansion of the state sector has destroyed the capacity for the private sector to grow and has permanently reduced the rate of growth of potentyial GDP. In only 2 years since 1995 did actual annual productivity growth rise above 3%. Since 2004 it has been declining and only rose temporarily in 2007 to 2.6%. Credit growth does play a part but not in a sustained way.

  5. Posted 04/02/2014 at 19:13 | Permalink

    Kent – I’m still not convinced. You say that “inflation did not occur” by which you presumably must mean that the CPI measure of inflation did not rise. While this is true, I question whether CPI tells us all that much about inflation (as it relates to our discussion), because it excludes housing costs AND public sector output inflation (which is not included since most public sector output is not paid for directly by the user). These two between them (even allowing for the fact that some public sector input is simply redistributed via the social security system) must constitute getting on for half of GDP.

  6. Posted 04/02/2014 at 23:36 | Permalink

    HJ – If I am right and that we are near to full capacity and that the low productive public sector has crowded out the higher productive private sector, we will see growth in 2014 consistent with low productivity growth. If I cannot convince you now perhaps we can revisit this exchange this time next year to see if the prediction is verified and I can convince you then.

  7. Posted 05/02/2014 at 10:20 | Permalink

    Kent – I don’t disagree with what you are saying. All I am saying is that I think that productivity rises prior to the crash were exaggerated upwards and that since the crash productivity falls have been exaggerated downwards – not that neither effect hasn’t happened. We are in agreement that the low productivity public sector has crowded out the higher productivity growth private sector.

  8. Posted 05/02/2014 at 17:25 | Permalink

    Fair comment

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