Labour Market

Productivity is always a slippery concept – but there are clear trade-offs policymakers need to recognise

This week’s positive news from the Office of National Statistics about the continuing strength of the UK’s jobs market was once again qualified by the slow growth of earnings. What should we make of this?

For one thing, we should always be wary of economy-wide economic averages, which reveal little. Many groups of workers continue to obtain significant pay increases. This includes people in fast-growing sectors like IT, with skills which are in increasing demand. But it also includes lower-skilled and lower-paid workers benefiting from the introduction and escalation of the National Living Wage. Not everybody’s pay is stuck.

And it’s important to emphasise that the labour market is in constant flux. Every month hundreds of thousands of people (youngsters, labour market returners and immigrants) enter and hundreds of thousands leave the labour market every month (to study, have babies, retire, move abroad, become ill or die). If the entrants are lower-skilled or less experienced than the leavers, average pay falls: if vice-versa, it rises.

Many more voluntarily change jobs, which almost always results in a pay increase. It’s recently been estimated that changing jobs boosts pay by about 10% on average.

One slightly worrying feature of the last few years is that job-changing has slowed down. This could be due to many factors, but one concern for public policy is that it may be partly the consequence of the messed-up housing market, where high rents and house prices (plus the imposition of higher stamp duty) have made geographical moves more expensive.

Pundits talk about slowly growing productivity as the ultimate cause of slow earnings growth. In one sense this is undeniable, but quite what should be done about it is unclear.

Productivity is always a slippery concept. Heard my plan for boosting average productivity, and average pay, overnight? How? By raising the National Living Wage to £15 an hour. Low-skilled work would disappear, and with it three million jobs. Welcome to France. Lots of strikes, but the wine is good.

More sensibly, we want to raise productivity with the existing level of employment by making the existing workforce more productive. There is talk, as there has been as long as I can remember, of improving the skills of the workforce. But this is a long-term project, even if we could agree what skills are needed. In a world where technology is changing our conception of useful skills every day, and our lumbering state education system and quasi-state university sector cannot keep up, this sounds like the usual windbaggery that passes for  thinking in enlightened circles.

The present push on the left, sadly echoed by Mrs May’s administration, is for what Mariana Mazzucato terms the ‘entrepreneurial state’ to support strategic investments in fashionable sectors. But this is to ignore the lessons of the past. In reality government is a major part of the problem.

UK productivity is inhibited by high and badly-designed taxation, ever-growing regulation which makes investment more costly, planning procedures which hold back house building, endless public consultations which have stymied airport development, fracking and myriad other developments, and public sector conservatism which is strangling the NHS.

One issue which hasn’t been talked about enough is the role of labour market regulation in squeezing wages. As I demonstrated at tedious length in my Working to Rule, labour market regulation raises costs to employers who inevitably pass them on to consumers and, to a very large extent, workers themselves.

If a worker is producing output which is worth £20 an hour to the employer, that is the maximum the employer is willing to pay. If employers face a payroll tax, or are required to give paid holidays, or maternity leave, or a pension, this reduces the amount which they can profitably pay out in wages.

The total cost of employing a worker typically considerably exceeds the wage paid out. In recent years non-wage costs of employment have increased sharply, with higher employer’s national insurance, auto-enrolment in pension schemes, the apprenticeship levy, extended parental/carer leave and so forth.

Maybe one way employees can get higher pay in the absence of a visit from the productivity fairy is through imposing fewer costs on employers. This is a trade-off which policymakers need to recognise.

Editorial and Research Fellow

Len Shackleton is an Editorial and Research Fellow at the IEA and Professor of Economics at the University of Buckingham. He was previously Dean of the Royal Docks Business School at the University of East London and prior to that was Dean of the Westminster Business School. He has also taught at Queen Mary, University of London and worked as an economist in the Civil Service. His research interests are primarily in the economics of labour markets. He has worked with many think tanks, most closely with the Institute of Economic Affairs, where he is an Economics Fellow. He edits the journal Economic Affairs, which is co-published by the IEA and the University of Buckingham.

1 thought on “Productivity is always a slippery concept – but there are clear trade-offs policymakers need to recognise”

  1. Posted 19/08/2018 at 19:59 | Permalink

    I totally agree with you Len.
    IR35 false self employment regulation forced construction contractors to hire their labour via employment agencies, adding approximately 10% of unproductive cost to labour.
    Combine that with the fact that contractors are unaware of the skills & abilities of temporary agency workers and you end up with a cocktail of HSE liability and Quality control issues that encourages rentseeking worker certification schemes.
    As for housing, workers need a roof over their heads, if housing costs go up, employers have to pay increased wages and become less competitive on the global market, unless they want to employ homeless people. Meanwhile the bankers who have created vast amounts of privately created bank credit to inflate the housing bubble, sit back with the baby boomers and enjoy the rewards of unearned income while UK competitiveness nose dives.
    The political elite of all colours seem to create policy without analysis of the ramifications.

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