Wednesday, 22 October 2014

A little light on the UK productivity puzzle?

The October Economic Review from the ONS has a section in it on productivity that is perhaps worth  highlighting.

The UK recovery has been puzzling people, because although we have not had the unemployment of other countries we have had a major impact to productivity that has been difficult to explain. Productivity has been flat to declining since the Financial Crash.

The review breaks that down by industry composition and that highlights the impact of a few sectors on UK productivity.

Part of the explanation for the weakness in productivity growth relates to the UK’s industrial mix, and in particular to the productivity performance of mining & quarrying. Productivity in this industry, which is dominated by the extraction of oil and gas from the North Sea, has been on a long-term declining trend, as the remaining reserves demand more factor inputs to reach and extract. As a consequence, while the level of productivity in this industry remains relatively high, it has fallen by more than 50% since 2008.
The drag on productivity growth is then shown in a graph showing change in output per hour.

*ABDE includes all non-manufacturing components of the production industries. This is dominated by the extraction, energy and water industries.
Looking at the change in productivity before the crisis and afterwards leads to this change graph:

Which shows a productivity decline across pretty much all the industrial sectors, with the biggest decline ex. oil and gas in the old bubble sectors - Finance and Pharma.

There is still no comprehensive explanation for what is going on here, but clearly retaining staff (contrary as that is to standard economic theory) and the return to rational pricing from bubble mania will have had some impact.

The atypical response of the UK to the crisis is a natural experiment - after all retaining staff while productivity falls is essentially a privatisation of unemployment benefits which would stop demand falling as far as it otherwise would - and a comprehensive analysis from the ground up would show some theories of the way firms work in aggregate are incorrect.

Hopefully we'll see an adaptation of ideas that can explain what has happened, rather then the usual filtering of facts to fit pre-conceived beliefs.