As we all know, Britain is now the fastest growing economy in the G7. This has come as a considerable surprise to many people – most notably the neo-Keynesian economists who had held up the UK as an example of how not to conduct an economic policy.
These same economists can now be found picking through an avalanche of good news, hoping to find some titbit or other of bad news. In a post for his Mainly Macro blog, one such individual, Professor Simon Wren-Lewis of Oxford University, has hit upon a novel strategy – declaring that the good news may in fact be bad news:
“…the much stronger growth in UK employment continues to be greeted by many as unqualified good news – even by some who should know better.”
The Professor’s problem with the growth in employment is that it is even stronger than the growth of GDP:
“…strong employment growth relative to output growth means a reduction in labour productivity.”
In this short-term this can be helpful – as Wren-Lewis admits:
“It means that a given level of output is being produced by more people, so there are less people unemployed. This is good news because our evidence is that the costs of being unemployed are very high. Of course if more workers are producing the same amount of stuff, their real wages will fall, but that just means that the cost of a recession is being evenly spread rather than being concentrated among the unemployed.”
On the other hand, if productivity remains low, then that would be a disaster. Or would it?
To properly think about this issue we have to remember that labour productivity is a very crude measure. All that it does is divide the size of the economy by the number of people in work (or the number of hours that they collectively work). A broad-brush indicator at the best of times, it is downright misleading in Britain’s current circumstances.
Getting people back into work and rebalancing the economy from public to private sector employment are top priorities for any country seeking to restore its finances. Successfully achieving these goals may well show up as a reduction in labour productivity – thanks to the creation of a large number of initially less productive and lower-paid new jobs.
Still, when it comes to his favourite economic indicator, Wren-Lewis is like a dog with a bone:
“The problem is that the absence of growth in labour productivity since the recession is unprecedented… nothing like this has happened in living memory.”
Note that this just a way of saying that employment has recovered more quickly than GDP. Furthermore, with GDP now growing faster than any G7 economy, just about the only thing that George Osborne can now do on the labour productivity front is to somehow find a way of slowing employment growth without compromising GDP growth – with doesn’t strike me as the most progressive of economic objectives.
Wren-Lewis concludes by accusing the Government of a lack of intellectual curiosity:
“…you would imagine that the UK government would be frantic to know what was currently going on… Instead this government seems strangely indifferent. If they have an explanation for the absence of UK productivity growth, I have not seen it.”
Perhaps the Professor should have spent more time reading ConservativeHome, where he might have come across this piece by the then Financial Secretary Greg Clark – which provides some direct answers to Britain’s “productivity puzzle”.
Despite the gloom of the 2010-12 period, the British economy excluding the financial and North Sea sectors grew by about two per cent a year – a reminder that the true explanation for Britain’s missing productivity was the collapse of Gordon Brown’s bubble economy plus the decline in oil and gas production.
Britain’s unbalanced economy was hugely vulnerable to these factors, which is why we suffered a particularly bad recession. To have recovered from this position to lead our competitors on GDP growth – while simultaneously creating millions of new private sector jobs – is a near miraculous turn of events. It takes all ingenuity of a neo-Keynesian economist to spin it as bad news.