UK's economic productivity problem

The productivity crisis

There has been much talk in the finance news of the UK's productivity problem. This isn't necessarily an issue exclusive the the United Kingdom. It is relevant to most western world economics such as the US, Japan and North Western Europe. However, the purpose of this article are my rambling thoughts as to why the issue of falling productivity numbers may not be of a such a concern as originally agreed upon by wider media.

Defining the UK's productivity problem

To understand the problem fully we must understand how the Office for National Statistics (ONS) measures productivity for an economy such as the UK. Productivity for a country is normally measured as the total Gross Domestic Product (GDP), a proxy measure of a country's income divided by the number of hours worked by the working population. These measure have been taken over a number of decades and generally tell the following story: whilst both GDP and hours worked in a country have been going up, the number of hours worked has been rising much faster than GDP increased. This suggests that although the population is working harder, less output is being gained from the additional effort.

You might be forgiven for believing that the UK's productivity should tail off eventually. There is only so much additional benefit to be gained from working extra hours. Rest is required by every employee. At the margins, working additional hours should not automatically result in increased output as working ever longer hours will lead to tiredness resulting in inefficiencies and mistakes. However, intuitively it feels as if this stage is a long way off. The average working week in the UK is about 40 hours, a far cry from being overworked. 

GDP productivity and the black economy 

The black economy is a term that defines all of the income earned in a country that isn't captured in the GDP figures. For example, cash exchanges between builder and his client whereby the income isn't declared for tax purposes. It is possible that the true income figures for the country have been growing even faster than the ordinary GDP figures would suggest; the shortfall being made up by the black economy. If GDP figures are understated then the resulting productivity numbers will also be lower than the reality.

The number of self employed people in the UK has been rising ever since the 2008 financial crisis. Rather than rely on a corporation for employment, many workers have decided to carve their own destiny by freelancing and setting up their own businesses. The ONS would find it far harder to estimate the number of hours worked by the self employed, particularly since not all of their hours necessarily translates into a direct income boost today, but may instead be an investment for the future.

GDP may not capture the true economy

One of the agreed upon issues with GDP as a measure of national income is that it is incomplete. GDP has no way of capturing all of the components of our economy that provide the population with happiness. Facebook is a good example of something that is free at the point of use to consumers but clearly has a value to the economy as it entertains millions. 

The internet itself is generally free at the point of consumption. It is one of the most revolutionary inventions since the invention of the printing press. It brings knowledge and accelerated productivity in a multitude of ways. However, the Internet is not captured by the GDP figures as having a value. Once again GDP figures are likely to be understated, in which case so are the productivity figures.

More people but fewer hours

The total number of hours worked figures may be much higher for a reason other than people simply working longer. It may be the case that there are simply more workers in the economy but each working fewer hours. It is possible that the number of lower wage migrants entering the economy have increased the number of hours worked whilst not increasing the income figure by as much as they accept lower salaries. As such, productivity figures for the core economy may be improving but productivity figures appear depressed due to the influx of low wage workers.

Is the falling productivity even a problem?

Finally, does is really matter. There has been an awful lot of literature about the depressed productivity numbers. These would suggest that there is inefficiency in the economy. However, as long as the pie is growing, people are employed and happy, does is really matter that there is some slack?

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