The Strategist

OECD explains stagnation in the UK

08/10/2018 - 02:29

Labor productivity in the UK has stagnated since the global financial crisis. After a sharp decline at the beginning of the crisis, it reached the pre-crisis level only by the end of 2016. The reasons for this are structural, not cyclical, according to the report of the Organization for Economic Cooperation and Development (OECD). The most negative contribution to the overall indicator comes non-financial services and ICT, as well as the general redistribution of labor from productive to non-productive sectors of the economy.

Susanna Phipps via flickr
Susanna Phipps via flickr
Labor productivity after 2008 has been slowly growing in other countries. Some researchers associate this phenomenon with the slowdown of progress, others - with incorrect estimates of growth in the context of rapid digitalization of the economy. A part of researchers also believes that it is related to globalization and structural changes in the world. However, the United Kingdom shows particular sluggishness against the background of other OECD countries: the gap between the real hourly output and the potential output (with a pre-crisis growth rate of 2.2%) amounted to almost 20%. This runs counter to historical trends: a decade after the recessions of 1973, 1979 and in 1990, the productivity curve in the country was 15-25% higher.

The unprecedented nature of the current downturn prompted researchers to talk about the "riddle of productivity." Most of the "shortage" is structural, not cyclical, and can be explained by weak intra-sectoral general factor productivity (independent of the outlays of labor and capital), the OECD believes. The growth in the number of self-employed (accelerating with the population aging), inadequate skills and lower capital intensity (especially in real estate and business services) could slow productivity growth in the non-financial services sector. In finance, low rates are associated with a decrease in willingness of players to take risks and reduce use of borrowed funds (business lending to banks had been reducing until the first half of 2015). Slow restructuring of enterprises could restrain productivity growth in industry. The OECD also notes specifics of the pre-crisis development of the UK, including lower investments in tangible assets (compared to OECD countries), a sharp increase in the financial sector, an insufficiently aggressive (i.e., innovation-stimulated) industrial productivity growth and a long-term decline in oil and gas sector due to depletion of resources in the North Sea.

In the fourth quarter of 2016, more than half of the total gap between real and potential productivity was provided by non-financial services, almost a quarter - by the financial sector, about 15% - by industry and more than 10% - by other production and construction. At the same time, the negative contribution of all sectors, except for non-financial services and construction, did not correspond to their share in total production and employment. In the sector of non-financial services, the ICT industry was the most inhibited by productivity (more than 20% of the total gap). Such sectors as transport, warehousing, real estate and business services are responsible for 8-8.5% of "shortages" each; governmental services and retail - for 6.5-7%.

At the level of the economy as a whole, sluggish labor productivity is explained by the lag in production from the pre-crisis level. At that, the number of hours worked has been growing at an accelerating rate (the labor market was practically not affected by the crisis). Recall that unemployment in the UK is now at a minimum over the past 42 years, but since 2014, there has been a shift in labor from declining more productive (extraction, energy, industry) to growing less productive sectors (sectoral science and technology, management).