Jonathan Jones

Fag break Britain: four answers to Britain’s productivity puzzle

Fag break Britain: four answers to Britain's productivity puzzle
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Jobs are being created in Britain, but the economy isn't growing. In the last year, the number of people in work rose by 2 per cent, but economic output rose by just 0.3 per cent. As the below graph shows, employment is now 0.7 per cent above its pre-recession peak, whereas GDP is still 3 per cent below it.

This adds up to a big drop in productivity. Output per worker is now 3.8 per cent below its 2008 Q1 level, and 13.3 per cent lower than it would be if the pre-recession trend had continued.

In a piece for this week's issue, The Spectator's business editor Martin Vander Weyer points out that this slump is 'the equivalent of an extra five-minute fag break outside the fire exit for every employee, every hour'. (On the latest figures, it's more like an eight-minute break.) So why has it happened? Martin examines the various factors contributing to what has become known as the 'productivity puzzle':

1. Cheaper workers. 'Most of us who are not bankers have settled for zero or below-inflation pay rises for the past five years,' says Martin. In that time, average earnings have risen by 9.5 per cent, from £431 a week to £472. But since prices have risen by 17.7 per cent, that actually amounts to a 7 per cent real terms fall in earnings.

Because workers are cheaper, companies can afford to hire them or keep them on to do less productive jobs, lowering output per worker.

2. Part-time jobs. Some — but by now means all — of the productivity puzzle can be explained by the rise in part-time workers since the recession hit. There are now 580,000 more part-time workers and 420,000 fewer full-time workers than there were then:

But despite that shift, the mean number of hours worked per week has barely changed: it was 32.0 in April 2008; it's 31.9 now. The total number of hours worked has risen, though only by 0.2 per cent (from 945.4 million to 947.1 million). If you measure productivity in output per hour worked (rather than per worker), it's down 2.8 per cent since 2008 Q1 – a smaller drop than the 3.8 per cent fall in output per worker but still a significant one.

3. Zombie companies. Martin explains:

'some pundits have claimed that as much as 10 per cent of the private–sector workforce — more than two million people — are employed by failing companies that should have gone under by now if the banks had chosen to pull the plug on them. That loose figure isn’t inconsistent with the more precise number of 197,000 "financially distressed" companies identified at the end of last year.

That’s a significant slice of the economy that cannot invest for growth because it can barely meet the interest payments on its debt — not unlike some European governments, you might think.'

4. Start-ups. There's been a 10 per cent rise in the number of self-employed people since the start of the recession: from 3.8 million to 4.2 million. And, as Martin says, there have been around 970,000 new company registrations in the past two years alone. He says:

'the sheer optimism of entrepreneurship against the odds accounts for hundreds of thousands of jobs and, I suspect, a layer of economic output that is unrecorded because it falls below VAT and other measurement thresholds.'

You can read Martin's full article in this week's Spectator and online here.

Click here to subscribe to the Spectator for as little as £1 an issue.

The Institute for Fiscal Studies has a detailed analysis of the productivity puzzle here.

You can also read the Office for National Statistics' takes here, here and here, and the Office for Budget Responsibility's here (Box 3.2 on p43).