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Why has productivity taken a downturn?

On the face of it, today’s news from the Office for National Statistics is excellent, with unemployment falling and the number of people in work growing by far more than expected.

And earnings growth, while only rising by 2.9% in the three months to March, is at least in all likelihood now outpacing inflation.

There is, though, a blemish – productivity fell during the quarter by 0.5%. This is hugely disappointing given the improvements in productivity seen during the second half of 2017.
This is because stronger productivity, at the end of the day, enables employers to pay their workers more. It is the key driver behind higher living standards right across the economy.
So why the downturn?
The statistical explanation is pretty straightforward, as summed up by Richard Heys, deputy chief economist at the ONS: “Continued strength in employment growth combined with weaker output growth.”
The big question is whether this downturn will eventually be revised away. A growing body of economists are expecting the UK’s disappointing GDP growth of just 0.1% during the first three months of the year to be revised upwards over time.
Indeed, the strong job creation numbers today back that up, suggesting the economy was growing more strongly during the period than that initial estimate suggests.
Stronger output growth means that, all other things being equal, the drop in productivity may be similarly revised lower.

Image: Cold weather in February and March will have hit productivity in construction
The poor March weather will also have contributed. There will be certain sectors, notably construction, where employees worked their regular hours but did not generate the same output in the snow as they would have done otherwise.
A scaffolder or a landscape gardener, to name a couple of occupations, are not going to be as productive in Arctic weather as they are when the sun is shining.

Another factor that may have weighed on productivity is business investment.
This is a key driver of productivity growth and rose by less than might have been expected during the first three months of the year. It also grew at just 0.3%, quarter-on-quarter, during the final three months of 2017.
This was the weakest growth for a year and may also have hit productivity in the beginning of this year.
One final point to be made is that comparisons with last year may be misleading and that the productivity growth at the end of 2017 was not quite as good as thought.
It is becoming increasingly clear that, during the final three months of last year, productivity rose due to workers producing the same amount in slightly fewer hours rather than producing more while working the same hours as previously.
Overall, though, the worry must be that, for all the jobs being created in the economy during the first three months of the year, they were not in the kind of sectors that generate the kind of growth and wealth creation that the UK economy needs.
One pointer to that is that the employment rate, the proportion of people of working age actually in work, stands at 75.6% – the highest since comparable records began in 1971.
During the quarter, there were 46,000 fewer unemployed people than there were from October to December last year, while a further 115,000 left the ranks of the ‘economically inactive’ – those not working and not looking for work or available for work.

More from Business

That is why record numbers of people are in work. That is something to be celebrated.
The downside is that those joining the labour force appear to be among Britain’s least productive workers.

Source: Sky

About Business Ideas UK

My name is Joel Bissitt. I have been an entrepreneur for 24 years and have run many small businesses across various sectors. For the last 10 years I have worked mainly within online media, franchising and small business start-ups.

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