Any economist who says they are not confused is lying. It is very puzzling. While the UK flirts with the possibility of a triple dip recession, UK employment is at an all-time high, and unemployment – considering the awful economic performance – is surprisingly low. What on earth is going on?
I admit to getting irritated with economists. The current debt over stimulus versus cuts puts the discipline known as economics in a very bad light. I read one extreme view after another. I have to say I would have more respect for the authors if they gave a little more heed to the other side of the argument.
My irritation is especially pronounced when it comes to the issue of why the UK economy is able to enjoy such increases in employment at a time when GDP growth is anaemic. Most explanations do little more than advance the prejudices of those offering the explanation. I offer no concrete explanations here; to do so would be to add to a growing list of biased accounts. I merely try to offer possible explanations.
The UK economy contracted in the final quarter of last year, according to data which may get revised upwards or downwards. If the data proves to be right, and if the data for Q1 this year also shows contraction, then the UK will be in recession. Provided the data from last year is not revised upwards to show that the UK actually did not contract in 2012 after all, then that will mean the UK economy will have suffered a triple dip. That’s a lot of ifs, but the point is that it is clear that the UK is suffering its worst downturn ever recorded. It is now five years since UK GDP peaked, never has it been so bad. Okay, a downturn may have been worse under King Alfred or Henry VIII but we don’t know about that. It is the worst downturn since the 1920s, and as far as economics goes, that amounts to saying forever.
Yet employment stands at an all-time high. Unemployment is now 7.8 per cent, which is not brilliant, but it is not awful either. It is usually much higher during a recession and often much higher for extended time frames too.
I am not being contentious, merely stating an economic fact, when I say that low growth and high employment means low growth in productivity. Not surprisingly ONS data has been pointing to poor productivity for some time.
The question is why?
Some at the Bank of England think the explanation lies in shortage of credit. Companies can’t borrow to invest therefore they employ more people because that entails a lower upfront outlay. A related argument might be to say that companies are not investing because they lack confidence, and are hiring instead, giving them short term cash flow benefits but long term negative effects on profits.
A more simple explanation is that firms are not laying-off staff because it is cheaper to keep them on, than to re-hire and re-train when the recovery occurs. This explanation assumes companies think a recovery is close. I think such an assumption is flawed.
Another theory is that part-time workers currently make up a high proportion of the work-force, meaning of course, less productivity per job. This makes some sense, and I certainly think there is anecdotal evidence to partly support this explanation.
Another possible explanation is that we have seen the UK re-balance away from City domination. So like it or loath it, the City is supposed to be highly productive. As we rely less on the City, productivity will necessarily fall. Closely linked to this explanation is an idea I have some sympathy with, which is that much of the UK’s growth during the boom years was built on an illusion. It was not real growth. Falling productivity is merely a consequence of removing illusionary wealth from the equation.
Maybe flexibility of the labour market has something to do with it. Back in the 1960s and 1970s it was inconceivable that workers would accept lower wages. Today workers will accept pay decreases or freezes in return for job security.
Maybe this is all connected to the idea of zombie companies. Firms are being propped up by rock bottom interest rates, and workers willing to work harder for less money. Maybe the UK needs creative destruction before the economy can see growth in productivity.
Let me finish with one more point. I have some sympathy with the idea of a Keynesian stimulus, but only if the stimulus is used to fund investment, so that is either investment in infrastructure or investment into would-be entrepreneurs. But at a time when UK employment is so high and unemployment is relatively low, such a stimulus can only be beneficial if it not only creates jobs, but creates jobs that are more productive than many of those already in existence.
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