Productivity? Is there something wrong with the math?

Productivity? Is there something wrong with the math?

by Ewen Stewart
article from Wednesday 27, December, 2017

IT IS FASHIONABLE to suggest UK productivity is weak. At the Budget the OBR cut GDP forecasts materially, largely blaming a cut in forecast productivity growth as the culprit. The OECD too has jumped onto the bandwagon arguing the UK has a structural productivity problem. It is certainly correct that the official data shows a productivity plateau.  But is it really true? 

Does it not strike you as odd that productivity data is so weak? Since James Hargreaves invented the Spinning Jenny, in 1764, productivity has increased by around 2% pa almost every year. That is until 2007. Why should it be, in the midst of perhaps the greatest technological innovation in the history of mankind that suddenly a 200 year trend should end? 

Clearly the financial crisis and subsequent monetary policy has had a very major impact in terms of distorting the cost of capital and reducing financing costs to distressed companies. Schumpeterian destruction has thus been denied.  

Moreover the massive expansion of public debt, in excess of £1tn of additional debt in a decade, with a negative real yield, has arguably played its part in crowding out higher returning private sector investment.

However, consider the innovation there has been over the last decade. In 2007, the digital revolution was barely consummated and certainly not as a mass market offering. Internet banking was in its infancy, Google was just 10-years-old and significantly less developed, there was no Uber or Air BnB (and in the future there may again be no Uber but that is another story), you had to visit a shop to buy something, perhaps we were on 1G, and so it goes on. 

Beyond doubt the revolution which is shaping and upturning business has gathered pace in an extraordinary way. In believe the global (and UK) economy is substantially more efficient (and therefore productive) than it was in 2007. I just cannot see how productivity can be lower today than it was in then. Something must be wrong with the math.

There are not easy answers, and indeed many academic papers have been written on the subject without substantive agreement, but the way the ONS measures productivity clearly needs careful examination and I believe it is far too cautious, especially failing to capture ‘new economy’ gains.  

It is clearly harder to measure productivity in a service based economy than a manufacturing based one. In the latter productivity can be measured simply by output/cost per unit. In a predominately service based economy measurement is more problematic as output is often less clearly defined. 

Is a teacher more productive because the class size increases from 15 to 16, or does that make the quality of the product inferior?  Is it more productive to be treated in an efficient hospital, which turfs you out after an operation that afternoon, or better to stay in an inefficient hospital where care might last several days? 

Is it really credible to suggest that the UK economy is around 30% less productive than the German economy, as official productivity data suggests, when GDP per capita is broadly similar between the two countries and when the economic drivers of the two countries are relatively different making comparison hard?

Moreover, is a banker less productive because the banks’ profits halve despite the fact he carries out 10x as many transactions on line as he did when he used paper? On top of this, the data does not pick up product improvement. Today’s Ford Fiesta is surely better than the 2008 alternative and cheaper. The same can be said for a myriad of products.

Specifically, the ONS productivity data fails to pick up many digital developments; unbelievably, ‘Cloud’ activity is excluded, for example. ONS data also ignores product improvement. It is also questionable if on-line transactions are sufficiently captured given domicile issues.

Further, the UK is well advanced in technological development compared with most developed economies. IT spend, e commerce, and digital penetration are higher than in many other European countries, with Scandinavia perhaps being the exception. The UK spends more on IT as a proportion of GDP than virtually any other major EU economy, partially as its financial services sector is comparatively large and IT dependent. Empirically I find it hard to believe the data is a fair reflection of what is going on.

Perhaps having to run two networks, a digital one and a traditional one, is an issue that may drag on short term efficiency, but if that is the case it will not last for ever. The cheque and queuing up to cash the wretched thing will soon be a thing of the past and with it the friendly teller.

The bottom line is even if the data is correct, and I do not believe it is, I suspect productivity will pick up substantially as the traditional models are wound down and more efficient digital ones replace them.

Ewen Stewart is Director of Walbrook Economics

ThinkScotland exists thanks to readers' support - please donate in any currency and often


Follow us on Facebook and Twitter & like and share this article