All writing, hopefully, changes your perception on an issue. Great writing makes you think again and see things differently.
Martin Wolf has written a great article in the FT this morning. He's addressed the issue of unemployment and provided me with a wholly new insight on why it is not rising as fast as many (me included) expect in the UK at present.
His explanation is a simple one, but so intensely logical it's hard to see why he seems to be the first to point it out, but that's the Emperor's new clothes for you. As he notes (and I'm quoting very selectively from a dense set of data):
From 2007 to 2010, output per person employed rose 5.1 per cent in the US, but fell 2.6 per cent in the UK. The only significant high-income country to register higher productivity growth than the US was Spain, with output per person employed up 6.3 per cent. That, combined with the depths of the recession, explains the huge rise in the Spanish rate of unemployment, to 21 per cent. All other large high-income countries registered productivity falls.
The result? US GDP actually rose whereas that in the UK fell. But UK unemployment has not mushroomed as expected, whereas that in both the USA and Spain has - in the latter enormously.
As he also notes:
One might suppose that these huge contrasts in the changes in output per person employed reflect US decisions to reduce hours of work by laying off actual workers (the “hire and fire” culture) against choices elsewhere, including in the UK, to lower hours worked per employee, instead. This was not entirely the case. In France, Germany, Italy and the UK, output per hour worked fell, as well. Thus, US output per hour rose 6.2 per cent between 2007 and 2010. It fell by 0.5 per cent in France, 1 per cent in the UK, 1.3 per cent in Italy and 1.4 per cent in Germany. Interestingly, Spain is like the US: its output per hour rose 5.3 per cent, partly because of the collapse in employment in construction.
So the conclusions is:
Even though UK productivity performance has been weak, unit labour costs have risen little. Thus, the pain has been shared out among workers via stagnant nominal wages and reductions in hours per worker and in output per hour.
So, by having a continental style labour market, and not as many claim a US style one, we have shared out unemployment. The impact may be on profitability of course: but people are still in work. This to me seems the best explanation as to why, so far, unemployment has not sky-rocketed despite the obvious problems in our economy that I've seen. And as Wolf concludes:
If one is going to pursue austerity, as the UK government does, it greatly helps to have poor productivity performance. With US productivity, too, the UK would have a jobless rate of over 12 per cent.
On balance, I am grateful that the UK job market has responded to this recession in this curiously continental way. More important, so should George Osborne be. This has probably not delayed the recovery. It has certainly made it far easier to bear the recession and his austerity.
And note what 12% unemployment would mean: unemployment of 3.77 million, close to that which I forecast. For once, if I'm wrong, I'm grateful. But let's also note: it's not private sector efficiency that has given rise to this: more some rather welcome inefficiency.
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As you state, this is a good thing, although it’s not good that it’s happened by accident. Tim Jackson, the NEF in general, and the ‘prosperity without growth’ crowd have all called for fewer working hours in order to avoid us ‘growing’ the planet to an early death. This way we can reduce production but maintain employment. Of course a less efficient workforce would also help hugely as well…
This is hardly a new concept. Free market economists had been banging on about hidden unemployment and overmanning for years, especially with regard to British industry in the 1970s. It has been well known for a long time now that productivity in the UK manufacturing sector improved substantially in the 1980s, not despite – but in fact because of – rocketing unemployment. The best plain-English explanation for this is that the deadwood at the bottom was flushed out of the system. I also recall South American unemployment in the 1980s being about 15% despite economic growth of about 8-9% p.a.
Wolf draws too many conclusions using Spain. There are an enormous amount of factors that explain Spain’s predicament and he’s being too simplistic.
“So, by having a continental style labour market, and not as many claim a US style one, we have shared out unemployment.”
It has to be said that one of those who claimed we have US style one is a certain R Murphy, who constantly contrasted the UK labour market with other European ones. So do we have a flexible labour market or not? I would say we probably have a more flexible labour market than most countries.
Finally, it is interesting to note that “continental labour markets” tend to have relatively high and stable rates of unemployment regardless of the economic cycle, say someting like 8-9%. The UK and US tend to have much lower unemployment during booms (4-5%) but slightly higher during recessions (10%). Which is better? I’d go for latter.
But anyone who can calculate productivity without taking into account the waste of talent, ability and energy of unemployed people reveals their incompetence and indifference to humanity at large
Which is why I’ll be deleting further comments from you
Philip Vincent’s explanation of the rise in productivity in the 1980s is just plain wrong. The increase in productivity was principally due to the reduction in overmanning in privatised industries – eg British telecom which took out *five* layers of management and the CEGB; National Power (just over half of the CEGB) claimed that it was running the largest redundancy programme in history: when I asked the Chairman whether that include Caesar’s legions he obviously didn’t know (I suspect some PR guy thought it was a great “one-liner” and didn’t expect anyone in the City to have an education). It wasn’t deadwood at the bottom of the system but in the middle that was the greatest cost.
“But anyone who can calculate productivity without taking into account the waste of talent, ability and energy of unemployed people reveals their incompetence and indifference to humanity at large ” I sympathise with your viewpoint, but since the definition of “productivity” ignores the existence of those not working and the non-working hours of workers, you should omit “incompetence”.
@Philip Vincent: “The best plain-English explanation for this is that the deadwood at the bottom was flushed out of the system.”
Some “deadwood” might have been “flushed out”, but I think a better plain-English explanation would stress that high unemployment caused by mass lay-offs puts downward pressure on wages (because of greater job-competition), and that employers can exploit this to extract greater output, and thus greater profits, from workers, without having to award corresponding increases in real wages. In the meantime, ordinary human beings are thrown on the scrapheap, and end up languishing on benefits rather than engaging in productive activity, simply because there aren’t enough jobs for everyone who is willing and able to do one. Wasting a huge chunk of our most important real resource – human labour – by leaving it unemployed does not sound much like efficiency to me, and any productivity increase comes at a significant social cost.
“His explanation is a simple one, but so intensely logical it’s hard to see why he seems to be the first to point it out”
I could employ an extra 50 people, even though I don’t need to. Unemployment would go down, and so would my firm’s productivity. Take that example and apply it many times over to the whole economy. That’s what Wolf is saying essentially, but with fancy economic statistics.
Not sure that Wolf is the first. Professor Pissarides of the LSE was on The Today program yesterday making the point that unemployment has not risen as much as might otherwise have been expected, particularly because of increased flexibility in the Labour market compared to the 1980s.
Anyway you can find his contribution here at about 3 minutes in: http://news.bbc.co.uk/today/hi/today/newsid_9514000/9514184.stm
But Wolf s saying it’s because we’re not being flexible to some degree …. we’re keeping people on
flexible usually means sacking…
“flexible usually means sacking…”
Not necessarily.
It is quite logical to describe the flexible working arrangements (including reduced working hours for more employees rather than sacking individual employees) which have so far helped to restrict rising unemployment as being part of a flexible labour market.
I’m interested in why companies/employers accept lower productivity ?
This also suggests that people are employed that are not needed….which, given the various costs of employing someone, has to be a puzzle.
In these [difficult] times employing 4 people to do the wok of three sems a bit contradictory.
Mind you, since a LOT of employers are now paying overtime rates of normal time plus nothing, instead of + half, it may mean that some employees are choosing to vote with their feet at the end of their 40 hours.
Maybe the coming relaxation of employment laws (if) will have some effect……
You’re not employing 4 to cover 3
You’re seeking to keep a team and their skills together
And some bosses are also compassionate human beings
I’ll take your word for the last comment Richard.
In my world money comes before team, as in if you can get 3 people to do the job of 4 then that is the business philosophy. And the 3 will rapidly concur, especially the ones that will be staying.
Money comes before compassion as well, at least in the production economy. One of the advantages of training/teaching a variety of operations/skills to people is that one can do the jobs of others.
There is little compassion shown by those that will be staying…..mortgages/loans/etc come before worrying about others.
A sad comment I know.
The private sector worries about productivity. Generally it has to to stay in business.
Most of the increase in employment between 2007 and 2010 was in the public sector.
But low productivity in the public sector is exactly what people want:
– it means more home helps, which is one-to-one attention
– it means longer appointments with doctors
– it means lower class sizes
– it means more nurses
– it means weekly bin collections
All stuff that people say they really want
And that they’re willing to pay for
Celebrate it!
“All stuff that people say they really want
And that they’re willing to pay ”
They don’t want to pay for it. The NHS costs £125bn a year, but since the country runs a deficit of £170 bn the population effectively puts off the annual cost of both healthcare and education.
Complete nonsense – in fact a blatant lie
There was a deficit only to finance investment pre 2008
The deficit since then has been caused solely by the banks
Your statement is a blatant, unadulterated lie
Hmm… Normally the PSG agrees with you Richard… but in this instance the concept of increasing inefficiency as a “humanitarian” measure creates a somewhat contradictory dilemma from the perspective of growing the UK economy.
Admittedly the welfare of human beings far outweighs the interest of commerce; so perhaps a “Queens Award for Inefficiency” would encourage more companies to employ superfluous staff even though this may well lower that company’s efficiency (productivity).
This would be beneficial in the sense that it rescues many from the deprivation of unemployment; but also good news for China, India and other (so-called) booming economies competing in the world’s markets.
On balance you may have persuaded us. Just.
It is possible that this is down to an expectation that the economy will pick up and it might be better to have the workforce in place to take advantage when that happens. Very difficult and very expensive to get a team together when unemployment is coming down and wages are rising.
I find it hard to think of competent managers keeping on excessive staff without some idea of what they will get out of it. Of course, it could be down to a simple inability to manage effectively by our senior management although firing people (by text!) requires little ability.
This appears to be typical capitalist economics. With markedly higher productivity rates, the politicians could deliver the promise that was bandied about in the early 1970s, that is, lower working hours and more leisure time. Less working hours should mean high productivity levels are maintained and significantly less people should have to be flung onto the dole.
This means more people earning a wage, meaning more income tax and NI contributions for the government, a bigger consumer base to buy your products, not to mention benefits to people socially and better health due to less stress caused by long hours anf hard work.
The environment will benefit as factories are running less hours, family life is improved and the economy benefits. Any losses to employers due to wages will be offset by lower production costs as less electricity and heating is used. It would be a largely a win-win situation.
But of course, the neoliberal way is to have less people working longer. This impacts on the economy with less taxes and NI coming in and more money spent on benefits and redundancies going out, causing greater strain on an economy that relies on consumer confidence, ie, people buying things. Less people buying things leaves the possiblilty of a glut of unsold items, meaning business suffers.
The former has benefits for all. Why, when there are losses, does business show paucity of imagination and simply cut? Selling less? Cut back on employment. Less profits, cut back on spending! That seems to be the default setting for capitalism now.
It would never do to look for more imaginative ways.