Dead Men Left

Tuesday, June 21, 2005

Productivity growth, a-bloody-gain

Having jumped all over the mythology of Brown's "economic miracle", and in particular the failure to address longstanding productivity issues, along comes this article:

But amid this summer of our discontent there is, still, some cause for optimism. A silver lining rings the clouds in the form of the possibility of a sustained acceleration in Britain’s productivity. It is an enticing prospect that holds out the promise of a transformation in the country’s economic potential. If it is confirmed, it could yet do much to offset the impact of the cyclical slowdown upon which the economy seems to have embarked...

Until last year Britain’s recent productivity record could reasonably be dismissed as dire. It reached a nadir in 2002, when the annual growth of productivity measured by output per worker fell to only 0.7 per cent. Over the first three years of this decade the average figure was only 1.7 per cent. That compares with an average annual rate of 2.8 per cent in the Sixties, the nation’s productivity heyday.

Last year, however, there were signs of improvement. Productivity growth jumped to 2.8 per cent in the second quarter and remained at a respectable 2.2 per cent in the following three months. Admittedly it then slowed again, to 1.7 per cent, in the final quarter of last year. But, as Ms Redwood observes, the news is still encouraging — especially if one focuses on the even better showing of private enterprises, after stripping out the dead weight drag from the public sector. Private sector productivity climbed to an impressive peak last year of 3.6 per cent.

Public sector "dead weight drag" is a nonsense: the public sector overwhelmingly deals in services. Service productivity is both notoriously hard to measure and, when it can be measured, inclined to below-average growth, whether the service is in public or private hands. Services are often highly labour intensive, like nursing, and of such complexity that mechanisation is difficult to introduce. There's even a sound, orthodox case to be made that the public sector ought to cover only the lowest productivity services, leaving the rest to the market. To blame the public sector for slowing down productivity growth, as is done here, is to mistake cause and effect. Anyway.

The article's main contention, based on a Capital Economics report, is that we could finally be seeing the long-awaited productivity benefits of the "ICT revolution". You might remember, at the height of the bubble, much excitable talk about the "new economic paradigm", the "fourth industrial revolution", and even dry old Alan Greenspan becoming positively energetic about the miracles of telecommunications technology, not least in sluggardly service industries.

In practice, the internet has revolutionised office life only inasmuch as it has provided a thousand more ways for bored staff to avoid work, like blogging. The assumptions of a productivity overhaul were questioned at the time and the bubble's subsequent collapse appeared to confirm the analysis. The most significant increases in US labour productivity arose in the decade or so preceding the bubble, driven by the decidedly old-fashioned technique of making workers labour longer, and for less money.

The argument now is that, after a significant gestation period, the true productivity gains are emerging. Without having seen the original report (he says as a caveat), there are a number of reasons to be dubious about this judgement. First, sudden improvements in apparent productivity may reflect the market power of US firms, rather than true innovation. Much of the hysteria about the revolutionary impact of ICT depended on looking at components of productivity that aren't directly measurable. Because they aren't directly measurable, they are particularly unreliable. What one person claims as a huge improvement due to the mysterious effects of the internet, another could easily claim as measurement error, or the product of large firms able to dominate markets.

Second, the length of time for this gestation period is uncertain. If we allow that it takes a long time to install new technology, train everyone how to use it, and wait for others to catch up with you - a telephone is no use unless others have telephones, likewise with the internet. But there's no good indication as to how long this should take, and no real explanation as to why, after the networks are in place and training acquired, the gains should be so unevenly distributed, whether comparing across sectors or whole national economies.

The most likely explanation for any sudden upturn in UK productivity growth is exactly as the article admits: that it is cyclical, the side-effect of continued economic growth last year. When growth in the whole economy slows down, so too will productivity growth.

Shorter version, for them as can't be bothered: nah, Gordy's still stuffed.