Business

Should we care about the UK’s “low productivity”?

Would we rather get our productivity up through lower GDP or higher unemployment?

BY Andrew Lilico   /  9 May 2017

“Productivity” is the ratio of outputs to inputs used in a production process – that is to say, the output per unit of input. The main kind of productivity discussed in politics is labour productivity, defined either as output (GDP) per worker or as output per hour worked.

We often hear that UK productivity is low. Should we care? We obviously care if GDP per person is low or high. If it’s higher, folk are richer. GDP can be seen as made up of returns to capital and returns to labour. Do we care about the split?

Perhaps in terms of the output per hour notion of productivity, at some level we might. If we could get the same amount of GDP by all working for 30 hours a week instead of 40 hours a week, we might prefer that if we don’t enjoy our work and would prefer to spend an extra 10 hours per week doing something else. But since we choose freely, in market transactions with lots of alternatives available, where we work and how much to work, presumably we consider the current trade-off best for us. For example, assuming that productivity declines with longer hours, we might already be able to secure higher productivity for our work by working slightly fewer hours, though at the expense of a bit of GDP. That we do not choose to do that suggests we prefer the extra GDP. Or maybe we just enjoy our work and would find ten extra hours of leisure time boring?

What about output per worker? Would we prefer to have fewer folk working in our economy? We could, for example, get productivity higher in the UK if we made it harder or more expensive to fire workers, because the consequence of that would be that low-productivity workers would never be hired at all. Then we’d have lower GDP and higher unemployment, but our productivity would be greater. Does that sound attractive? No, me neither.

The UK’s “productivity problem” is that we have a high rate of employment, working relatively long hours, given our GDP per capita. It is thus, in a sense, the counterpart of our much better labour market performance than those of our Continental peers. In my opinion there is nothing per se to solve on “productivity”. What matters in an economy in which we choose freely how to spend our time is the level of GDP per capita. The UK’s GDP per capita is pretty good by the standards of peer economies. The fact that our citizens choose to work rather than stay at home, and to work longer hours, is their choice. We would not, I suggest, want a society in which we were poorer but employment rates were lower and we spent more time at home and less in the office. I simply don’t regard “productivity” as an issue of any per se interest. It is, in my view, a mathematical point – something that is a useful calculation step in economic models – not a substantive point.

There is a banal sense in which “It would be good to have higher productivity”, namely that if “productivity” were higher then, by definition, we’d have a higher level of GDP for any given level of employment. But that is the only sense in which “higher productivity” is desirable. It would not be desirable to have higher productivity at the expense of either lower GDP or lower levels of employment.

So next time someone tells you the UK needs to get its productivity up, ask if they’d prefer we did that through lower GDP or higher unemployment. Then maybe they’ll move on to focus on something that does matter.


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