I just heard a fascinating interview on Radio 4's Today programme with Robert Peston, who was explaining why low productivity was such a big problem for the British economy, and what might be causing it. You can also read his thoughts on his blog.
The short answer is we don't really know why productivity is falling.
Some plausible explanations have been put forward, but I'd like to offer another. A great many jobs in the British economy are in the service sector. For example, I work as a medical statistician. You could measure my productivity in terms of how many clinical trials I analyse, but of course no-one would. My productivity would be measured as the value of the work I do.
And that, in turn, is measured by how much clients pay for it.
So if prices for services are squeezed in a recession, then productivity will drop, even if everyone is working just as hard and as smart as they did before. Certainly in clinical research I've noticed prices come under a lot of pressure in recent years, though how much that is due to the recession and how much it is due to global competition from low cost countries such as India and China is a question wiser people than I will have to answer.
It's easy to imagine many parts of the economy where prices have come under pressure, or where there has been a shift from expensive services to cheaper ones. I'm sure a waiter at Pizza Hut will serve more customers in an hour than a waiter at Le Manoir aux Quat'Saisons, but the waiter at Le Manoir will have far greater productivity when measured by the value of all that work, just because Le Manoir is a more expensive restaurant. In a recession, there is undoubtedly a shift to low-end services.
So I wonder if lower productivity is driven not so much by workers becoming more inefficient, but by the difficulty of selling expensive services during a recession.
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Lower productivity - really?
The news media was all over this headline a couple of days ago. They had 'cherry-picked' one item from the Bank of England's quarterly report on inflation, and generally ignored the rest of the report.
The Bank wasn't talking about productivity, they were talking about inflation.
They actually referred directly to energy prices dropping, food prices dropping, oil prices dropping, sterling variation and low wage increases. They then went on to say:
"Productivity, though, is not something that monetary policy determines, and among the many uncertainties we face, the timing and extent of any prospective pick-up in productivity growth remains our most difficult judgement. "
So they do not feel confident expressing an opinion. But being good economists, they have a go:
"One insight from our review of supply is that over the past year, some of the weakness in measured productivity reflects so-called compositional effects: there has been disproportionate growth in relatively low productivity jobs, partly reversing what occurred when unemployment rose sharply. "
In the part of the report where they detail Output and Supply they say (in a section where copy 'n' paste does not work, hence the need for an image):
In short, this was a non-story from the start.