No pay, no productivity

Economics commentators have a way with words that tends to obscure the truth. When the latest set of official figures on investment was published at the end of November, the Press Association noted that the economy appeared “sluggish”. That’s overgenerous – the data show an almost complete lack of investment growth.

And before anyone starts shouting “Brexit!”, it’s worth pointing out that the worst performance in investment occurred in the third quarter of 2015, before the date of the referendum had even been announced – an actual decline over the previous quarter of almost 5 per cent.

The results of this dismal performance are clearly visible in another set of figures, those dealing with productivity – output per hour. When the Office for National Statistics released its bulletin covering labour productivity from April to June 2017, it estimated this had fallen over the period.

The decline in productivity was small – 0.1 per cent – but any kind of fall is really bad news, even though the decline was not uniform throughout the economy. Productivity in the service sector was estimated to have risen by 0.2 per cent. But that was not enough to cover a shocking 1.3 per cent fall in manufacturing productivity.

Officials from the Office for Budgetary Responsibility (OBR) said in December 2017 that productivity was a bigger challenge than Brexit.

“The big issue economically is productivity. If we could do something to address that successfully it would completely swamp the Brexit consequences, whatever they are,” said Sir Charlie Bean, its top macroeconomist.

“Machines are pricing themselves out of work.”

Productivity is indeed the big issue. The OBR has been puzzling about it for years. Five years ago, in an article aptly headlined “The Productivity Puzzle”, it examined a number of possible reasons for the long-term decline of productivity.
In the end it was still baffled. “It is unlikely that any single factor fully explains the fall in productivity,” it said. “The balance of the arguments...suggest that a significant proportion of the 15 per cent difference between the current level and a pre-crisis trend level is structural, although there is doubtless also a cyclical element.”

Which is all as clear as mud.

That confusion and lack of analysis probably explains why the OBR has an appalling track record in predicting what will happen to productivity.

In these grim economic times, anyone looking for a good laugh could start with the Resolution Foundation’s briefing paper (see http://bit.ly/2oi2zCQ) produced in response to the autumn Budget – specifically at Figure 1, which shows precisely how wrong all the OBR’s forecasts have been.

The real scale of the productivity debacle, though, is shown in the Resolution Foundation’s Figure 2. It comments, “The awfulness of the UK’s recent record on growth in output per hour is even more apparent when viewed over a longer period…”

That longer look shows that the past ten years have been the worst decade for productivity growth since…1812. Yes, 1812, the year nominated by BBC History magazine as Britain’s worst ever, the year Napoleon invaded Russia and the United States declared war on Britain, the year the prime minister was assassinated.

Strategy

While commentators on the recent official figures lined up from all sides to explain why investment and productivity are so low, the government produced its White Paper on Industrial Strategy – putting productivity front and centre.

“For all the excellence of our world-beating companies, the high calibre of our workforce and the prosperity of many areas, we have businesses, people and places whose level of productivity is well below what can be achieved,” wrote business secretary Greg Clark in his introduction.

He went on: “So this Industrial Strategy deliberately strengthens the five foundations of productivity: ideas, people, infrastructure, business environment and places.”

The White Paper is full of initiatives on this, that and the other, many of them laudable. But there is almost nothing about wages, except to assure us that higher
productivity will lead to higher wages.

Social democrats have two answers to the productivity puzzle. Neither is right.

The first explanation is that the problem is demand – business won’t invest because people haven’t got enough money to buy goods. Yet industrial production since Brexit has been strong. The second is skills – productivity is low because there is not enough investment in training.

Tony Burke, assistant general secretary of Unite, says it’s no wonder productivity is dropping: “Our workforce is undereducated, exploited and demoralised.”

In 2015 Unite analysed manufacturing productivity in Britain, the US, Germany and France. “One of the biggest problems facing the UK is that lending and investment still have not even come close to their pre-crisis rates and this has forced some companies especially SMEs to hire cheap labour instead of buying new machines that would make them more productive,” it said.

It all comes down to the platitude that productivity is low because investment is low. And why is investment low? Their only answer seems to be that there was a financial crisis in 2008.

Nowhere does Unite address the question of why SMEs are able to hire cheap labour – because that would force the union to acknowledge the consequences of the free movement of labour from the European Union, and of immigration in general.

Most unions appear to believe that higher wages will flow from higher productivity and higher skills. It would be nice to see the evidence for this. The facts show the opposite: since the start of 2008 real wages have declined in Britain by about 3 per cent, while productivity has risen (by a little under 1 per cent).

The big financial crash took place with the collapse of Lehman Brothers on 15 September 2008. But the productivity slump was already well under way by then.
“Labour productivity – the economic output produced per hour worked – has, for many decades, grown steadily at 2.3 per cent a year. All that changed in 2007, since when it has stubbornly flatlined,” blogged Sheffield University Pro Vice Chancellor for Research and Innovation Richard Jones two years ago.

Free movement of labour into Britain from Poland began in 2004, and from Bulgaria and Romania in 2007.

A classic case study is academia itself. It is undeniable that the productivity of academics is increasing. A survey by academics’ union UCU in 2016 put numbers to this: 83 per cent of staff in higher education reported a rise in the intensity or pace of work over the past three years; in further education the figure was 95 per cent.

Shrinking pay

What has been the result of this rising productivity? Pay rates in 2016 were a massive 14.5 per cent lower than in 2009. While academic pay has shrunk, academic immigration from the European Union rose from 10.9 to 17 per cent between 2006/07 and 2015/16, according to Universities UK.

Blinded by their love of the EU, most academics seem unable to work out why universities have no trouble filling teaching and research places while morale and pay rates plummet. The answer is simple: there are plenty in the EU who earn a lot less.

When labour is cheap, capitalists will have less incentive to invest. Why should they? And labour in Britain is cheap, driven above all by uncontrolled immigration.

“Blinded by their love of the EU, most academics seem unable to work out why.”

We’re always being lectured by our rulers that “you can’t buck the market”. And to make sure that wages stay low, they have rigged the labour market through free movement so that the supply of labour is, effectively, infinite. Wages, like everything else, are affected by supply and demand: when supply exceeds demand, the price will drop.

All this may be a big puzzle to the government and the TUC, but Karl Marx saw to the heart of it more than 150 years ago. There is indeed a link between productivity and wages: not that rising productivity produces rising wages, but that rising wages produce higher productivity.

Chris Dillow from Investors Chronicle put in nicely in an article for the Financial Times in November 2017: “The flipside of people pricing themselves into work is that machines are pricing themselves out of work.”

Marx had already observed this relationship in 1865, in Wages, Price and Profit, a series of lectures he delivered in London. He noted that the rise in agricultural wages in England from 1849 to 1859 led to a rise in productivity. Faced with higher labour costs and unable arbitrarily to raise prices, landowners turned to new technology – introducing machinery of all sorts, adopting more scientific methods, and so on.

“This is the general method in which a reaction, quicker or slower, of capital against a rise of wages takes place in old, settled countries,” Marx said.

In those days, before mass transport, modern communications and free movement of labour, landowners couldn’t place a job ad in Poland and have a migrant workforce in place virtually overnight. Now they can, and they do.

Britain’s forthcoming departure from the European Union gives an unprecedented opportunity to the labour movement to re-assert control over the labour market. Instead of promoting free movement, unions should fight to stop the flow of migrant labour. Then and only then will greater education and training lead to higher wages and to a more productive economy.