From the TUC

Figures for 2014 change nothing: weak productivity is still caused by austerity

01 Apr 2015, by in Economics

As many argued in the wake of the Budget, productivity outcomes remain a significant concern and major blot on the government’s economic record. Today ONS issued the first figures for 2014 as a whole, showing growth at only 0.5 per cent, up only marginally on 0.4 per cent in 2013 (left chart); they remarked that there had been an ‘unprecedented’ ‘absence’ of productivity growth.

But once more we should take care when interpreting these figures. There is a tendency to see underlying economic flaws (on the ‘supply-side’ of the economy) that are irrespective of government policy. TUC have argued instead that the weakness of productivity is a direct result of the government’s austerity policies. Austerity has reduced demand and economic growth; the labour market has adjusted to this weaker growth through severe cuts in wages and the quality and security of work, rather than reductions in the pace of employment growth (as argued here and here and here). There may well be deeper structural weaknesses with the economy, but these cannot be addressed without first reversing austerity policies.  


The fact that productivity weakness has continued into 2014 is grist to the mill of those who see productivity flaws on the supply side. Finally there has been a material revival in economic growth, but productivity has still shown only the smallest gain. But from a demand point of view, nothing has changed. Austerity continued in 2014 (albeit slightly reduced); the structural change in the labour market continued, with the adjustment to still weaker (relative to pre-crisis) income growth increasingly on earnings (right chart). Conventional analysis continues to have causality the wrong way round. Weak productivity is the consequence of weak growth and weak wages, not the cause. Moreover, under these conditions, productivity is only an arithmetical result, with no causal implications for the future (beyond: if austerity continues, so will weak productivity).

In 2014 there may have been some revival in economic growth, but this is less remarkable on the cash basis that is critical to the labour market response (as well as the public sector finances). Nominal GDP grew by 4.6 per cent in 2014, up from 3.5 per cent in 2013, but still down on the pre-crisis annual average of 5.7 per cent (over 2002-07 – see end of post for table of figures ).

In terms of labour income (strictly, wages and salaries of employees), growth in 2014 was 4.1 per cent, up on 2.5 per cent in 2013, but again still down on the pre-crisis average of 5.2 per cent. The right hand chart shows the extent of the adjustment on earnings is effectively even larger in proportional term, as well as being the lowest earnings growth figure shown (except for 2009).

(Though note that the national accounts figure for wages and salaries is higher than the figure implied in the labour market / productivity figures for employment and earnings growth – hence the positive ‘residual’; using different datasets can always mean modest mismatches between measures.)

These figures also show how aggregate labour market outcomes fall far short of the pre-crisis period. In spite of strong employment growth, the sum of the parts of employment and earnings still makes weaker labour income growth, the critical factor underpinning eight years of living-standards crisis.

For completeness, low productivity comes from comparing economic growth of 4.6 per cent in 2014 adjusted for 1.7 per cent inflation (the GDP deflator), and employment growth of 2.3 per cent. (4.6 – 1.7 – 2.3 = 0.6; the match is not exact again because of measurement mismatches, see end of post for all figures.)

If anything ‘productivity’ has become even more prominent since the Budget, with a change in the public economic narrative around the deficit. City commentators in particular (see e.g. Stephanie Flanders of J. P. Morgan: ‘unproductive workers make for a laborious recovery’) have argued there should now be less attention on the deficit and more on productivity.

But on the basis of the analysis here, this position has no foundation in economics. (Though it is convenient politically: better for the government not to have too much talk about stalled deficit reduction and the more severe austerity still to come). The two are different sides of the same coin. Austerity has caused measured productivity to fall; for measured productivity to rise, austerity must be reversed. Though really there is no need to bring productivity into it: austerity has caused a material reduction in growth and severe dislocations in the labour market and earnings; for healthy growth and earnings, austerity must be reversed. (This is not to say that there aren’t shortcomings with the economy, not least the financial system itself or industrial policy, but nothing can be resolved without first rejecting austerity.)

But the conventional interpretation of productivity has implications that go way beyond attempting to absolve austerity policies and their political and economic champions.

Under the theoretical framework for monetary and fiscal policy, low productivity is generally interpreted as causal, at least on a short horizon. The effect is that policymakers assume away (i.e. write-off) any capacity as it is not used. As austerity erodes outcomes, policymakers assume the underlying potential of the economy is smaller and smaller, which not only diminishes the future income prospects for the workforce and society as a whole but also means that a threat of interest rate rises is ever present. The world is teetering on the brink of deflation because of the consequent vast under-utilisation of capacity; there is nothing ‘good’ about this. So far, of policymakers, only the Bank’s Andy Haldane seems to have any grip on this potential reality.


Background numbers

The table below shows the calculations for productivity, comparing the latest figures for 2014 with a pre crisis average across 2002-07. Also shown are unit labour cost figures which in effects adjusts productivity for wages, and are seen as greatly reduced in 2014. Arguably there is more economic sense to looking at ULC, e.g. for analysis of competitiveness and inflation prospects. The former is therefore advantaged, but the latter points clearly to the deflationary concerns.



3 Responses to Figures for 2014 change nothing: weak productivity is still caused by austerity

  1. Robin Rice
    Apr 6th 2015, 2:53 pm

    were there meant to be hyperlinks at “here, here, and here” text near the top?

  2. Geoff Tily

    Geoff Tily
    Apr 6th 2015, 7:30 pm

    Yeah – thanks. fixed now.

  3. The next chancellor should reject the logic behind today’s warning from the FT’s Chris Giles that weak productivity would mean ‘harsher austerity’ – ToUChstone blog
    May 7th 2015, 1:58 pm

    […] argument can be simply stated (fuller versions can be found here and here and here and here).  Austerity has meant reduced government demand which has reduced overall aggregate demand (i.e. […]