A slump in productivity growth could jeopardise the UK's recovery. Figures this week showed that a net 345,000 people moved into work in the three months to April, the biggest rise since records began in 1971. This means employment has rising even faster than output, implying a drop in productivity. The ONS estimates that the total hours worked rose 1.5 per cent in the three months to April, but the NIESR estimates that GDP grew by only 1.1 per cent then.
This means GDP per worker hour is lower now than it was three years ago - despite a 4.5 per cent rise in GDP - and is 4.5 per cent lower than it was at the end of 2007; in the previous 40 years, it grew by an average of 2 per cent per year. Except for the two post-war periods, we haven't had such a prolonged drop in productivity since 1884-90.
Falling productivity has caused real wages to fall. The ONS estimates that wages, excluding bonuses, rose only 0.4 per cent in the year to April, implying a drop in real wages. This in turn will limit consumer spending. "Spending will have to continue to rely on more people entering employment rather than any sizeable boost to individual consumers' spending power," says Martin Beck of the EY Item Club.
With unemployment falling sharply, however, some economists think this could change. "Pay growth should pick up in coming months, perhaps significantly," says Chris Williamson at Markit. Unless this is accompanied by a recovery in productivity, it will push up firms' unit wage costs which will mean either a squeeze on profits or a rise in inflation, either of which could derail the recovery. To prevent the latter, the Bank of England could raise interest rates; Mr Williamson thinks this could happen later this year.
Others, though, think still-high joblessness will continue to hold down wage growth and prevent an early rate rise. Although there are only 2.17 million officially unemployed, the ONS says there are another 2.23m people outside the labour force who would like to work and 1.4m working part-time who'd like a full-time job. "There is still plenty of labour market slack," says Sam Hill at RBC. If this continues to force down real wages, the UK's recovery could slow down.