Productivity has stopped growing. Figures next Tuesday could show that total hours worked rose a lot in the third quarter, implying that GDP per worker-hour flatlined. This would mean the rise in productivity earlier this year was just a blip.
This matters. Other figures on Tuesday could show that nominal wage inflation is close to a 10-year high. If productivity stays flat, these pay rises won’t be offset by efficiency gains. This means one of two things. Either inflation and interest rates rise, or pay growth falls back as companies cannot afford to pay more. Whichever it is, it’s bad news for somebody.
And we have good reasons to be pessimistic about productivity. Most of the things that might cause sustained rises in it are absent.
I had hoped that rising share prices might raise animal spirits and willingness to invest and innovate. The stock market’s tumble last month has dented that hope.
Productivity gains often require higher capital spending. But business investment is lower now than it was at the end of 2016, despite the fact that high capacity utilisation, high profits and low interest rates should be boosting capital spending.
Another cause of productivity growth is overseas trade: a greater international division of labour increases efficiency, and the threat of foreign competition spurs domestic companies to up their game. But this too is weak. Dutch statisticians CPB estimate that world trade has grown only 2.6 per cent in the last 12 months – far below its post-1990 average – and it is unlikely to accelerate, given the trade war and Brexit.
Yet another possible cause of productivity growth is high expected demand: this encourages companies to invest and innovate. But last week the OBR forecast that GDP would grow less than 2 per cent per year over the next five years.
Productivity can also rise because efficient companies expand at the expense of less efficient ones. Latest Bank of England figures, however, show that bank lending to companies is weak, and that to small business actually fell in the last 12 months. That points to little chance of an economy-wide expansion of new or efficient companies.
You might think there’s another reason to expect productivity to grow. It’s simply that unemployment is low: next week’s figures could show the rate has dropped below 4 per cent for the first time since 1974. If labour is scarce, companies should economise on it by using it more efficiently.
This has been the case in the past. One reason for strong productivity growth in the 1950s and 1960s was precisely that full employment forced companies to raise their game. In recent years, however, there’s been little sign of this happening. In fact, since 1971 the correlation between the unemployment rate and subsequent productivity growth (whether over one, three or five years) has been statistically insignificant. One reason for this is that tight labour markets cause firms to hire workers who are less well-suited to their roles. Also, low unemployment might simply be a sign we’re at the peak of the cycle and hence that a slowdown is coming, and productivity usually falls if output does.
All this raises the question. If the usual causes of decent productivity growth are absent, why did it rise earlier this year?
I suspect it’s because uncertainty caused companies to slow down hiring and try to get by with existing staff numbers. That, however, can only raise productivity temporarily. Lasting efficiency gains require innovation, investment, new technologies and changes in working practices. And there is scant evidence of these occurring significantly on an economy-wide scale. Perhaps, then, we are destined for stagnation.
