The productivity of our labour generally improves a bit almost every year. It can fall a little during recessions,but it’s never fallen by anything like as much as 3.7 per cent. Which may mean the world’s coming to an end,but it’s more likely to mean there’s something funny going on with the figures.
The commission’s first revelation is that the number of hours worked during the financial year grew by an unprecedented 6.9 per cent,whereas the economy’s output of goods and services grew by 3 per cent. So,as a matter of simple arithmetic,our productivity worsened.
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Now,before you jump to terrible conclusions,there are a few points to make. The first – which the commission didn’t make,but should have – is that one of the most basic things we expect the economy to do for us is to provide paid employment for all those of us who want to work.
And what happened last financial year is that a lot more people got jobs,and a lot of people working part-time got the extra hours of work they’d been seeking. It’s a safe bet that all those people being paid to work more hours were pleased to oblige.
So,before we beat ourselves up,we need to be clear that the unprecedented rise in hours worked was a good thing,not a bad thing. It was,in fact,part of the economy’s return to full employment for the first time in 50 years. That’s bad?
No,rather than cursing our bad luck or bad management,we should be asking questions:how on earth did that happen? It doesn’t make sense. Employers employ people to produce goods and services,not because they feel sorry for people who need a job.
So,if they increased their labour inputs by 6.9 per cent,how come their output of products increased by only 3 per cent?
When you hire more workers,you usually need to buy more tools and equipment for them to work with. If you don’t bother,then the extra workers won’t be as productive as your existing workers,and your average productiveness will fall.
The commission points out that businesses’ decisions to hire more workers didn’t lead them to acquire an equivalent amount of extra machines and other physical capital. The nation’s ratio of physical capital to labour fell by 4.9 per cent in the year – the biggest recorded decline in our history. “This meant on average,each worker had access to a shrinking amount of capital,which weighed down labour productivity,” it told us.
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The point is,if you want productivity to improve,you need anincreasing ratio of capital to labour. So,if businesses aren’t increasing their investment in capital equipment and structures sufficiently,don’t be surprised if productivity is getting worse rather than better.
But while I think it’s true that weak business investment is an important part of the explanation for our weak performance on labour productivity over the past decade,I don’t think it’s the reason productivity fell by 3.7 per cent last financial year.
No. One possibility is that while business has hired a lot more workers,it’s taking a bit longer for the increased investment and greatly increased output to come through. This is a common problem with the interpretation of changes in the economy over short periods. Wait a bit longer and the puzzle disappears.
But I think the true explanation is bigger than that – and so does the commission. It points out that,during the pandemic,measured productivity rose rapidly – mostly because high-productivity industries kept working,while low-productivity industries were locked down – but last financial year that measured gain disappeared.
Get it? COVID and our response to it,with lockdowns and economic stimulus,did strange things to the economy and to our measurements of it.
But by about June last year,thelevel of labour productivity was about the same as it was before the pandemic. We didn’t get much productivity improvement,but nor did we go backwards.
Ross Gittins is the economics editor.