Fortnightly insight into the current state of the economy and how it relates to Dorset by Nigel F Jump, Chief Economist of Strategic Economics Ltd (a Dorset Company) and Visiting Professor in Economics at the Universities of Bath and Plymouth.
See: www.strategiceconomics.co.uk
The latest international comparisons on productivity show the UK’s relative position weakening in 2012. Output per hour and output per worker were 16 and 19 percentage points respectively below the Group of Seven average (USA, Canada, Germany, France, Italy, Japan and UK). The ONS says the former gap was the largest since 1994. Unlike most of its peers, UK productivity was lower in 2012 than in 2011. In current prices, last year, UK output per hour was 29 points behind the USA and 24 points behind Germany and France. In constant prices, UK productivity remained below its 2007 peak. Significantly, it slipped relative to the main international rivals and compared with its own previous long-term trend. This is the real cost of the UK downturn. We are getting less efficient and competitive.
This matters because productivity growth is the ‘holy grail’ of economic performance, underpinning our future living standards. If our relative productivity performance is slipping and our absolute productivity is not increasing, relative living standards will fall over time and absolute, post-inflation, living standards will, at best, stagnate, and probably drop. In turn, this means lower employment and real incomes, and higher unemployment down the line. For example, if Dorset firms are less productive than Hampshire ones, they will tend to have higher prices, lower quality of goods and services and lose competitive orders. If it persists, more business will go to Hampshire and jobs will be lost in Dorset.
Of course, we all know individual Dorset businesses that are productive and can compete well. But, over time, unless the local economy is generally vibrant, such firms will tend to move away in search of better markets and skills
Many don’t get this positive link from productivity to jobs. “Surely,” they say, “productivity destroys jobs. The easiest way to increase productivity is to sack people. It’s better for us to have high employment than high productivity.” This confuses the micro and the macro and the short and medium term. For an individual Dorset firm, it may be that shedding labour will boost productivity – for a while. In an upturn, this may be because new technology is adopted which raises output per hour/worker and fewer workers are needed to produce the same level of output. In a downturn, this may be because demand has slumped and the current output level needs fewer staff.
But, in the first case, the new investment will make the company more profitable and more competitive. It will be able to enter new markets, develop new products and increase its market share. In the medium term, this growth will lead to a need for more staff as the company grows. The links in the chain are from productivity to growth to jobs. In the second case too, shedding staff can start to turn things around by releasing labour resources that can be redeployed to better effect elsewhere in the economy and by turning around a firm’s finances to the point where more positive decisions can be taken.
In the medium term, then, macro productivity growth coming from positive decisions is a generator of jobs. If many Dorset employers are sacking workers to boost productivity, demand will fall and the local economy will shrink: productivity will then drop again. But, if everybody raises productivity by investing, being innovative and being entrepreneurial, it will begin to increase spending power, lift demand and more hiring will follow.
The bottom line is that the UK recovery will not be sustained and secure until productivity starts to climb again, in absolute and relative terms. In the short-term, this may restrict employment growth but, later, once we have got on to a productivity-led growth path, increases in employment will come. Unfortunately, right now, unlike our competitors, the aggregate UK economy is going in the wrong direction. Until, we turn this around, locally and nationally, the recovery can only be weak and will remain vulnerable to shocks. This should be the economic theme for Dorset in the run up to the 2015 General Election
Professor Nigel Jump, 21st September 2013
