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Full employment in Britain has lowered productivity instead of increasing wages

Full employment in Britain has lowered productivity instead of increasing wages

The UK jobs market is booming, as the latest ONS figures show. Unemployment is at its lowest for over 40 years. A record 32.1 million people are in employment, a rise of over 3 million since the financial crisis.

Apart from in a few scattered pockets, Britain is at full employment. Usually in such circumstances, wages would start to outpace inflation. Labour shortages would lead employers to start bidding for workers, who would themselves feel more confident about demanding pay increases.

Perhaps this is starting to happen, with the TUC voting for a campaign to raise public sector wages by 5 per cent.

But a combination of immigration and a concerted government campaign to get people off benefits means that the supply of labour has risen sharply. This holds down the price of labour, the wage, in the bottom half of the labour market.

Instead, full employment manifests itself in different ways. A few anecdotes might illustrate the key points.

I recently bought a new phone, which has proved to have an intermittent fault. The Richmond branch of EE advertises both on the internet and on its doors that it opens at 9.30am. I turned up at 9.40 to find the place in darkness. I went to another EE branch, where a listless young woman informed me that she could not replace it. I asked what she could do. She replied that she could take it in for repair, but that this “would take three weeks”. I left, and she slumped back to her stupor.

Later that day, I went to see someone at a leading London university. The department receptionist asked if I had the extension number. When I said I was rather hoping he might have it, he responded that he probably did, but that it would be “hard to find”. We looked at each other in silence. Then a light bulb came on in his mind. He winked at me, and pronounced “I’ll take you up there”.

These experiences are not confined to the dynamic capital city. A few weeks ago, I visited the maths department at Durham and left my glasses behind. They offered to post them guaranteed next day delivery. I tracked the parcel on the Royal Mail website. 39 hours later, it had arrived at the Newcastle sorting centre, all of 15 miles away.

These examples of appalling service arise for two reasons. First, the very high demand for labour means that some people now in jobs are scarcely able to perform work at all. Second, many low paid workers realise they can easily get another job, so why bother making an effort in your current one?

Here is part of the answer to the so-called productivity puzzle. During the recovery from a recession, productivity, output per worker, usually rises quickly. But it has been flat.

Whether due to limited ability or a lack of incentive, the output of some workers taken on in the jobs boom is close to zero. And this drags the average down.

As published in City AM Wednesday 20th September 2017

Image: Fatigue by Shanghai is licensed under CC by 3.0
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Cautious corporates sitting on hoards of cash are to blame for our slow recovery

Cautious corporates sitting on hoards of cash are to blame for our slow recovery

The slow recovery since the financial crisis remains a dominant issue in both political and economic debate.

The economy has definitely revived since 2009, the depth of the recession, in both Britain and America. The average annual growth in real GDP has been very similar, at 2.0 and 2.1 per cent respectively. This is much better than in the Mediterranean economies, where growth over the 2009-2016 period is still negative. Even so, the Anglo-Saxon countries have not expanded as rapidly as they have done in previous recoveries.

A key reason for this is the lack of vision being shown by the corporate sector. True, highly innovative companies like Facebook have emerged over the past decade, and start ups continue to proliferate.

But the longer standing major firms in both the UK and the US have become real stick in the muds. Caution, safety first and an increasingly stultifying bureaucracy envelop them.

The contrast in the behaviour of the corporate sector in the two major financial crises of the 1930s and late 2000s makes this clear. The US national accounts only have data going back to 1929, the year before the Great Recession. But in that year, the net savings of non-financial companies was 3.5 per cent of GDP.

When the recession struck, firms ran down their accumulated cash. Between 1930 and 1934, their net savings were negative, averaging -2.4 per cent of GDP. That amounts to a shift during the recession from a surplus of $650 billion in 1929 to an annual overspend of $450 billion in today’s prices.

In the United States, during the decade prior to the crash, 1998-2007, companies on average had net savings of 2.6 per cent of GDP each year. Since 2009, this has averaged 4.0 per cent. So instead of spending their assets, as they did in the 1930s, companies this time round have simply saved more.

To be fair, American firms are gradually moving back towards their savings patterns prior to the crisis. From 5.4 per cent of GDP in 2010, net savings in 2016 were back down to 3.1 per cent. They are gradually getting their confidence back, their “animal spirits” as Keynes called it.

There are signs of this happening in Britain as well. Between 1998 and 2007, net savings by non-financial companies averaged 1.3 per cent of GDP.  From the trough of the recession to now, the annual average has been 2.7 per cent. As in the US, the figure has come down from 2009-2011, when it averaged 3.8 per cent. But firms remain cautious.

But in both the UK and the US, companies are sitting on piles of cash and lack the entrepreneurial spirit to spend it. Boards obsess about fashionable concepts such as lean and agile processes and management. At the same time they set up procurement systems more suited to the old Soviet Union in terms of the tick box mentality which prevails.

Capitalism must be seen to be delivering the goods, and many of our major companies are simply not doing this.

As published in City AM Wednesday 12th July 2017

Image: London Construction by Bonny Jodwin is licensed under CC by 2.0
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