The UK economy is not lacking in dynamism, but productivity is lagging behind
WPAST ONKS worried months for the thousands of UK workers sent home during the pandemic, who then lingered on the government’s leave schedule. Were they just donned by employers, only to be thrown away when completed on September 30? On November 16, the first batch of post-employment labor market data was reassuring. The number of employees (ie excluding the self-employed) increased by 0.6% in October compared to the previous month. The economy will need this dynamism to adapt to Brexit, covid-19, climate change, and more.
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A big job shake-up is clearly underway in Britain, which is good news for growth if people are in jobs they are best suited for. The share of workers changing jobs reached a record high of 3.2% in the third quarter of the year (see graph). Encouragingly, this was mainly due to people resigning rather than being fired. Fabrice MontagnÃ© and Abbas Khan of Barclays, a bank, note that this mobility was wide, now extending beyond people with highly skilled jobs.
Other measures of dynamism are also improving. Joint research by the Center for Economic Performance and the Resolution Foundation, two think tanks, analyzes the Decision Maker Panel, a survey of British companies. This suggests that finance officials expect the reallocation of workers from shrinking firms to growing firms (a measure of momentum) to accelerate in the coming year. Another business survey found that in July of this year, more than 60% of businesses had engaged in product innovation, and nearly 70% had adopted new management practices. Since productivity increases when people and things are used more efficiently, all of this bodes well.
Britain’s productivity could definitely use a little extra oomph. Before the crushing impact of covid-19 restrictions, he was languishing. Between 1995 and 2007, output per worker increased by about 2% per year, which roughly matches the rate for the 25 richest members of the OECD. But over the next 12 years, that figure for Britain was a dismal 0.4%, compared to an average of 0.9% for the others.
Britain has long been known for its outdated and inefficient management practices, so innovation here is a promising sign. As for the dynamism of the workforce, a calculation at the bottom of the envelope by Juliana Oliveira-Cunha of the Center for Economic Performance and her co-authors suggests that if only 4% of workers moved from the least productive companies to those at the other end of the distribution and the productivity of these companies has remained unchanged, GDP could grow by 6%. (They reject the commonly heard suggestion that improving the UK’s long tail of relatively unproductive companies would make a big difference, both in debunking the idea that this tail is indeed unusually long, or has grown over the years. the last decade, and pointing out that these companies are so unproductive that even great improvements would hardly be recorded in the economy.)
However, to explain Britain’s past productivity malaise, an insufficiently dynamic labor market cannot satisfy. Britain’s productivity has lagged behind that of other developed countries in recent decades, even though its companies have created and destroyed jobs at a fairly stable rate relative to overall employment. Meanwhile, the rate of such creative destruction in France and America has plummeted. Even though Britain’s productivity growth slowed between the 2000s and 2010s, researchers found that its economy was actually getting better at reallocating workers from less productive firms to more productive ones.
Researchers believe that a safer path to a high-wage, high-productivity economy lies in increased investment. Between the public and private sectors, investment grew by less than 1% in Britain over the five years to mid-2021, compared to an average of 14% in France, Germany and America. Of course, a higher investment will be expensive in the short term. But without it, lasting increases in real wages are unlikely. For all current job changes, the underlying wage growth from July to September could be as low as 3.4% from the previous year. Meanwhile, in October, inflation hit 4.2%. To adapt to the new challenges, it will be necessary to correct the weaknesses of the British economy, and not only to exploit its strengths. â
This article appeared in the Great Britain section of the print edition under the headline “Tout change”