Is the UK going to solve its productivity puzzle? Deputy governor of the Bank of England Jon Cunliffe says yes
The productivity puzzle may soon be solved, according to a high-ranking official at the Bank of England.
Read more: Osborne uses speech to lay out government plans to tackle the productivity puzzle
Jon Cunliffe, the deputy governor for financial stability, said that surplus labour in the jobs market was drying up, meaning companies would have to look for less labour-intensive ways of increasing output.
Noting that productivity in car manufacturing had risen, Cunliffe said the economy would now be "30 per cent, or £500bn, larger than it is today". #
But that was not the case.
"Unfortunately productivity in the UK has not followed the lead of the car industry. Indeed, the opposite is true. In 2014 labour productivity in the UK was actually slightly lower than its 2007 level. In the seven years between 2000 and 2007 labour productivity grew at an average annual rate of about two per cent a year. In the seven years that followed, our annual productivity growth averaged just below zero.
"Or to look at it another way, the level of labour productivity – output per hour worked – in the UK economy is now 15 per cent below where it would have been if pre-crisis trends had continued."
While you would expect a "hit to productivity" during a recession, the UK's was 17 percentage points below the rest of the G& average – "disturbingly weak", Cunliffe said. And although the UK had been able to grow relatively strongly as it came out of the recession, by using the spare labour supply, that was unlikely to continue without the productivity puzzle being solved.
While the BoE thinks it will remain "pretty weak" this year there will be a pick up in 2016 and 2017.
We can, I think, now point to an alignment of factors that suggest that productivity growth will start to move in the right direction over the next few years
After collapsing in the crisis, productivity began to increase again within firms two years ago. We expect that to continue. As the economy grows, spare capacity is used up. The real cost of labour increases relative to the cost of investment. Firms have a greater incentive to find efficiency gains and to switch away from more labour-intensive forms of production. This should boost productivity.
This was not to say productivity would get a sudden boost, or that he could particularly explain what had caused the problem in the first place. "The Bank, like many others, has tried very hard to explain the puzzle but we can’t explain it all," Cunliffe said.
"Indeed, we may never solve the productivity puzzle. Perhaps that is not so strange. A very important part of productivity growth, so called Total Factor Productivity is pretty mysterious by definition. It is the extra efficiency with which a given amount of labour and capital can be used to produce output. It exists – but we can only estimate it by looking at the part of productivity growth our equations can’t explain.
"Indeed, because of this it is sometimes referred to by economists as the ‘Magic Fairy Dust’."