Transcript Alex Bryson and John Forth

The UK’s Productivity Puzzle
Alex Bryson
John Forth
NIESR (London)
23rd January 2014. CEPREMAP productivity project
Ecole Normale Supérieure, Paris
Nature of the Puzzle(s) in the UK
• Big drop in GDP followed by slow rate of
recovery which has been unprecedented
• Labour market holding up: relatively high
employment
• Low productivity growth relative to competitors
• Two puzzles
– Why has growth taken so long to return?
– Why has labour market responded differently this
time compared to earlier recessions?
GDP Change from Peak Relative to Previous Recessions
Employment Change in Recent Recessions
Figure 1 Labour Productivity growth in the UK and the rest of the G7, 1997-2013
Growth in GDP per hour
Average annual growth (%)
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
UK
FR
DE
ES
EU
USA
-1.0
2002-7
2008-10
2011-13
Source: OECD
Structure of the Chapter
• Describe nature of UK productivity puzzle
• Review others’ take on what’s happening
• Provide some (partial) insights from micro
analysis of workplaces
– WERS 2004-2011
– Some 1998-2004 analysis
• Speculate about the future
The Workplace Employment Relations Survey
• National survey mapping employment relations in workplaces
across Britain.
• Unique and comprehensive: data collected from managers,
worker representatives and employees in 2,700 workplaces
with 5+ employees.
• Well-established: 1980, 1984, 1990, 1998, 2004, 2011
• Linked employer-employee:
• 2004 and 2011 cross-sections
• 2004-2011 Panel
Potential Explanations
•
•
•
•
Discussions have been about.....
The role of the Banking Sector (direct, indirect)
Any ‘cleansing’ effect
Incentives to innovate (conflicting hypotheses)
Labour Hoarding
– If so why and to what end?
• The Flexible labour market
– Strong labour supply, falling real wages
• Capital shallowing
• Measurement error
– Output, capital stock; intangibles; estimating
counterfactual
Hypothesis 1: A Banking Crisis
•
•
•
•
Direct impact on UK’s large Finance Sector
Expensive in taxpayer money and govt time
Potential for credit constraints
Evidence:
– Many firms cash rich, interest rates low
– Lending fell more sharply than in previous recessions but
had little impact on aggregate productivity (Riley et al)
– Concerns about forbearance (‘zombie’ firms), but not
found to be substantial (Arrowsmith et al; Riley et al)
Hypothesis 2: No Cleansing Effect?
• Was the cleansing effect of the recession
limited?
Evidence:
– Spike in liquidations, but rates of workplace
closure no different to benign 1998-2004 (WERS)
– Low productivity not a strong predictor of exit
(Harris and Moffatt; WERS)
– Variance in output and productivity rose (Barnett
et al; Pessoa & Van Reenen; Field and Franklin)
– Chief contributor to falling productivity is within
sector and within firm (Riley et al; Barnett et al)
A CLEANSING EFFECT?
Closure Rate Higher Among those with Poorer Pre-recession Performance
Financial
Performance relative
to industry average in
2004:
Raw:
Mean
Controls:
Below
.29
Marginal
Effect
-
Mean
.25
Marginal
effect
-
Average
.17
-.12
.17
-.09
Better
.20
-.10
.21
-.04
A lot better
.08
-.21
.08
-.17
Decomposition of labour productivity growth into within and between firm
Hypothesis 3: Incentives to Innovate?
• Opportunity costs v uncertainty
Evidence:
– Decline in product and process innovation in firms
though real R&D expenditure constant (ONS;
Barnett et al)
– BoE estimated fall in product innovators accounted
for 1pp of productivity shortfall between 2008 and
2012 (Barnett et al)
– Moderate degree of work reorganization and not
linked to being hit by Crisis (van Wanrooy et al)
– Similar to early 90s (Geroski and Gregg)
WERS evidence on
workplace innovation
• Little change in rate of workplace innovation
– Exception: increase in “changes to work
organization” (2004: 32%; 2011: 37%)
• However N innovations lower where workplace
faced “declining” or “turbulent” market
conditions
• N innovations lowered likelihood of “weaker as
a result of recent recession”
Hypothesis 4: Labour Hoarding
• Labour retention in the face of declining
demand – induced by uncertainty
Evidence:
– % firms with falling output but constant
employment doubled in recession (Barnett et al)
– WERS shows healthy rates of employment
growth at workplace level – see next slide
– WERS also suggests link between performance
and employment change broken
Employment Change as a Percentage of Base Year Employment Level
Private Sector Panel – consistent with labour hoarding?
Shrunk by No Change
at least 20%
2004-11, at least 10
employees:
1998-2004, at least 10
employees:
Source: WERS
Grew by at
least 20%
25
40
34
24
42
34
Other evidence on labour hoarding
• Retention of high value-added workers creating
intangible capital – not hoarding (Goodridge et al)
• WERS: growth in % skilled workers negatively
correlated with workplace employment growth
– In workplaces that had shrunk by at least 20%, the increase in the
percentage of employees who were skilled was 9 percentage points,
whereas it was only 2 percentage points in workplaces that had grown
by at least 20%
– Consistent with hoarding of skilled workers
• Hiring rates high relative to pre-recession – not
hoarding (Barnett et al)
Hypothesis 5: Flexible Labour Market
• Are firms taking advantage of the UK’s flexible
labour market?
Evidence:
– The UK economy supports more jobs now than it
did prior to the recession
– Growth in non-standard jobs (part-time,
temporary, self-employment; often involuntary ->
underemployment)
– Now growth in full-time/permanent jobs
– Aided by growth in the labour force and declining
real wages?
Rise of under-employment, 2008-13
Source: Bell and Blanchflower (2014)
WERS evidence on the ‘flexible’
labour market
• Greater use of numerical flexibility in 2011 than 2004
– Up from 50% to 65% of workplaces
– But not associated with managerial perceptions of
how adversely workplace affected by recession
nor how workplace had emerged from recession
– In panel analysis greater use of numerical
flexibility linked to poorer workplace performance
(additive scale) and productivity relative to
industry average
Unprecedented fall in real wages
Source: Gregg, Machin and Salgado
Falling Real Wages
• Which, if any, of these actions were taken by your
workplace in response to the recent recession?
– 38% wage freeze/cut = most common response to
recession
– Accompanied by other cost cutting actions in 4/5 cases
• % reporting pay freeze in last settlement doubled
– 12% in 2004, 26% 2011
– 36% where manager said affected “a great deal” by
recession
WERS Evidence on What Lies Behind
Falling Real Wages
• Union bargaining power?
–
–
–
–
No correlation between freezes/cuts and unionisation
No correlation between pay freeze in last settlement and unionisation
Little change in union wage premium (some counter-cyclicality)
Hard to identify break point in union power
• May have been some time ago?
• Welfare reform
– Those using public job placement service and those drawing on
unemployed for recruits no more likely to freeze/cut pay
• Immigration
– 1 percentage point in the number of non-EEA nationals employed at a
workplace raised the probability of a wage freeze or cut by roughly 0.4
of a percentage point
– % non-UK EEA nationals was not significant
Hypothesis 6: Capital Shallowing
• Fall in capital-labour ratio?
Evidence - heavily contested:
– Pessoa and Van Reenen say accounts for 2/3 decline in labour
productivity, with hours decline also important but TFP minor
– By end 2013 8% lower than counterfactual in absence of
recession, accounting for 2.5pp of productivity shortfall (Bennett
et al)
– Field and Franklin disagree saying TFP is more important
– Harris and Moffat: no capital shallowing in manufacturing –
instead LP decline in manufacturing attributed to decline in
intermediary inputs. In services LP decline due to decline in TFP
Hypothesis 7: Slowdown in HRM
investments
• Possibly part of the story in France – what about
the UK?
Evidence:
– A progressive shift away from formal, collective
approaches (i.e. problem-solving groups, group-based
incentive pay and engagement with unions) towards a
more individualistic focus (up-skilling, the direct
management of quality and performance).
– However, no obvious change in trajectory between
1998-2004 and 2004-2011.
A SLOWDOWN IN HRM INVESTMENTS?
Share of employment in private sector workplaces with specific HR practices, 1998-2011
1998
2004
2011
%
44
%
35
%
48
Functional flexibility+
Training for 80%+ experienced
employees+
79
21
78
41
82
49
Problem-solving groups
Quality targets
Appraisals for 80%+ nonmanagerial employees
49
55
53
34
58
69
Profit-related pay
Share-ownership scheme
53
32
Voice:
Representative + Direct
Representative only
Direct only
Neither
26
43
11
20
Semi-autonomous team-working+
2004 v
1998
Signif.
***
2011 v
2004
Signif.
***
2011 v
1998
Signif.
***
**
***
***
30
63
78
***
*
***
***
***
***
44
33
43
28
***
31
28
21
20
33
24
23
19
**
***
***
***
**
*
***
***
***
Ordered probit regression of labour productivity on count of HR practices
private sector, 1998-2011
Controls?
1998
2004
2011
1998
2004
2011
No
No
No
Yes
Yes
Yes
0.11***
[2.77]
1259
0.10***
[2.75]
1210
0.05
[1.53]
1337
0.11*** 0.09**
[2.92] [2.32]
1258
1210
0.06
[1.60]
1337
Count of HR practices
N
Hypothesis 8: Measurement issues
• Measurement issues and output revision may explain
4pp of productivity shortfall (Barnett et al)
• Difficulties measuring output – not huge contributor
(Grice)
• North Sea output falling pre-recession
– Not fully accounted for in estimating trend
• Don’t capture intangibles where there has been big
growth (Goodridge et al)
– From 2014 R&D has counted as part of gross fixed
capital formation and thus part of GDP
• Big debate over TFP growth – better than 70s recession,
similar to ‘80s (Pessoa and JVR)
Summary
• The Great Recession in the UK notable for the size of the
output shock and the muted employment response
– Employment/output recently reached pre-recession peak
– Real wage growth remains elusive
• Key point; Most of the decline in productivity was withinsector and within-firm
• Some limited evidence of capital shallowing, aided perhaps by
falling real wages and flexible labour market
• But debates continue about the importance of changes in TFP
– Pessoa and Van Reenen: no structural break
– But Barnett et al. and Harris and Moffatt accord falls in TFP
a more central role
Future
• Permanent loss?
– Barnett et al argue reduced investment in capital and
impaired resource reallocation account for 6-9pp of 16pp
shortfall in labour productivity
– UK productive capacity 2/3 its pre-recession rate (Ball)
• Similar to France, smaller than Spain, larger than Germany
• Long tail of poorly-performing firms remains
• But reforms suggest long-term prospects good (Aghion et al)
– Deregulation of capital flows; Higher Education; Welfare system; Labour law