Wednesday, April 04, 2007

10 Years of New Labour - Labour Productivity

It is often noted that British productivity per hour is lower than that of other major developed countries, and the Labour government's stated aim was to improve this. So how has the government done?

Eurostat have calculated productivity based on GDP in Purchasing Power Standards (to remove currency distortions), per hour worked, relative to the EU-15 (i.e. relative to the average of the 15 Western Europe EU member states). The index is set at 100, and if the index of a country is higher than 100, the country's GDP per hour worked is higher than the EU-15 average and vice versa. As before, the comparison in the following table is with other mature economies with a similar sized population (to see the entire EU's data, click the link above).

Year UK USA France Germany Spain Italy Japan

1995 89.9 109.5 116.0 108.9 93.6 104.9 76.4
1996 90.8 110.6 115.3 109.8 93.0 103.2 77.0
1997 91.8 110.1 116.9 109.1 90.4 102.5 77.3
1998 92.7 111.0 118.3 108.2 89.6 102.6 76.4
1999 93.4 112.3 117.6 107.9 90.2 101.9 77.3
2000 94.4 111.5 119.2 106.7 87.5 101.1 77.2
2001 95.7 112.2 120.4 106.6 87.7 99.9 77.4
2002 98.3 111.9 120.8 106.3 88.4 96.9 77.1
2003 98.0 113.6 116.8 111.2 88.9 92.5 77.3
2004 99.7 115.3 117.3 109.7 88.5 90.9 80.8
2005 * 116.7 * 109.3 89.1 89.8 *

* indicates data unavailable.

Britain's story is one of steady improvement. Unlike our competitors, we never really falter. This has a lot to do with how steadily the UK economy has performed. As noted in The Times last August, "It is well known that when markets droop, employers are initially disinclined to shed labour. They fear that if and when business improves, their good workers may be difficult to recover. Consequently, in a recession either working hours or working rates must be cut." This explains the faltering in France, Germany, the USA and Italy after 2000.

Of course Spain has had steady growth throughout this period too, but their productivity falls. But this could be explained by the extraordinary change in their labour participation rates (see previous post). Employers always pick the best staff first, but as labour markets tighten, they end up being forced to employ the not-so-productuve. The challenge when you have tight labour markets, is how to improve training, so that the less productive can be brought up to scratch, and how to automate things, so you are less dependent on unproductive people. Productivity in Britain improves faster after 2000 than before, mainly due to the huge take up of IT around the millenium, and the introduction of IT into the public services.

The conclusion must be that the Labour government has largely achieved their goal of improving productivity and has brought Britain to the EU-15 average. We've improved the most out of the countries listed above (productivity per hour in 2004 is 10.9% higher than in 1995). The pivotal achievement again seems to be avoiding the world recession of 2001 - if we hadn't our productivity would have fallen as it did in France. Governments show their mettle by how they perform when world conditions get tough. The other theme emerging from this series is steadiness. Growth has been steady, improvements in employment have been steady, improvements in labour productivity have been steady. Perhaps we should nickname this period "The Great Steadiness".

Previous articles in this series:
10 Years of New Labour - Financial Services Regulation
10 Years of New Labour - Economic Growth Since 1997
10 Years of New Labour - Employment

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