The productivity puzzle
Answers
1.
What
is meant by ‘labour productivity’? (2 marks)
Labour productivity is a measure
of output per worker per period of time. Evidence B suggests a long term trend
for labour productivity to increase over time, but little change since 2008.
2. Calculate how much gain in productivity was
lost by leaving the trend line over a six year period. Comment briefly on this.
(4
marks)
In 2014 the productivity index
rose slightly above 100, whereas the trend line goes above 110. This suggests
that over a six year period trend line improvements would have taken
productivity 10% higher than the level shown by the index. This suggestion
corresponds to slow GDP growth over the period, with output per worker not
rising in the way that might have been expected if the pace of previous
productivity gains had been continued.
3.
Explain
the benefits of increasing labour productivity. (4 marks)
Increasing labour productivity
means that workers produce more. One consequence of this is that the output of
each worker grows so wages might rise to reflect the additional added value.
The converse of this is that if the same workforce produces more goods and
services, total output and GDP will rise. This adds to economic growth and
should lead to improved living standards.
4.
Discuss
the contributions of factors in Evidence C to the stall in productivity. (8
marks)
Evidence C identifies four
factors influencing labour productivity. The first of these is a slow recovery
in investment after the recession. There is a straightforward relationship
here. More and better capital goods should equip workers to become more
productive. Many productivity gains can be linked to technological changes
allowing the introduction of better equipment. For example, 50 years ago
complex calculations were often carried out manually with slide rules. The
introduction of electronic calculators and computers brought faster and more
accurate methods.
Successful dealers in high
finance can generate £millions of profit in a good day. A thriving financial
sector made a large contribution to output before the ‘crash’. Once oil wells
are constructed, a small labour input can ‘produce’ large quantities of
valuable oil. Such productive activities will have pushed up the average labour
productivity. By contrast, unskilled workers tend to produce (and be paid)
less. Temporary and part-time workers are less likely to receive training to
make them more productive or to be highly motivated. If more jobs are in less
productive areas, labour productivity is unlikely to rise.
Skills shortages will restrict
output. Where skills are unobtainable production might be stopped. If people
who are not fully skilled for tasks are used, their productivity tends to be
lower. In addition to the health care, I.T. and catering listed in the
evidence, there are also shortages of engineers, specialist teachers of several
subjects and in other skills. Construction firms say that house building has
been slowed by shortage of skilled construction workers. It seems clear that
skills shortages hold down productivity.
The determinants of labour
productivity are complex. All of the factors in Evidence C have contributed to
the stall in productivity. Their importance probably varies in different parts
of the economy. Other factors such as
low levels of aggregate demand have also had a part to play in the UK’s
disappointing productivity performance since 2008.
5.
Contrast
the policy approaches that free market and interventionist economists might
take to improving productivity. (12 marks)
A free market economist believes
that market forces are the most efficient system for the allocation of
resources. She/he would look for market based methods to improve productivity.
Interventionist economists feel that market failures in free markets create
situations in which government activity can be the best way to address
problems.
When problems arise, free market
economists often suspect that market signals have been distorted in ways which
slow or stop market corrections. If productivity is poor, either weak
motivation or reluctance to develop skills could be linked to weakening of
incentives caused by progressive taxation. If the prospect of losing more pay
to tax dulls incentives, cutting top marginal tax rates could help. However,
cutting the top income tax rate in 2012 had no discernible impact on
productivity.
Market forces can be nudged by
incentives. A current example is the apprenticeship scheme. Apprentices can
cost less than standard pay. Training cost for apprentices are subsidised by
government. Where this addresses skills shortages and improves worker
productivity it is valuable. Where apprenticeships teach limited skills such as
fish frying and where large retailers are alleged to abuse the system by giving
little training and simply using apprentices as cheap labour, the benefits will
be limited.
Free market economists like
deregulation, removing controls which limit competition. The theory suggests
that opening markets to more competition forces firms to be more efficient and
productive. Some of the privatisations (e.g. British Telecom) have been linked
to improved productivity; others (e.g. railway network) have not. Bus services
were deregulated but this seems in places to have speeded decline in this
industry. Regulations are intended as protection. Financial deregulation played
a part in the banking crisis. There would be obvious dangers in deregulating
services such as medicine and dentistry so that anyone could set up in business.
Interventionists suggest that
public sector involvement can support productivity improvements. Transport
(e.g. London Crossrail) and other infrastructure improvements (e.g. high speed
internet) can stimulate productivity gains by speeding communications. They
argue that improving the Health Service can cut working days lost to sickness.
They see public investment to raise standards in education and training as an
important part of improving the quality of the workforce and so productivity.
Just as markets can fail, so too
can governments. Public sector provision can be inefficient and substandard,
though the best public services like the best private sector industries can be
excellent. It is sensible to use market forces together with public sector
involvement where that is necessary. The stalling of labour productivity in
recent years suggests that there is more for both market forces and governments
to do.
