Fall in productivity takes shine off UK employment figures

Workforce ‘facing imminent reality check’ as ONS figures show private-sector productivity at lowest level since 2005

Productivity in the private sector has dropped to its lowest level since 2005 as employers strive to keep workers in employment despite falling demand for goods and services.

The data takes the sheen off supposedly buoyant employment statistics that showed companies continuing to create jobs throughout last year.

John Philpott, director of the independent consultancy The Jobs Economist, said: “The continuing and deepening decline in productivity highlights the degree to which rising employment levels mask a severe underlying shortage of demand in the UK economy.”

The output per hour of private-sector workers fell by almost 4% in the year to October 2012, according to data from the Office for National Statistics. Figures for the economy as a whole were not much better, with a 2.4% decline in productivity over the year.

Some companies have retained staff by forcing employees to accept pay freezes, or in some cases a wages cut.

But, as productivity declined, labour costs per unit of output rose by more than 3% over the year to October. In the manufacturing sector these costs were more than 6% higher than a year earlier.

Philpott said workers’ tolerance of pay restraint had probably reached its limit, so businesses would come under increasing financial pressure this year. He expected companies to try to boost productivity instead of shedding staff.

“The probability is that employers will look to squeeze more out of each hour by making workers work harder, rather than by cutting back on jobs, particularly if they think the economy is going to pick up,” he said.

But, if economic growth was weaker than expected, he said companies could go for redundancies. “Either way,” he said, “it suggests the UK workforce faces an imminent reality check.”

The situation is exacerbated by the growing number of “zombie firms” or companies in financial difficulty which are unable to function but which are kept going by low interest rates and banks’ reluctance to write off loans. These companies generally retain a few employees but are seen as unproductive.

Economists have been puzzled by the decline in productivity, particularly as this situation followed a financial crisis, which usually prompts a burst of productivity.

Some say that employers have been taking advantage of cheap labour rather than making investments in new technology that would improve productivity. Businesses have found it hard to invest in capital goods following the crisis as banks have been unwilling to lend.

Paul Gregg, a labour market economist, said companies could be opting to run for longer hours, to hire more staff for extra shifts, and to delay purchases of new machinery.

“That explanation is good,” he said. “It is consistent with the order of magnitude of the kind of declines we are seeing.”

There are growing concerns that the fall in productivity could be long lasting.

Howard Archer, of IHS Global Insight, said: “Productivity could suffer if extended economic weakness leads to a growing number of workers being out of a job for an extended period and their skills and experience being diluted.”

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