Falling productivity may explain the jobs riddle

If both the GDP and the employment figures are correct, then productivity is dropping by more than 1% a quarter

As the economy endured the third quarter of a double dip recession, the jobs market bloomed. Employment in the three months to June rose by more than 200,000, the sharpest quarterly increase for almost a quarter of a century. Confused? If so, you are not alone. The Bank of England, the City’s finest and the cream of academia are scratching their heads as they try to work out what is going on because, historically, a fall in national output has meant lengthening dole queues.

Three explanations have been put forward, none of them entirely convincing. The first is that the Office for National Statistics has been systematically understating growth in the economy. Activity is actually a lot stronger than the official data suggests, which would make the robust state of the labour market more plausible. But while there is a fair chance that the ONS will revise up growth in the third quarter and may find that the picture in earlier periods was not so gloomy as it originally thought, the best that can probably be said for the economy is that it has been moving sideways for the past year. It certainly has not been booming, which is the story from the employment figures.

Perhaps, then, the ONS is wrong about the demand for labour being so robust. The puzzle would be solved if it could be shown that jobs were not being created at anything like the rate shown in the official figures, although the ONS’s labour force survey uses a big sample of the population and relies on internationally agreed methodology.

Finally, it is possible that falling productivity has been one of the many malign effects of the recession. If output per worker has dropped markedly, then it is possible to square rising employment with falling output, even though there has not yet been a really convincing explanation for why employees should have lost their skills or their motivation in such a profound way over the past five years. If both the GDP and the employment figures are correct, then productivity is dropping by more than 1% a quarter, a truly catastrophic performance.

A more compelling narrative would go like this. The first phase of the recession in 2008-09 saw a shakeout of the labour market, with rising unemployment and lower employment. Some of the people who lost full-time jobs have found their way back into the labour market, but are working fewer hours in part-time jobs or in self employment. The number of people working part-time or in self-employment because they are unable to find full-time jobs is the highest since recent records began in 1992.

For those workers still in full-time employment, the squeeze has come through pay rather than through hours worked. Average hourly earnings have fallen by almost 8% in real terms since the recession began. That has made it possible for firms to cut costs and hoard skilled labour. It has, though, meant that wages have lagged inflation, with knock-on consequences for consumer spending and growth.

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